KiwiRail is a bit different. Although it generates nearly a billion dollars of its own revenue annually, it often goes cap in hand to the government for more money to help upgrade its trains and boats. Even so, there is no serious suggestion that it can’t afford to maintain its ferries. At the end of the last financial year it had a quarter of a billion dollars in the bank, and has just paid for an upgrade to the affected ferry’s steering system. It was presumably this steering system that failed a few weeks after it was installed.
The need for the current KiwiRail ferries to be replaced at some point is real and that is what much of the political debate has been about before and since the grounding. The Government has, rightly in my view, baulked at spending $3 billion on gold plating a ferry service which only makes $150 million in annual revenue.
The Opposition has sought to politically conflate the two issues but they are only loosely linked. The future ferries, whatever form they finally take, are just that, in the future. Nobody is suggesting they would be here now. The current ferry had no business losing its steering and grounding itself. That’s clearly on the company that runs it.
The limited liability company is a wonderful invention. Companies are a tremendous way to organise ourselves to execute a task, build something or provide a service.
Companies raise the necessary capital and hire the people that undertake the task. If the task finds and satisfies customers, the company grows and prospers. If the company does its job badly, there are consequences. They might lose out to their competitors. Shareholders might change the management, they might fire the board, and if all else fails they can remove their capital by selling their stake in the company or closing it.
The private company is externally regulated by governments, on behalf of the public. Perhaps it has insufficient competition, or its activity creates harmful side effects, such as environmental pollution or health and safety risks. If it falls foul of the law, it can be charged and fined. In extreme cases, its directors can be personally liable.
There is no shortage of ways shareholders, customers, and the public can hold private companies accountable for their actions, or conversely, reward their performance for a job well done.
Unfortunately, many of these incentives, both positive and negative, don’t apply to government companies. Government companies often don’t get rewarded for doing a good job or penalised for a bad one. There is no share price through which to reflect shareholder satisfaction or dissatisfaction, nor a sensible way of rewarding good leadership. Performance pay is politically frowned upon, which is possibly fair enough, given performance in these entities is so opaque.
Most government companies aren’t measured by their ability to do a good job and increase shareholder value, or obtain more customers. Many are monopolies or act like one. Their measures are often political. Stakeholders apply political pressure to make them do things that make no commercial sense. They almost never face an existential threat like closure, because that would have political repercussions.
Government companies rarely get fined for wrongdoing, as it makes little sense for a government to fine itself. Government companies are also not removed from government contracts for poor performance, because who would you give the contracts to? The dreaded private sector?
Politicians are rightly discouraged from directly running government companies because they have conflicting objectives. Companies should be providing a commercial service that improves over time. Politicians are incentivised to focus on the next election.
The trouble is that nobody else fills the void. There is in practice no significant shareholder oversight. State-owned companies often end up doing what they like. In my experience, they are the least supervised in the country.
The only control politicians can exert is by appointing their boards. But even then, the focus on commercial performance is often subjugated for political imperatives. Directors are regularly appointed for their political fealty rather than commercial nous. A glance at many appointments to the KiwiRail board by the last Government will confirm that.
It all leads to a culture of mediocrity and butt-covering, with little, if any accountability.
If Transpower and KiwiRail were listed companies, their share prices would have both dived in the past week, and boards and management would have been forced to respond immediately and transparently, detailing what happened, and moving to reassure their customers and the market with concrete steps, including personnel changes.
Transpower would likely have faced regulator fines for non-performance.
Instead, both companies have set up internal inquiries, with few expecting heads to roll at the end of them. The Transport Accident Investigation Commission is investigating the ferry grounding, but it has no power to fine those responsible.
One of the best things we did as a government was float the four power gentailers on the stock exchange. Overnight, these mixed ownership companies went from bickering with Treasury about their value and performance and indulging in semi-political flights of fancy with their capital, to getting on with their core job of performing for customers and shareholders. This is all because of the full glare of their public listing. In my view, we should have floated Transpower at the same time.
KiwiRail is more difficult given its reliance on government funding to stay afloat. The solution to the ferry issues would likely be to sell them to a third party, not Bluebridge, to ensure competition. Throughout all of this ferry drama the private operator has chugged on, delivering freight, people and cars between the islands at no cost to the taxpayer and little fuss.
Like I say, limited liability, non-government owned, companies are a wonderful invention. We should have more of them.
