Public debate over the National Government’s proposals to reduce the government share in five state-owned enterprises (SOEs) to 51% has been polarized and there has been misleading advocacy from all parts of the political spectrum.  The Labour Party cried “privatization” in the lead-up to last year’s election, whilst the National Party in its pre-election campaign dressed its SOE plans ups in the language of “the mixed ownership model”.  In truth, the National Government’s proposals have seemed to represent a move towards privatization rather than any genuine belief in the merits of a mixed model: no real attempt has been made to defend the unique virtues of a 51% government share (or to point to overseas examples where a 51% share has been effective, such as that of the Brazilian aircraft manufacturer EMBRAER), and the arguments for the move have been grounded in the value of market discipline and share ownership by “mum and dad” investors – arguments which could justify total privatization.  However, even with the character and motivations behind the National Government’s proposal becoming clear, media commentary has lacked a certain nuance.  What I will attempt to do in what follows is provide a slightly more fine-grained analysis of the proposed reform of state-owned enterprises, leading to the conclusion that the suggested sale of shares in the five state-owned enterprises is a misguided move.

First, some facts.  What the Government is proposing (and has been proposing, to be fair, for some time since prior to the last election) is the reduction of its share in five state-owned enterprises – Genesis Energy, Meridian Energy, Mighty River Power, Solid Energy, and Air New Zealand – to 51%.  This means that the Government will retain a majority stake in these state-owned enterprises, but will allow the sale of the remaining shares on the market.  The Government estimates that it will make between $3 and $7 billion on this sale, which the Government has said will be deposited in the “Future Investments Fund” for infrastructure investment.  The state-owned enterprises were established under the State-Owned Enterprises Act 1986, an Act which notes that state-owned enterprises are to “operate as a successful business” (including through serving as a good employer and exhibiting social responsibility), allows for Ministers to hold shares in these enterprises, requires that these enterprises do not act inconsistently with the Treaty of Waitangi, and establishes transparency measures (such as annual reports and statements of corporate intent).  New legislation will have to be passed to authorize the sale of shares in state-owned enterprises.

What this change is really about is the level of government control and oversight over Genesis Energy, Meridian Energy, Mighty River Power, Solid Energy, and Air New Zealand.  Whether the move is right turns on one’s view of the appropriate level of government ownership and control of these enterprises – and on whether one believes that the sale of a significant government stake in these enterprises will achieve the asserted benefits of improved economic performance and a deepened capital market.  Let me address these issues one by one.

Significant government ownership and control allows the use of these state-owned enterprises as “market rudders” within the small New Zealand market.  That is, in the same way that the government has used Kiwibank as a tool to steer the banking market in certain positive directions (for instance, in interest rates), the presence of state-owned enterprises creates an opportunity for the government to nudge markets – for instance, the electricity and coal market – in socially desirable directions.  In the electricity and coal markets, the state-owned enterprise model (with high levels of government ownership) means that environmental innovation can be encouraged, and power prices kept acceptably low.  Recent governments have not always used these “market rudders” as they might.  But what is clear is that this capability will be lost, or at the very least dented, with the advent of the Government’s proposed mixed ownership model.

What will also be lost are legal accountability mechanisms for the activities of the five state-owned enterprises affected by the Government’s proposals.  State-owned enterprises with high levels of government ownership have been found in law to be amenable to judicial review (which ensures fair process in decision-making) and are also thought to be subject to the New Zealand Bill of Rights Act 1990, since they serve important public functions.  But the further that these enterprises move away from government ownership and control, the more they slip out of the robust ring of public law controls: it could no longer be said definitively that the state-owned enterprises with their proposed new structure would be able to be taken to court in judicial review or Bill of Rights Act proceedings.  Some might shrug their shoulders at that thought: perhaps there is no reason for Mighty River Power or Solid Energy to have to honour public law obligations and to face stringent legal accountability.  But others would say, with some justification, that what we are talking about are quite essential services, such as electricity.  Where these services are refused to individuals, it may be that higher standards of fairness in decision-making should be required.  The public would seem to agree, as evidenced by the outcry when Mercury Energy – a division of Mighty River Power – switched off Folole Muliaga’s electricity supply abruptly in 2007 because of non-payment of a bill of $168.40, resulting in Mrs Muliaga’s death since she was unable to access an oxygen machine.  And Singapore has opted for a similar commitment, using a state-owned enterprise to ensure that its ports and power industry are 100% government-owned.  The accountability that is achieved by government control is diluted by the sale of shares in these state-owned enterprises.

Maybe what is lost, however, is offset by what is gained in the way of improved economic performance and capital market benefits.  The Government argues that incentives will allow for better returns once shares are floated in Genesis Energy, Meridian Energy, Mighty River Power, Solid Energy, and Air New Zealand.  It also states that the partial sale of these assets will deepen New Zealand’s shallow capital markets and provide another investment option for “mum and dad” investors. 

Unfortunately neither of these claims really passes muster.  The enterprises are performing well: New Zealand’s state-owned enterprises returned 16.4% on funds in the 2010-2011 financial year according to Treasury figures, and Air New Zealand (to take just one of the state-owned enterprises) is widely regarded as a top-performing New Zealand company, with the most effective CEO in Rob Fyfe in the country.  And it is hard to see that distant share-owners will provide such increased discipline for the performance of these enterprises.  Further, in terms of capital market benefits, selling shares in these five enterprises is surely no long-term solution to New Zealand’s capital market problems.  The sale may provide a burst of share activity, but New Zealand’s capital market challenges are structural, and the sale does nothing to address these underlying structural challenges.

When the dangers outlined above are weighed against largely illusory benefits (and when one throws into the calculation the danger of arriving at an accurate price for the partial sale of these assets, especially at a time of economic uncertainty and when the Government aims to limit the purchasers of shares to “mum and dad” investors), it becomes clear that the Government’s mixed ownership model is a wrong turn for New Zealand.  Too much is lost from this sale, and not enough gained, to say that it is a move that we need as a country.

*Max recently graduated with a Law/Arts conjoint degree from the University of Auckland