2 GOVERNMENT IN BUSINESS - THE STATE OWNED ENTERPRISES ACT 1986

Introduction

Successive New Zealand governments have been owners of many businesses. The areas covered have included airlines, railways, shipping, telecommunications, postal services, banking, radio and television, printing and publishing, tourism and travel, electricity production and marketing, forestry, timber production and marketing, coal mining, farming, heavy construction and several more.

There were two periods of heavy growth and development of publicly owned trading organisations. The first was in the early part of this century, when the Government decided to supply the country with badly needed infrastructure and utilities - roads, railways, telegraph systems, port facilities, electricity generation plants and supply systems, and so on, and to provide support for developing industries. This was the "pioneering stage" of New Zealand's development.

The second stage occurred in the third quarter of the century, up until the mid 1980s, as the Government sought to establish major domestic industries in an effort to broaden the base of New Zealand's economy beyond its traditional dependence on the agricultural sector. New Zealand Steel, Tasman Pulp & Paper and Petrocorp, were examples of very substantial enterprises in which the Government was deeply involved, in partnership with private sector companies. This could be termed New Zealand's "industrial expansion stage".

By the mid 1980's, however, the New Zealand economy was growing at a rate significantly below the OECD average, and was weighed down by a State sector that was absorbing 20% of gross investment and 12% of Gross Domestic Product. As an illustration, 10% of national income in 1986 was spent on the Post Office, the Lands and Survey Department, the New Zealand Forest Service and the Ministry of Energy, with the post-tax return on investment being negligible. It became clear that State owned and operated monopolies trading in tightly regulated markets were simply not going to provide the impetus needed to establish a vigorous and expanding economy.

The principles of the new legislation

Changes to the Government's commercial role were signalled in the Economic Statement given to Parliament by the Minister of Finance in 1985 discussing, amongst other things, efficiency in the State sector. An excerpt from the Minister's speech outlines the environment which preceded introduction of the market oriented State owned enterprises legislation.

The Minister went on to say that:

A new approach to State enterprises - corporatisation, deregulation and privatisation

The Government's initial approach to reform of the State sector was based on the three concepts of corporatisation (or commercialisation), deregulation, and privatisation.

Corporatisation began when the State Owned Enterprises Act 1986 came into effect on 1 April 1987. The principles of the Act closely followed those outlined by the Minister of Finance in the Economic Statement. For example - the principal objective of every State enterprise shall be to operate as a successful business and to this end, to be:

Furthermore, managers were to be allowed to control inputs, while pricing and marketing would be matters for the board of each State owned enterprise, which would be made up predominantly of people with relevant commercial experience and skills. State owned enterprises would pay tax, and pay dividends to the Government as shareholder, as returns on the Crown's investments. Where the Government required "social good" outputs from enterprises these would be supplied under contract, in a normal supplier/customer transaction.

Deregulation of various industries began prior to 1986, with the financial, broadcasting and transport sectors being amongst the first to feel the effects of free market economic policies. State dominated industries that were later deregulated included electricity generation and distribution, most postal services and the telecommunications sector.

Privatisation was based on redefined 'role of the State' and fiscal principles. In the Budget Statement of 1988 the Minister of Finance put forth a number of reasons why the Government should decrease its asset holdings - Ministers were not in the best position to make essentially commercial decisions; privatisation would decrease the demand for Government capital for development purposes and the subsidisation of inefficient operations; and unencumbered by commercial responsibilities the Government would be able to focus on economic and social priorities.

Criteria for asset sales included whether or not the Government would gain more in the longer term from privatisation than it would by retaining ownership, and whether the sale of a particular business would impede or enhance achievement of the Government's social goals.

Between 1988 and 1993 the Government obtained $13 billion from the sale of assets in New Zealand.

The machinery of State Owned Enterprises

Shares in the enterprises are issued to and are held by the Ministers of Finance and State Owned Enterprises. The principal form of accountability to the Government is each SOE's Statement of Corporate Intent. Each board produces a draft Statement for the shareholding Ministers no later than a month before the beginning of the enterprise's financial year.

The Statement of Corporate Intent contains much the same corporate data as is provided to investors in listed companies. For the next financial year and the two years thereafter, the following information must be outlined:

• the objectives of the enterprise
• the nature and scope of the activities to be undertaken;
• the ratio of consolidated shareholders' funds to total assets;
• a description of the accounting policies used;
• performance targets and other measures by which performance of the enterprise may be judged in relation to its objectives;
• a statement of principles adopted in determining the annual dividend together with an estimate of the amount or proportion of annual tax paid earnings that is intended to be distributed to the Crown;
• the kind of information to be provided to the shareholding Ministers by the State enterprise during the course of those financial years, including the information to be included in each half-yearly report; and
• any activities for which the board seeks compensation from the Crown (whether or not the Crown has agreed to provide such compensation).

In order to assist it to carry out its 'ownership' and 'shareholder' responsibilities in relation to the diverse range of SOEs, the Government established the 'SOE Unit', later to become the Crown Company Monitoring Advisory Unit. CCMAU provides ownership monitoring advice to both the Minister of State Owned Enterprises and other Ministers responsible for Crown Companies. Other forms of Crown company, such as Crown Health Enterprises and Crown Research Institutes are also monitored by the Advisory Unit.

State Owned Enterprises - 01 March 1998

Airways Corporation of New Zealand Ltd

Contact Energy Limited

Crown Forestry Management Ltd

Electricity Corporation of New Zealand Ltd

Government Property Services Ltd

Land Corporation Ltd

Meteorological Service of New Zealand Ltd

New Zealand Railways Corporation Ltd

New Zealand Post Limited

Solid Energy New Zealand Limited

Television New Zealand Limited

Terralink New Zealand Limited

Timberlands West Coast Limited

Transpower New Zealand Limited

Vehicle Testing New Zealand Limited

The Post Office example - Telecom, New Zealand Post and Postbank

Up to 1987 the main functions of the New Zealand Post Office were the receipt, processing and delivery of mail, ownership and management of the telephone system and regulation of telecommunications, and operation of a retail banking network.

The organisation embodied nearly all of the structural and systemic flaws of the traditional State sector - its functions were diverse and in some case unrelated (eg postal services and banking); some of its functions conflicted (eg telecommunications policy advice v telecommunications regulation v telecommunications operations v telecommunications marketing). Its postal and telecommunications operations were protected monopolies. Commercial policies and prices were determined by the Government on the basis of a wide range of social, economic and political considerations which tended to overwhelm commercial factors. Production systems were highly labour-intensive, with little in the way of incentives to improve efficiency or the quality of service to users. And ultimately, the Government was responsible for funding increasingly substantial capital development commitments - particularly in telecommunications, and bore all the risks associated with the Post Office's very diverse activities. In purely commercial terms, the Government received very little in return for its considerable investments in the New Zealand Post Office.

The decision was accordingly taken to separate the Post Office into its three main businesses - postal services, telecommunications and banking - and to set each of these up as State owned enterprises. Residual policy advice and regulatory functions were transferred to the appropriate core Public Service departments.

Telecom, inheritor of the telecommunications business, had a monopoly in the supply of all telephone connections (corporate and private), facsimile lines and provision of local calls and national and international toll calls. Subsequent deregulation of the telecommunications industry encouraged competition, prices to consumers have reduced in some areas, service standards have markedly improved (supply of a new telephone connection is down from six weeks to two days or less) and the range of services available has increased.

Telecom has since been completely privatised, and is partly owned by American companies Ameritech and Bell Atlantic. While there was criticism of a national asset being sold to overseas interests, those interests were limited to a 49.9% equity stake in Telecom, for which $4.25 billion was paid. Shares in the rest of Telecom were offered to the public in one of the biggest and best publicised floats in the history of the New Zealand sharemarket. The Crown has received substantial income from the private company, with the September 1995 half year financial statement listing $167.4 million tax paid.

New Zealand Post, the SOE retaining New Zealand's legal obligations in international mail delivery, has become a highly successful business organisation. Soon after corporatisation NZ Post reduced its staff numbers by 30% and closed 40% of retail outlets - despite some market resistance. A measure of its corporate success is the recent lowering of domestic letter charges from a standard 45¢ to 40¢. New Zealand Post's 1994 Annual Report declares 1993/94 tax paid at $33 million; the Government received $84 million in tax and dividends from the SOE.

The third branch of the old Post Office to be corporatised was Postbank. It too has subsequently been fully privatised and it is now owned by the ANZ Banking Group. Postbank also provides the Crown with revenue through taxation - a significant change from the past.

Summary

The redefinition of the State's role in business has been amongst the most successful, in economic and commercial terms, and the most controversial, in terms of its social and political impacts, of all of New Zealand's broad programme of reform since 1984.

There is no doubt that these policies have been very beneficial in economic terms. Where the Government was previously exposed to substantial and ever-expanding financial liabilities it now receives significant returns from its former businesses. In most cases competition has improved the quality of services very significantly.

Corporatisation, deregulation and privatisation have, however, also had very substantial social impacts. Thousands of jobs have been lost as the former State businesses have adjusted to the demands of competition. Communities that once depended on a single major industry - forestry, timber production, coal-mining, heavy construction (eg hydro-electricity development) - have been hard-hit. Rural communities in particular felt the losses of local Post Offices, which were often their main link to the wide range of services once provided by the Government.

As time has gone by new industries and opportunities have emerged to replace the former State businesses in many areas - or people have relocated to places where there are more or better opportunities. There have undoubtedly been some unfortunate effects - particularly through the enormous reduction in the supply of low-skilled and semi-skilled jobs, and consequently high levels of unemployment.

'Corporatisation' has done as much as anything to underline the need, in the modern world, for people to have productive skills and qualifications, and this has placed considerable pressures on an education and training system that has itself been undergoing radical reform. It has also placed very great pressures on those sectors of the community that have traditionally supplied low- and semi-skilled workers, and have accordingly placed only moderate value on the acquisition of skills and qualifications through the formal education system. The period of adjustment in these communities is likely to be quite long.