Mixed Ownership – from the bowels of Nexus

This was originally printed in Nexus Magazine Issue 7 2012, released on Monday 30 April 2012.

Yes, this week we’re supposed to be talking about Health. But I’m not going with that this week, mostly because I couldn’t think about something I could write about regarding Health. Instead, I am going to talk about the Mixed Ownership Model for State Owned Assets, or as the left incorrectly brands it, Asset Sales.

Okay, it might seem a little bit of a minor distinction, but I don’t think it is. It might not be hugely different by definition, but in terms of connotation, it’s very different. When people think of asset sales, they think of the 1980s when Labour sold 100% stakes in New Zealand’s assets. That’s very different to the Government having a controlling 51% stake in the assets.

We don’t need to look far to see positive examples of the Mixed Ownership Model in practice. Just look at Air New Zealand. In 2001, after the purchase of Ansett Australia by Air New Zealand almost brought the company to collapse, the organisation was renationalised, with the New Zealand Government owning 76.5% of the company. Since then, the company has been given at least ten awards, including Airline of the Year in both 2010 and 2012. Does this seem like a failed business, left to the wolves by a stake of the company not owned by the Government? I can’t see a single award that Air New Zealand won before 1994, which was well after the Government sold the airline in 1989.

What Air New Zealand shows us is Government ownership doesn’t give high performance, privatisation gives high performance but can lead to issues (such as the near collapse of Air New Zealand), and a Mixed Ownership Model gives both the high performance of external owners and the stability of Government ownership.

During the election campaign last year, you will have heard Labour saying that they learned from their mistakes of the 1980s in terms of asset sales. However, I didn’t hear them saying they learned from their mistakes of 2001 when they introduced a Mixed Ownership Model to Air New Zealand. That’s what you need to remember – Labour was the first party to introduce this model. In fact, Labour leader, David Shearer has been asked if he would buy the externally owned share of Air New Zealand. He didn’t say “Oh yes, of course. The Mixed Ownership Model is terrible, so we need to remove it from Air New Zealand too”. Instead he said that he thought that would not be a smart idea. Why is that? I would suggest it’s because the Mixed Ownership Model makes sense and works. Labour bought all of KiwiRail in 2008 – couldn’t they have done the same thing with Air New Zealand if Mixed Ownership was so bad?

Let’s look at a more theoretical reason why Mixed Ownership works – particularly when it comes to assets like power companies. No, lefties, I am not going to say the trickle-down theory. I am, however, going to say Mixed Ownership will work here because it will provide competition that currently does not exist in the market. No, it’s not creating more power companies as such. However, right now, Mighty River Power, Meridian Energy and Genesis Power are all owned outright by the Crown. This means while they are three separate companies, in effect they are one, and we have a lack of competition. In reality, we have a duopoly – the Crown and Contact Energy.
It’s not too recent history when we had a duopoly in the mobile phone market. The introduction of more players in the market (in particular 2degrees, but also Black & White, Slingshot, Compass, TelstraClear, Orcon, etc) reduced the cost significantly.

By selling 49% of Mighty River Power, Meridian Energy and Genesis Power, you are creating a market with four major players. If the mobile market saw marked decreases in price with the introduction of a third player, imagine what will happen for energy in the long term with not only a third, but a fourth player.

Note, I did say in the long term. It will not be immediate, but in the long term, prices should drop.

Yet, the left is not wrong in saying a company is going to work to make its shareholders better off by increasing profits. With prices dropping, how can they increase profits? By increasing efficiencies. For New Zealand, this would probably involve investment in the infrastructure, which in a lot of places is getting quite old. Yes, that will possibly increase prices for consumers in the short term, but in the long term, market forces will reduce prices.

And just quickly, I don’t buy the “we already own it” argument. If I own a car, I can keep it, I can dispose of it, or I can attempt to sell it to someone else. I can’t dispose or sell my 0.00002% of each SOE, so I mustn’t own it?

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About Daniel Farrell

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Posted on April 30, 2012, in From Nexus Magazine, New Zealand Politics. Bookmark the permalink. Leave a comment.

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