THE INSTITUTE OF DIRECTORSState Services
The New Zealand public currently owns a portfolio of 14 State Owned Enterprises with a book value of $10.3 billion. Thats an investment worth $2,798 for every man, woman and child.
The market value of that investment is estimated to be three or four times greater.
Collectively, our investment in SOEs is equivalent to around 10% of New Zealands GDP, or 20% of the capitalisation of the New Zealand Stock Exchange top 40 companies.
New Zealanders place great value in ownership.
We hold dear the right to control what we own, the right to benefit from what we own, and the right to sell what we own.
No single policy did more to broaden ownership in this country than the decision of Sid Hollands National Government to make every New Zealander a home owner.
Hollands housing programme provided generous loans and gave state tenants the option of buying their houses.
For the first time it became possible for ordinary wage earners to own their family homes.
The programme set in motion New Zealands property-owning democracy.
Today, we are a nation of home owners. In a survey on home ownership published recently in the National Business Review, 92% of those polled rated owning a home as fairly or very important to them.
International comparisons show our 70% rate of home ownership among the highest in the world -- dead even with Australia and ahead of the UK, the US and Canada.
We value the right to buy, to improve and to sell our homes. (Though the Reserve Bank would argue that we should do a little less of all three).
The same rights that exist in private ownership are present in public ownership as well.
However, the chain by which the public exercises those rights is long and indirect.
Lets look at how the public exercises its control of the $10.3 billion investment in SOEs:
- public sector managers are accountable to the board of directors,
- board of directors is in turn accountable to shareholding Ministers;
- shareholding Ministers are accountable to Cabinet and Parliament;
Parliament is accountable to the public once every three years.
Each of us indirectly benefits from our public investment when:
- an SOE makes a profit;
- a dividend is paid to the Government and is pooled in the Crown accounts;
- those funds are spent on new or existing government services that may or may not affect each of us materially.
We also benefit when an SOE is sold and the Government uses the proceeds to pay off debt. Figures released last week by the Minister of Finance show net public debt at $23.9 billion -- about $6,490 of net debt for every man, woman and child. The foreign currency component of that net debt was paid off in 1996.
Of course, exercising the right to sell our investment is not that easy. We do so by voting for a political party that includes privatisation in its manifesto. When enough of us vote for this party, it forms a government and implements its privatisation policy with the approval of the parliamentary caucus.
Wednesday marks eleven years since the first of the SOEs were created.
It also marks the beginning of the end of a political principle that extended public ownership and influence into every nook and cranny of the New Zealand economy.
The desire of successive governments to own and control the New Zealand economy reflected a deeply held conviction that production and distribution will be far more rational if all key resources are owned by the public (and put under the control of a state planning agency) than if those resources are privately owned.
But far from creating a rational and harmonious sense of common ownership, public ownership produced industries that were unhelpful, unaccountable, and unprofitable.
A recently published book, aptly titled Reining in the Dinosaur, tells of the transformation of NZ Post from a trading department into a competitive SOE.
It describes how:
- politicians leaned on the Post Office, Railways, Public Works and State Mines to mop up the unemployed, particularly in election years;
- unions used their monopoly power to secure higher wages and resist attempts at modernisation;
- management opted for the path of least resistance and steered an ineffective course between the politicians and the unions.
These publicly owned industries were run neither in the public interest nor for the benefit of consumers, but in the interests of politicians.
Would those of you who own homes sit by while vandals tore down your front door, broke the windows, punched holes in the walls and smashed all your furniture?
Of course not. But the long and indirect chain of public ownership forced the public to do just that as their investment in government departments and trading enterprises was plundered.
The sorry failings of public ownership were finally realised, albeit ironically by the party with socialist origins, in the mid-1980s.
Over the last eleven years, corporatisation has been very successful in transforming government departments and trading enterprises that once lost millions of dollars into companies that operate on a successful commercial footing.
Good governance has been key to this. Putting boards at arms length from politicians and clarifying commercial aims has allowed SOEs to get on with their core business, rather than serving as reluctant champions of the Governments social objectives.
However, the long and indirect chain of public ownership remains.
The public can hardly be said to enjoy ownership when they have no direct control over company decision-making, they receive no direct dividend from company profits, and they have no direct right to sell their stake or give it away to someone else.
Thats worth considering as we look to the future of our investment in SOEs.
Many SOEs face increasing competition and the possibility of reduced market share within their industries. A number of SOEs also require significant capital investment to expand and maintain their competitiveness.
The Government is reluctant to fund these investment demands some of which amount to several hundred million dollars. We would rather invest in new hospital wards, new schools, and fighting crime.
Nor do we wish to see SOEs borrowing extensively from the private sector to fund business ventures that could fail, leaving the public to foot the bill.
This is a vexed issue for SOE boards. I recognise that some directors are becoming increasingly frustrated with the risk averse nature of the Government as shareholder.
But directors must accept that the Government is risk averse, and that it is a relatively sophisticated shareholder that fully intends to monitor board performance.
While the monitoring processes we have put in place may annoy a few from time to time, they are necessary alternatives in the absence of full exposure to sharemarket analysis and monitoring.
The Government has made it clear that it would rather leave private sector businesses to take risks the Crown is unwilling to accept. I for one did not come to Parliament to expand the States role in business.
But without capital investment, or the ability to expand their businesses to meet increased competition or technological advances, the competitiveness of many SOEs may well be eroded, reducing the value of the publics $10.3 billion investment.
Just as parents come to the realisation that some day they must let their children find their own way in life, the public may have to accept that the future success of many government businesses lies in private, not public ownership.
In last years Budget, the Government announced its intention to review, on a case by case basis, whether continued public ownership of commercial businesses would best serve the welfare of New Zealanders.
Of course, this review excludes the six SOEs the Coalition Agreement lists as strategic and not for sale. And I want to make that clear: dont go kicking the tyres, theyre not on the lot.
Nevertheless, we are determined to improve competitiveness and growth in the economy.
Where there are no good public policy reasons for public ownership of non-strategic SOEs, and where private sector owners can do a better job of running these businesses, then we will consider moving these into private ownership.
Privatisation has led to even further benefits than the gains that were made from corporatisation:
- have proved to be more competitive in private ownership;
SOEs have been more innovative, providing better products and services at lower costs to consumers;
- debt has been reduced;
- there is less commercial risk to the public.
But no matter how often or how well the benefits of privatisation are explained, many New Zealanders still refuse to accept the value of private ownership of businesses over public ownership.
For many, privatisation represents a loss of ownership akin to the same alienation felt when dealing with the state run industries that existed prior to corporatisation eleven years ago.
Perhaps the answer lies in the method of privatisation. To date, the most common way of passing SOEs from public ownership into private ownership has been by trade sale through a competitive tender process.
The record of privatisation in New Zealand is not entirely consistent with international trends.
According to the World Bank, direct sales are the dominant but by no means the only form of moving state businesses into private ownership.
Between 1988 and 1993, public floats accounted for 12 per cent of privatisations worldwide, but a much larger share -- 39 per cent -- of revenues gained from those sales.
Recent privatisations by public float of major state enterprises in Europe have seen many individuals and families flocking to buy shares. These include France Telecom, Telecom Italia, Portugal Telecom and Lufthansa the German airline.
Closer to our shores, the partial privatisation by public float of the Australian government-owned telecommunications company Telstra was an overwhelming success for small investors.
Two million Australians lined up to purchase 65 per cent of the offer reserved for Australian investors 600,000 of them were first time share owners.
John Howard has since promised to float the remaining two-thirds of Telstra if his government is re-elected. His goal, he said last week, is to turn Australia into the greatest share owning democracy in the world.
Can you imagine a New Zealand Government making a large scale privatisation the cornerstone of its re-election chances? I dont think so.
An article in the business pages of todays Dominion describes the hunger for share ownership among Mum and Dad investors in Australia.
People who are buying shares in Australian icons like the Commonwealth Bank and Telstra, the article says, are not in for the short haul. They are locking them away in the bottom drawer like a small savings account or nest egg.
New Zealanders have not had the same opportunities to take direct ownership at the ground floor, waiting instead to invest in later floats by private sector owners of businesses such as Telecom and Tranz Rail.
New Zealanders have certainly enjoyed the benefits of better products and services, the reduction of government debt and a more efficient economy.
But they have not enjoyed the right to own, to benefit and to sell shares in newly-privatised SOEs.
Not every divestment will be suitable for partial of full public float. But opening our minds to more innovative methods of sale has merit.
In her statement to Parliament in February, the Prime Minister said that, where it is appropriate, the Government will be taking a closer look at offering each New Zealander the opportunity to acquire shares in SOEs.
Governments in France, Italy, Germany and Australia are now leading the way in offering their people the opportunity to invest in major state businesses.
We can learn from these examples and extend ownership of industry and commerce by offering all New Zealanders a chance to take a more direct and genuine stake in major enterprises and to benefit from their economic success.
Simon Taylor, Press Secretary
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025 332 826