Dialogue: Transforming our liabilities

By MARK BURTON*

In 1984 the New Zealand economy was in serious difficulty. Crown trading enterprises were not doing well.

Treasury estimated that Crown trading enterprises comprised 12 per cent of the economy and accounted for 20 per cent of the nation's capital investment, but for all that provided a rate of return of minus 3 per cent.

Far from being assets, these substantial Crown investments were liabilities.

Businesses and households that relied on these trading enterprises were often victims of excessive prices and poor service.

In the mid-1980s, a corporatisation programme was undertaken by the Labour Government, ultimately resulting in SOEs under the direction of the State Owned Enterprises Act 1986, with a clear focus on being efficient and successful businesses.

Today, SOEs are a valuable part of the Crown's balance sheet. The legislation strikes a careful balance. It ensures appropriate commercial performance by placing operational control of businesses in the hands of experienced boards and managers, who have clear responsibilities and accountabilities.

At the same time, the shareholding ministers are able to protect the Crown's position, and ultimately the investment of New Zealanders, by holding boards fully accountable for their performance.

Overall, the SOE Act has been successful in transforming the Crown's substantial commercial activities into successful businesses. SOEs are now making a solid contribution to the Crown's finances, to the economy and to the social structure of NZ.

These former Crown trading enterprises have not only improved their performance as SOEs, often to the benefit of their customers, but their returns to the Crown.

The dividends and taxes that come from SOEs provide an important source of funding for the Government's social priorities such as education, health and housing.

The SOEs are also a significant component of the Crown balance sheet, having total assets of around $15 billion - about 20 per cent of total Crown assets.

As well as financial imperatives, we have also asked SOEs to develop non-financial performance measures.

This is not a radical departure from the past. It is simply in line with the requirement in the SOE Act that an SOE exhibit "a sense of social responsibility by having regard to the interests of the community in which it operates".

While section 4 of the act provides that an SOE's principal objective is to be a successful business, this need not preclude the SOE from having some objectives that are more socially oriented.

Indeed, we expect that all SOEs will be good corporate citizens.

This Government is committed to the SOE model and has a general no-sale policy. However, the Crown, on behalf of the taxpayer, has to take a commercially prudent approach to its investment in SOEs.

The decision to place Terralink in receivership was a clear signal that Crown ownership does not mean it will continue to pour money into a failing SOE, when that is clearly not in the interests of the shareholder.

We intend to retain and build assets, not liabilities. We are looking to build the value contained in our state-owned companies, not simply prepare them for sale.



As part of this, it is important that the Crown ensures these companies are able to cope with the changing environments and opportunities that arise.

For many, this will include exploring new opportunities, which have the potential to enhance and grow the company. Major projects will require shareholder approval and each case will be judged on its merits.

In this regard, I want to comment on the example that has attracted the most attention, largely due to a deliberate attempt to sabotage the taxpayer investment - New Zealand Post's banking proposal.

The bank project was subjected to intense scrutiny. It is true that, on balance, Treasury and the Crown Company Monitoring Advisory Unit recommended against the proposal. New Zealand Post responded in detail, and to the Government's satisfaction, to the risks identified and has further developed its strategy to mitigate those risks.

The NZ Post board and management are confident the new bank will succeed. As with any SOE, the responsibility now lies with the board to oversee the establishment plan and to make the final commercial decisions.

* Mark Burton is the Minister for State Owned Enterprises