Listener 30 January, 1999.

Keywords: Business & Finance; Governance;

One of the great upheavals of the 1980s was the `corporatisation’ of the state owned enterprises (SOEs). Following widespread concerns in the late 1970s, the 1984 Labour Government reorganized the government’s businesses into private corporations in every aspect except that the shareholders were a couple of government ministers. As many as seven major studies have been published on corporatisation. What can we learn from them?

Two books are about Forestcorp. Out of the Woods (Reg Birchfield & Ian Grant), commissioned by the company, seems to have been a `get-Treasury’ exercise. It fails because while citing official papers, there is no referencing, so there is no way of checking them. (In my experience many people have difficulty interpreting official documents, especially if they come with a particular predisposition.) A Century of State-Honed Enterprise is a celebration of state plantation forestry. Written by Andy Kirkland and Peter Berg who were closely involved in Forestcorp’s corporatisation and privatisation, it combines pride with sadness the era has ended.

This book, with Vivienne Smith’s Post Office story, Reigning in the Dinosaur, are the two best (and well illustrated) reads. Yet for all its interest, anecdotes and achievements, Smith spoils the book with her last sentence, which skites that the Post Office had been awarded a AA+ credit rating. Such things are a means to an end. What is really pleasing is that we still getting good service at a remarkably low cost.

The Power to Manage (Barry Spicer, Robert Bowman, David Emanuel and Alister Hunt) is one of three books from the Auckland University School of Business and Economics. It arises from a Treasury funded study to assess the creation of Electricorp. The approach is based on accounting, management theory, and historical anecdote (some of which is revealing, although not necessarily in the way the authors intended). Like most of these studies it is greatly enamoured with the outstanding competence of the men who ran the new enterprises (there were hardly any women). And it provides detailed financial performance indicators which show significant performance gains.

The theme of The Remaking of Television New Zealand 1984-1992 (Spicer, Michael Powell and Emanuel) is nicely illustrated by the book’s cover which looks like a corporate annual report. Again there is considerable detail about the changes. All the reviews I saw of this book were unfavourable, typically written by media experts who were furious that so little regard was paid to the impact of the corporatisation on the quality of the TV programs. This is nicely illustrated by the conclusion which lists achievements such as improved profits, market share, and share of local programming. But the critical issue for the average TV viewer, whether programming content is any good. One recalls a 1960 satirical group called `The Rubbishers’ who when evaluating children’s books, looked at every aspect – wearability, tearability, affordability, washability – except the content of the book, against which the matters investigated were trivial. It takes more than double entry bookkeepers to run a TV station, but the reviewers should surely have found the book enlightening as to what happens when they try.

The three authors makes a parallel mistake in their Transforming Government Enterprises, which looks at Electricorp, TVNZ, Coalcorp, Workscorp and the Government Computing Centre. in the same manner but with less detail as the previous two books. They conclude that there was an improvement in the SOE’s `economic and financial performance.’ However economics is not the same as accounting, and they markedly fail to evaluate the economic issues.

This was probably a consequence of the three studies’ commissioning agent, the Treasury. The same problem applies to economists Ian Duncan and Alan Bollard’s Treasury commissioned study on nine SOEs, published as Corporatization and Privatization. Restricted to looking at the individual firms they could not assess at the overall economic impact. For instance, the corporatised industries seem to have dumped around 40,000 workers (according to some data prepared by Bryan Philpott). It matters a whole lot whether those workers were reabsorbed into employment, or whether they remained unemployed (or displaced other workers who became unemployed).

We may not be able to answer that question. But as the TVNZ case illustrates, an enterprise’s purpose is important. It may not be captured by accounting measures. A retired Secretary of the Treasury said the studies they commissioned misled in regard to the likely success of corporatisation of public hospitals, where the concern is health care not profits. In summary there is a lot of evidence that the corporatisation of SOEs gave some benefits, especially in financial productivity, but there is very little that there was an overall benefit to the economy.

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None of these studies really address privatisation, although the Auckland academics keep leaping to the conclusion that privatisation is warranted, without any evidence except a thin theory (which is often contradicted by fat facts).

One is reminded of a story told by MP Rodney Hide’s friends. Apparently Hide’s lectures could be as riotous as parliament, and the students were having trouble throwing their various missiles into the wastepaper basket. Asked what he would do about, Hide is said to have avoided the obvious solutions such as stop throwing missiles or get a bigger bin. His solution was to privatise the university. If privatisation is the answer, very often one has misunderstood the question.

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KERR’S RETREAT

Note Roger Kerr commented on the article in a letter to The Listener (22May 199). My reply in the column of 19 June 1999, was as follows.

Roger Kerr, executive director of the Business Roundtable, seems to be backing down from the extremism of his rogernomics. Once it was insisted that all government businesses should be privatised because all would perform better in private ownership. We are now told that this was true only on average. That means some businesses perform better if they were retained in public ownership. An able government would retain those that operated better in the public domain. However, Kerr still claims that a range of studies demonstrate that on average and over time privatisation is better. Another range of studies comes to the opposite conclusion.

Kerr and I would probably agree there are no studies which show a national benefit from underpricing state assets which are privatised, as the New Zealand government has done (including, by the Minister’s own admission, Contact Energy), nor using the proceeds to pay for temporary tax cuts as occurred in the past, and as some still advocate.