Sell, sell, sell

December 19th, 2013 at 12:00 pm by David Farrar

Stuff reports:

State-owned enterprises’ performance has been “mediocre” in the last year, the Treasury says.

The Crown Ownership Monitoring Unit (Comu) today released the annual report of its portfolio, which reviews the performance of 49 government-owned enterprises that have full or partial commercial objectives.

All up, the enterprises employ more than 40,000 people, holding $125 billion in assets and $52b in investment funds at the end of June.

While the performance of the investment funds, mainly ACC and NZ Superannuation was strong, returning over 25 per cent in the year to June 30, the report was less kind about the other companies.

“While some State-owned enterprises have performed well, overall performance of the Crown’s commercial portfolio has been mediocre, with poor performance by Solid Energy, KiwiRail and Learning Media,” the Treasury said in a statement.

“Total shareholder return across the wholly owned commercial priority companies was 3 per cent,” the Treasury said, adding that this did not include KiwiRail because of the change in its structure at the start of 2013.

The number of companies the Crown should own is very few – there is a case for the odd utility monopoly like Transpower, but the rest should be owned by he private sector who are better suited to balance the risks and rewards.

Solid Energy almost went bust, as it is highly vulnerable to the global coal price. Kiwirail is a dog. NZ Post is profitable but in a dying industry. TVNZ has a business model that will also disappear in the not too distant future. We should sell them all while we can get some money for them.

The Solid energy failure

June 12th, 2013 at 11:00 am by David Farrar

Adam Bennett at NZ Herald reports:

Solid Energy withheld financial information from Treasury when challenged on its business plans in what an independent report says was a pattern of disrespect the company showed to officials monitoring its performance.

Treasury yesterday released a review by accounting firm Deloitte of its monitoring of Solid Energy which appears likely to be broken up and sold off after overextending itself and almost failing under the weight of $390 million in debt and low coal prices.

Deloitte said it did not believe “that the failure of Solid Energy has highlighted a material failure in Treasury’s monitoring processes”.

However, the report goes on to raise questions “whether Treasury’s response was forceful enough or occurred soon enough given that the company provided cause for concern over an extended period”.

Deloitte said several Treasury staff it interviewed “identified a sense of tension from the chair and chief executive particularly when challenged on more fundamental aspects of their business and strategy”.

The problem is that the sack the Board option is a very heavy step to take.

Deloitte was also given examples of the company’s “lack of respect for commercial expertise that set the scene for difficult interactions, particularly surrounding core issues with Solid Energy’s governance”.

The first written evidence of this was in April 2011 when a Treasury analyst requested financial information underpinning Solid Energy’s evaluation of one of its projects.

Deloitte understood Mr Palmer told Treasury the request was unprofessional and Solid Energy would not provide the information.

“Following robust disagreement from Treasury, the chair instructed the Solid Energy management team to provide the analysis. It is our understanding it was never provided.”

The Deloitte report comes just a few weeks after Treasury released documents showing Mr Palmer fought against Treasury’s wish to have an independent advisor appointed to the company’s board last year as the state owned coal miner’s problems mounted.

Deloitte’s report concludes that the removal of Mr Palmer and Dr Elder “may have been warranted.”

However it noted that for Treasury to initiate such action “would have required it to effectively form the view that it lacked confidence in a board and executive with a sound track record in a technically complex industry”.

Perhaps something needed for the future is an agreement between Board and share-holder, where they agree on what sort of information will be provided to Treasury on request. While the Board can be the only governing body, it is important Treasury has enough information so it can independently advise Ministers on the company’s performance and plans.

Another capital hungry SOE

March 15th, 2013 at 10:00 am by David Farrar

Jason Krupp at Stuff reports:

NZ Post says its balance sheet will have to wear the $100 million in capital Kiwibank needs to meet its regulatory requirements and replace an ageing banking system.

Testifying before Parliament’s commerce committee today, chairman Sir Michael Cullen said the postal service operator had requested funding from the Government to meet the capital needs of its bank subsidiary, but hadn’t received a definitive answer yet.

The board was operating on the assumption that no further funds would be forthcoming, which is “not surprising in the current situation”, Cullen said.

That meant the state-owned enterprise would have to provide the additional Kiwibank capital, with the lender not yet profitable enough to fund its own capital requirements.

If NZ Post and/or Kiwibank had some private shareholders then they would be able to raise capital without needing taxpayers to borrow money from overseas to fund a competitive risky enterprise.

We should learn the lessons of Solid Energy. Reduce or eliminate the risk to taxpayers.

Espiner on Solid Energy

February 27th, 2013 at 11:00 am by David Farrar

Colin Espiner writes:

I admit I’m no expert, but it looks to me as if taxpayers lose either way under our current SOE model. We either pay through the nose for our power with little or no government regulation on price or we watch poorly performing SOEs bailed out with our money.

I know the sale of SOEs has always been a political hot potato, but let’s look at it rationally rather than emotionally. Why does the public need to own a coal mine? Or a power company? Or an airline? 

Here’s my suggestion: Sell the lot, but only after decent regulation to protect the consumer has been put in place. Here in New Zealand we pay high prices for monopoly services that are effectively government-owned. 

Former energy minister Gerry Brownlee talked tough a few years back about taking on the power companies, but of course nothing came of it. According to a study by Victoria University researcher Geoff Bertram we have some of the highest power prices in the OCED. Is it any wonder, when the government is both poacher and gamekeeper?

There’s no reason I can see why taxpayers should be exposed to risks taken by wannabe venture capitalists or price-gouged by our own companies. Selling them off is the only way to create a level playing field and provide any real competition for the poor old consumer. 

I basically agree. The correct role of Government is regulation, not ownership. When they are both and owner and a regulator, you get a conflict of interest and neither are done as well as they can be.

If people think ownership doesn’t matter, look at Solid Energy. The “collapse” has happened because they had a very ambitious expansion programme led by the then CEO.

Now I’d argue that the basic strategy of expanding away from just coal mining was not a bad one for Solid Energy. With the difficulty of getting a coal mine consented, the new safety focus post Pike, and a target of more renewable energy – the company didn’t have much of a future just as a coal miner.

However where it appears the company went wrong was the scale of the expansion plans were too ambitious, they required too much debt and risk, and not enough focus remained on the core business of coal. Hence projections were done on coal prices that were too high. Now globally all companies have been caught out by the 40% slump in coal prices including giants like BHP.

However Solid Energy has been more exposed, because they had taken on higher risk with more ambitious expansion plans. And this is where ownership does matter.

If the Directors themselves have shares in the company, and they represent shareholders whose actual money is at risk, then they will be more cautious about expansion plans. That is not to say they would not agree to them, but they would probably have been saying let’s do it slower, let’s keep our core focus on our current income stream and not borrow too much on this vision of huge expansion into lignite and other areas.

When it is your money at risk, not someone else’s money, you act differently. The price of failure is catastrophic when it is your own money.

I have absolutely no doubt that if Solid Energy was not state owned, it would not be in as dire a situation as it is now.

That is not to be an absolutist and say that all private sector companies succeed and all state companies fail. That would be ridiculous and obviously not true. But overall there is a reason the private sector does better – it is because you make better decisions when it is your own money at risk.

Going back to Colin’s column, I agree we should sell pretty much all our commercial companies, and not just 49% of them. Taxpayers should not be having to bail out mining companies or risking the expansion plans of the power companies. The best thing the Government can do is be an impartial pro-consumer regulator that ensures we have excellent competition. That is not compatible with ownership

Rewriting history

October 27th, 2012 at 9:00 am by David Farrar

Clare Curran said yesterday that:

Another 50 Kiwis will join the ever-lengthening dole queue after today’s announcement by state owned enterprise Kordia that it will outsource its Auckland call centre, says Labour’s Communications and IT spokesperson Clare Curran.

Orcon’s 50 Auckland call centre positions will be outsourced to Manila, as the company integrates its two New Zealand telecommunications businesses, Kordia Networks and Orcon.

“This is part of a worrying trend for businesses to make cost cutting decisions at the expense of Kiwi jobs,” says Clare Curran.

“The fact that it’s a state owned enterprise making the decision reinforces the lack of commitment by the National Government to investing in Kiwi jobs.

“National has removed the social responsibility clause which ensures SOEs have to take into account community interests and this is the result.

That last line is now missing from the web version – gone as if it never was included.

The reasons is it is factually incorrect. National has done no such thing. In fact Curran scores an own goal by highlighting that the social responsibility clause in no way hinders SOEs acting to become more efficient.

Personally I think the issue with Kordia, is why do we own it? It nationalised Orcon when it purchased it. Do we want government owned ISPs competing with others?

Stuff reports:

 The Labour Party has acknowledged Kordia is still bound by the “social responsibility clause” of the State Owned Enterprises Act

Hard not to acknowledge reality. And also worth noting:

Orcon chief executive Scott Bartlett, who will take up an expanded role at Kordia as head of its new merged telecommunication division, said yesterday that many affected call centre staff would probably find jobs at Australia’s second-largest broadband provider, iiNet, which operates a 300-person call centre in Auckland servicing its customers in Australia.

Now you can take a view that no NZ company should outsource its call centre overseas, but this also means that you are arguing against NZ companies picking up business from overseas companies.


NZ Herald on SOEs

December 1st, 2010 at 7:32 am by David Farrar

The NZ Herald editorial:

The labour Party’s finance spokesman, David Cunliffe, raised some eyebrows last Thursday when he spoke favourably of allowing state-owned enterprises to form subsidiaries in partnership with private shareholders.

Could it be that Labour is relenting on the stern anti-privatisation stance it adopted under Helen Clark?

Alas, no. Mr Cunliffe was talking strictly of subsidiaries. It would be an enlargement of the state’s role in the economy, not a diminution of it.

Even the Clark Government was open to this idea. Trevor Mallard, urged it upon the SOEs when he was minister of state-owned enterprises, though nothing happened.

Mr Cunliffe, in his speech at Victoria University, cited Kiwibank as an example of a subsidiary that had added value to its state-owned parent, NZ Post. The next day he made it clear Kiwibank would be excluded from the envisaged private partnerships.

So alas, it is a policy from the Clark Government.

This policy will not answer the Stock Exchange’s prayers for blue chip listings of public utilities. But unless the National Party leadership has more gumption on that subject in a second term, there is not much prospect of SOE share floats from either of the main parties.

The bipartisan policy on no asset sales is I suspect unique in the developed world. And that is not unique in a good way.

Labour probably wants to sound more moderate and reasonable on a subject such as privatisation, even if its real motive is to increase state participation in the economy.

This is true, but they may find it hard to explain why they are pro-private sector investment in “new” assets ut 100% against in existing ones.

At least the policy Mr Cunliffe has revived, and the Government can readily endorse, opens the way for private enterprise to propose projects to SOEs and tap their resources. That sort of investment could be better for the country in the long run than passive private holdings in the parent utility.

No company should need additional capital unless it has something new to do. In that event, it is sensible to set up a subsidiary to do it.

With the benefit of private investors’ assessments of value, and the discipline of sharemarket accountability, the foal would outshine the horse. The state should open its stable and let all its enterprises reach their potential.

I agree.

The SOE challenge

June 18th, 2010 at 7:47 am by David Farrar

The Herald reports:

The chairman of Solid Energy says at least part of the state-owned coal miner should be sold off to raise billions of dollars needed for new projects, including more mines.

John Palmer – who is also chairman of partially privatised Air NZ – said Solid Energy needed up to $10 billion in additional capital over the next five years, and should be partially privatised if National wins a second term in office.

That was the best way to provide the money, given the state of the Crown accounts, he told the Herald yesterday.

“I don’t think it makes a lot sense for the Crown to put several billion dollars into a company like Solid Energy where it can retain all of its existing ownership and leverage and external capital can provide the opportunities for growth. It’s very much a win-win situation.”

Solid Energy is not a monopoly like Transpower or NZ Post. It is not a utility- it is a competitive business undergoing commercial activities that are not guaranteed to be profitable.

If Solid Energy can not access extra capital, it will not be able to reach its potential, which may mean less tax revenue and less jobs in NZ.

But do we want the NZ taxpayer borrowing money to invest in Solid Energy, and assuming all the risk? I think Palmer makes a good case for that risk to be shared around.

SOEs buying private companies

October 26th, 2009 at 1:00 pm by David Farrar

The SST reported:

THE GOVERNMENT will become one of the biggest players in the commercial property services market following Quotable Value’s (QV) takeover of DTZ.

QV has been in negotiations to buy the New Zealand arm of DTZ, a large publicly listed valuation and property management company based in the UK.

Neither company was responding to calls on the subject last week, but the Sunday Star-Times understands that DTZ’s staff have been told the takeover will proceed and both sides have been putting the finishing touches to the deal.

QV is a state-owned enterprise and its takeover of DTZ will create a property services company with turnover of nearly $70 million, making its easily the biggest property services company operating in the commercial property market.

While in one sense it is good to see an SOE operating commercially and making good commercial deals, it concerns me that they do so with taxpayer money, and an implicit Government guarantee.

Much the same happened when Kordia purchased Orcon. A smart strategic buy for Kordia, and some useful finance for Orcon, but should the NZ Government own an ISP and a commercial property company?

The Government has promised not to see any SOEs during this term. I hope that they have a more flexible policy for the 2011 election, which would allow the Government to exit areas that are commercially competitive.

Labour’s dividends from energy sector

September 14th, 2009 at 4:45 pm by David Farrar

I now have some more info on Labour’s reaping of profits from energy SOEs, and contrasting that to Phil Goff now decrying a $236 million dividend.

I blogged earlier that over the last five years, the SOEs made $3.27b after tax. Going back for their full nine years, the figure is $4.47 billion.

I also have the dividend figures. So this is the money actually paid out to the Government, and excludes profit that was retained for investment purposes etc in new generation.

  1. 2000: $255m
  2. 2001: $236m
  3. 2002: $290m
  4. 2003: $148m
  5. 2004: $154m
  6. 2005: $250m
  7. 2006: $949m
  8. 2007: $428m
  9. 2008: $383m
  10. Total: $3.09b

So its okay to take a $949million dividend payout in 2006 but wrong to take dividends a quarter that amount in 2009.

Again I’m not saying that the level of dividends is right at the moment, but when you raked them in during times of massive surpluses, it is a bit rich to do a sudden mea culpa and say that they should be much lower during a time of huge deficits.

Power Company Dividends

September 14th, 2009 at 9:00 am by David Farrar

I’m very cynical of Labour’s new stance on state owned power company dividends. The reality is that during a period when the Government enjoyed massive and record surpluses, Labour took in hundreds of millions of dollar in dividends.

And then suddenly within a few months of losing office, they now say it is wrong to do so – at a time when the Government is now running massive and record deficits and any reduction in dividends would be far more difficult.

I’m not arguing for the energy SOEs to price gouge – far from it. The sector needs reform. But there does need to be a return on capital that at least matches the cost of financing crown debt.

Labour also seems to be confused about the difference between dividends and retained earnings:

“Labour can and will stop price gouging. We will not demand excessive dividends coming back into state coffers above what is needed for investment in new generation.”

The dividends do not fund investment in new generation. It is almost the opposite. It is the amount of profit that you do not pay out in dividends that is used to fund new generation.

I’ve just added up the total net profit after tax for the six state owned energy companies for the last five years, and they were:

  1. 2004 – $406m
  2. 2005 – $561m
  3. 2006 – $1,230m
  4. 2007 – $622m
  5. 2008 – $451m
  6. Total – $3.27b

So under the last five years of Labour, the state made a profit of $3.27 billion (after tax) from the energy sector. And again, this was at a time of record crown surpluses. I don’t have handy how much was paid as dividends, but people should remember the $3.27b when Labour go on about excessive profits. Over their total nine years, it might be as high as $5b.

Trans-Tasman on Cullen as SOE Chair

March 12th, 2009 at 4:45 pm by David Farrar

Trans-Tasman has some good advice for the Government in discussing the ACC funding issue:

Which may be why the Nats have gone coy on making Michael Cullen the Chairman of Mighty River Power’s Board.

They also recall John Tamihere’s famous comment about Cullen’s ability to “cut a deal on a piece of legislation, he can change a single word in a piece of legislation without those other bastards [coalition partners] knowing about it, and it melts down everything they wanted.”

If it happens with coalition partners, imagine Cullen running an SOE under a National Govt.

That is a good reason, plus the angry horde of National Party members who would encircle the Beehive and try to burn it down if they appointed Cullen as an SOE Chair this year.

A good Kiwi Party policy

September 6th, 2008 at 11:30 am by David Farrar

Gordon Copeland is in the Dom Post saying the Kiwi Party advocates floating 20% of SOEs’ shares to release about $5 billion for infrastructure.

As reported yesterday, the public are getting sub-standard information on SOEs, because they are 100% Government owned.

Public ownership does not mean public accountability

September 5th, 2008 at 10:00 am by David Farrar

From the Dom Post:

A parliamentary report has given a damning assessment of the monitoring and valuation of state-owned enterprises, describing the lack of transparency as “indefensible”.

This has prompted NZX chief executive Mark Weldon to offer free listings for five per cent of SOE shares so the market can enforce a higher degree of transparency and accountability.

The transparency and discipline listings would bring are an excellent reasons to have some private ownership in the SOEs. The public would actually get more and better information on the billions locked up in the SOEs.

Every year Treasury and the CCMAU publish a statement of corporate intent providing information such as shareholder rates of returns. There were no statistics included in the statements in 2007 and 2008.

The committee said it had been told by officials “informally” that satisfactory portfolio performance data was not published because of a lack of resources.

The report said this implied that portfolio performance and public accountability were not considered relevant or important, respectively.

Again ownership does not translate to accountability.

The committee said it was concerned because Government documents, particularly the State-owned Enterprises Act, state the main aim of an SOE is to be as efficient and profitable as a comparable private company.

The committee said if Treasury or the CCMAU lacked the resources to do the analysis, they could put the work up for tender.

One funds research analyst said the private sector “couldn’t do a worse job even if we were drunk in charge”.

A possibility that can’t be ruled out 🙂

The most recent financial statements value the Crown’s interest in the 18 SOEs at $23.5 billion at June 30, 2007, the equivalent of 40 per cent of the $59 billion market capitalisation of the New Zealand sharemarket at June 2008.

Issues like this are not sexy but can be vitally important.