A missed opportunity

Thomas Coughlan reports:

In 2018, the new Government, less than 1-year-old, sought advice on lifting the performance of its ailing SOEs. …

“Our analysis showed that actual performance is poor against the SOE Act’s primary legislative objective of being a successful business, and the sub-objective of being as profitable and efficient as comparable privately owned businesses (as measured by shareholder returns),” Treasury told ministers in 2020. …

In 2018, three ministers, Jones, then-SOEs Minister Winston Peters and Finance Minister Grant Robertson tasked officials with investigating merging the companies into a massive holding company similar to Temasek, a large Singaporean firm which has a portfolio worth more than NZ$400 billion.

This would be far preferable to the Government being the shareholder directly. Rather than set up a Temasek, you could use the NZ Super Fund.

Treasury estimated the poor, almost uncommercial performance of the SOEs had cost the crown $13.6 billion in the 10 years to 2018 which might have been earned were they as successful as other, more commercial entities the Crown has an interest in.

Think what you could do with an extra $1.3 billion a year. This is the opportunity cost of retaining 100% ownership.

“Entities in 100 per cent Government ownership have produced aggregate returns of 0.1 per cent per annum, against a cost of capital of 10.9 per cent,” Treasury wrote.

A 0.1% return is laughable.

However, SOEs had a handful of benefits: the key ones being that while SOEs are commercial, they are not fully independent and are required to follow certain high-level directions of ministers – this includes areas like phasing out fossil fuel use, or continuing certain essential services.

This created a problem for ministers who, according to Treasury, faced a “strong personal and political accountability” for SOEs in the area of a “relatively broad set of wellbeing objectives” – but who faced significantly less accountability to deliver returns to the Crown – in other words, ministers had an incentive to use the companies to deliver on political promises, rather than to deliver value to the Crown.

So the cost of keeping them as Minister’s playthings is billions of dollars.

Treasury said that all of the SOEs were rolled into one company, it would want that company to have this power too – the company needed to operate a “dynamic portfolio” that could buy and sell assets at will.

Referring back to Temasek, Treasury said the company was able to grow through “the sale of underperforming state-owned assets and purchase of better growth prospect assets”.

The ability to part or fully privatise companies was central to the way the Temasek model worked. Underperforming parts of SOEs, like NZ Post’s letters division, could be sold, and the proceeds could be reinvested in parts of the business that were growing.

Any sensible business owner sells the unprofitable parts so they focus on the more profitable businesses.