Tuesday, February 20, 2007

Funding Our Future

Rob Cameron, one of the architects of the SOE model, has suggested that the ten largest SOEs partially float on the capital markets.

This is a good concept, but it’s not realistic under this government. Frankly, I doubt much that a John Key-led National government would partially list any of the SOEs, let alone the ten largest ones. Selling off state assets is seen as selling off the family silver at the expense of future generations.

State owned enterprises are an historical anomaly. They were set up during the Fourth Labour government to provide commercial structures and governance, in anticipation of privatisation.

State owned enterprises account for about $25 billion on the government’s balance sheet. Some of the largest—Meridian, Mighty River Power, Genesis Energy, and TVNZ, all face significant competition from the private sector.

There is little strategic argument for setting up a company with purely commercial imperatives, and then determining that the government should own those companies. TVNZ’s massive losses in value over the past few years can be attributed, on the one hand, to government interference into board operations, and a blind unwillingness to divest from a commercial entity that faces huge competition and high risk.

Again, we return to the core problem that politicians have: selling off SOEs is commercially sensible, but politically sensitive. It doesn’t matter how silly it is to own multiple competing energy generation companies—or even an airline.

There is another, much better option, which John Key should pursue. And it lies in the Super Fund.

Michael Cullen champions the Super Fund as his own. To be fair, it is one of the few significant economic achievements of this Labour Government. It has some $12 billion in assets, diversified across low and medium-risk investments in New Zealand and offshore. The taxpayer is contributing to its growth at the rate of a couple of billion a year. Its investment performance has been solid.

The Super Fund works because it operates outside of political interference. The super fund managers are professional fund managers. The guardians’ sole interest is in the economic performance of the fund. Even Helen Clark’s recent comments about investments in tobacco companies don’t matter a jot to the Super Fund guardians. And nor should they.

The Super Fund has now reached a size where it is untouchable politically. No politician can raid it to fund short-term, hare-brained schemes, and it is seen by the public as a legitimate means of securing New Zealanders' future. John Key's solution is to make it even harder to touch, and even more secure.

John Key should transfer all state owned enterprises to the Super Fund. This will have an immediate effect on the size of the super fund, into a significant public asset worth some $40 billion. The Super Fund guardians can then decide which of the SOEs to keep, which to partially or wholly divest from, and which to float on the capital markets.

While this will result in a direct reduction in the government's fiscal position--surpluses will be lower as profits from existing SOEs are moved to the Super Fund--it will also remove the need for the Government to make ongoing contributions directly to the Fund. The existence of a moderately-performing $40 billion super fund, earning 7% returns, will create an $80 billion fund over ten years--more than enough to cover the super liability bubble over the next forty years as baby boomers start drawing on it.

The positive effect on the capital markets as at least a dozen attractive, high-performing investments start trading domestically will make the New Zealand sharemarket immediately more viable for New Zealand investors.

There will be other options for establishing SOEs for a National Goverment--the ACC employers' fund is ripe for creation of at least two, and possibly three separate SOEs, with an additional $8 billion in assets that could be transferred to the Super Fund, thereby opening up ACC to private competition and investment.

It’s time to take the ownership of SOEs out of direct political interference, and place them in the actual interests of New Zealanders’ future.


Anonymous said...

You know IP, sometimes I think you are a raving rabid nut a'la Bill O'Reilly but at other times, and this hurts me, I agree with you.
I don't know how the state could cope with loss of revenue from the SOEs, I have no idea in $ terms, but the notion of a transfer to the super funds is a ripper.
Cheers, Chris.

Insolent Prick said...


The response to that is that the Government will not need to continue to make contributions to the Super Fund once it has made its one-off transfer of SOEs. Of course there will be a reduction in profits from SOEs, but that will be offset by the consequent reduction in contributions to the Super Fund.

The Government doesn't need to be running a $12 billion surplus. It's just an excuse for socialists to go on irresponsible spending sprees.

Anonymous said...

I agree with Chris--I'd never have expected to see on this blog such a reasonable proposal so calmly made. This sounds like it could be a way forward, a compromise that both Labour and National could live with.

But it doesn't help to then talk about "an excuse for socialists to go on irresponsible spending sprees". National governments have had their share or spending sprees, and you well know that not all Labour supporters are socialists, just as not all Nats are neocons, not all United Future are theocons, etc., etc.

If you want the other side to come to the table, perhaps you could begin to tone down the rhetoric a bit.

pdm said...

I like the concept but, I cannot see Clark, Cullen & Co agreeing to it as they won't want to give any control, no matter how small, away.

I am also a bit doubtful whether Key and English would buy into it - it would be right up Don Brash's alley though.

Insolent Prick said...

I disagree, pdm. Neither Key or English believe that the state is the most appropriate owner of SOEs: I think their reluctance to selling SOEs is the public acceptability of it.

The public would be much more accepting of placing the SOEs into the super fund--one of the arguments used is that it will stop future governments from selling off the assets and frittering the money away on short-term needs.

sagenz said...

IP - an excellent idea. float say 40% on the market so the super fund has a cornerstone shareholding that can be valued by the market and vest the rest in the super fund. use proceeds from the various floats to reduce debt and you solve you SOE income problem.

Personally I would accompany it with a slight change in policy to ensure the super fund is overweight in nz investments. mandate it at say 50:50 domestic:foreign. That way there is more capital available to develop New zealand industry.

Barnsley Bill said...

Outstanding idea.

peterquixote said...

excellent IP, also we combine this strategy with a sensible capital gains tax,

lift said...

Nice work. Has this been suggested before? If so, what has blocked it?

bar said...

Getting rid of SOE's is what Johnny Howard has been doing for more than 10 years.

However there are some SOE's that should not be sold off, rather their management should be farmed out. Those enterprises are "infrastructure monopolies". An example is Sydney's Mascot (Kingsford Smith) Airport. By it's nature, there cannot be another close in airport in Sydney, so Mascot is a monopoly. Another example is motorways. The reason for my reservation is that the pricing of the service provided by infrastructure monopolies is not determined by competition and efficient production, but by legal monopoly power, which can damage other parts of the national economy for it's own benefit.

So by all means sell off any SOE that is not an infrastructure monopoly, but make investors work for their dollar. Do not sell off infrastructure monopolies.

liberty through profit said...

using this logic, you can extend it to transit, and make big projects like the western ring, transmission gully, the taupo bypass, and other deffered projects part of the fund, eith returns coming by way of tolls, administered by a central SOE owned by the fund.
Your idea is worthy of merit, and should be explored/ implemented.

Insolent Prick said...


Airports are already mostly held outside of central government holding. The same goes for sea ports. Many of each are held by local government interests, which actually have no greater interest in creating competition than private investors. The main reason the Auckland Regional Council canned the waterfront stadium was its impact on its own commercial interests in the Port. There are huge conflicts of interest where the rule maker is also the owner of the asset.

There are mechanisms in place to govern the charging by monopolies. There are already many privately-owned monopolies in New Zealand, subject to commerce commission supervision regarding monopoly rents.

LTP: Motorways should be sold off. The charging mechanisms for road use are becoming much more sophisticated, and there's no reason why a private provider shouldn't be able to develop large new roading projects and charge accordingly.

Anonymous said...


The Guardians are fund of fund managers, they do not run businesses and they do not deal stocks. By transferring all SOE's to the super fund, you are essentially asking them to manage businesses. And if they decide to divest the fund of those assets you are expecting them to handle multiple IPOs as well.

The truth is, if the fund was given $25billion worth of local businesses they would immediately try to offload them as required by their mandate. Having that much of the portfolio, almost 70%, exposed to the local economy would be completely unacceptable. It would skew the portfolio's risk profile in gruesome ways.

I am not saying it isnt a nice thought. But it really isn't workable.

- Kimble

Insolent Prick said...

There's an easy way around that, Kimble: open the the Cullen Fund up to four or five fund managers to manage.

Anonymous said...


The fund is ALREADY managed by more than five fund managers. The truth is, none of them run the businesses in which they invest. It is a different skill set altogether.

- Kimble