Listener: 24 August, 1996. (Published as Editorial)
The New Zealand public has just lost $328.4 million because of bad Treasury advice on the 1987 sale of New Zealand Steel to Equiticorp. The public lost that money because, during the sale process, the deal between the Crown and Equiticorp broke company law – section 62 of the Companies Act makes it illegal for a company to buy its own shares.
Justice Smellie ruled that the Crown, or, more precisely, some of those acting for the Crown, knew the law was being broken and that the Crown was benefiting from the illegality.
The judge found that five people, who were either agents for the Crown during the negotiation leading up to the sale, or Treasury officials, knew that the transaction was illegal. The list includes two people who held senior Treasury positions Doug Andrew, an economist, and Ivan Kwok, assistant solicitor, and who now hold even more scnior positions. Andrew is deputy secretary of Treasury and Kwok is Treasury solicitor.
The judge has exonerated Roger Douglas and David Caygill, the two former Labour Government ministers involved, because there was no evidence that they knew of any illegality. But the judge did not comment on the extraordinary constitutional implications of the case. To effect the ministers’ policy of selling NZ Steel, Treasury officials broke the law. They did not tell their ministers, and therefore surely they ignored established procedures? The officials did not personally benefit financially from the transgression, but the fact that no full communication occurred between them and their ministers on such an important transaction surely amounts to a corruption of the body politic.
The Wild West attitude that gripped much of the private sector in the 1980s seems to have overtaken a major department of State. Did some of the so-called sheriffs in this case join the rustlers? It raises the question of how widespread these cavalier attitudes were, even within the public service. Roger Douglas said in court that he was keen to get rid of New Zealand Steel to demonstrate to the Labour caucus that he was serious about privatisation. We must wonder whether the general tone of government encouraged other fast and loose transactions within the public sector – it isn’t hard to think of various infelicities that have been put down in the past to enthusiasm, incompetence, or procedural ambiguity.
In the case of NZ Steel, Equiticorp bid almost twice what the government thought the firm was worth, but, because it did not have the cash, offered to exchange NZ Steel shares for its shares, with a guarantee to convert to cash later. This arrangement led to the breach of section 62 of the Companies Act to which Treasury officials apparently closed their eyes. In the wake of the court decision, Treasury needs to demonstrate that this regrettable – and costly – mistake was an isolated instance, and not a characteristic behaviour of the time.
The court sat for 204 days before it yielded its judgment. While there may be questions of law to be considered by the Court of Appeal, and even the Privy Council, the facts seem well established by the court. It would be easy to ignore the consequences of these facts, by arguing that any investigation will paralyse the Crown’s chief economic and financial adviser. However, we may be sure that if one does not take place, next year a parliamentary select committee will make its own investigations, generating a chaos of allegation and counterallegation, much of which is unlikely to be resolvable.
In order to allay the suspicion that the Treasury was a law unto itself, the public needs to know how it dealt with the issues when they became evident, A Treasury in which such an improper procedure was an isolated instance, rather than a common occurrence, would have taken a series of routine actions once the problems had begun to surface. These would have included an investigation of the events by an officer from another division of Treasury, a comprehensive report with a set of recommendations to ensure such procedural break downs would not occur again, and a prompt implementation of those recommendations.
Although those actions would have been secret, the appalling story of the sale itself is now public, and that further story of the response within Treasury must now surely become public, too. The State Services Commission should appoint an independent investigator to report whether appropriate steps were taken. It is not just a matter of the additional $328.4 million burden on the taxpayer – the public’s confidence in the integrity of Treasury itself is at stake.