Turn-of-the-century change in New Zealand's public enterprises.

Author:McKinlay, Peter
 
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Abstract

The New Zealand reform agenda of 1984-99 included a significant redefinition of the role of the state. Many public sector activities were restructured into corporate form; policy formulation and operations were largely separated; and privatization was extensive. The change of government at the end of 1999, to a center/left coalition, has seen a major reappraisal. Privatization is out of favor; state-owned enterprises (SOEs) are to be managed to enhance shareholder value, with authority to grow their businesses; and the social objectives of crown-owned companies in areas such as health, housing and public broadcasting are being reasserted. This article explores the implications of these shifts and indicates that New Zealand's SOE model, as well as the rationale for using the company form more generally in the public sector, are now under challenge. Reasons include an apparent lack of understanding of the nature of the corporate model and renewed political risk because of the difficulty of separating out social, political and commercial interests in the management of public affairs.

Introduction

The period 1984-1999 in New Zealand was one of major public sector and economic reform. Comprehensive restructuring included a significant redefinition of the role of the state and, flowing from that, the state's withdrawal from a number of activities that had previously been seen as the core business of government. As an OECD report (1999: p. 4) puts it, the underlying philosophy was that "the state should do and/or fund only those things relating to the exercise of its constitutional and coercive powers and/or those things where it has a comparative advantage".

The reform agenda was actively pursued by the Labour party which came to power in 1984, and subsequently built on by the National party which replaced Labour in 1990. The scope and magnitude of the reforms, and the relative haste with which they were introduced, attracted considerable overseas attention and applause. As Kelsey (1995: p. 5) records, the "radical adventure captured the imagination of the international economic community, whose institutions and organizations provided a chorus of support". Kelsey (1995) dubs the reforms "the New Zealand experiment", and Boston and his colleagues (1996) label the institutional elements "the New Zealand model".

A key component of the reforms was that trading departments and some other bodies with commercial or quasi-commercial interests were corporatized as limited liability companies and later, in several cases, partially or fully privatized by way of divestment. The specific initiatives, as well as those in relation to the core public service, public finance, and purchaser-provider arrangements, have been well documented and analyzed in other studies, so most of them need not be addressed in this discussion (see e.g. Boston, 1995; Boston, Martin, Pallot and Walsh, 1991, 1996; Duncan and Bollard, 1992; Easton, 1989, 1997; Kelsey, 1995; McKinlay, 1987, 1998, 2000; Schick, 1996; Scott, Bushnell and Sallee, 1990; Spicer, Bowman, Emmanuel and Hunt, 1991).

Many of the country's public enterprises are now structured as companies which are registered under the Companies Act but also governed by other important legislation of immediate significance of their operation, control and accountability. In terms of the latter legislation and the associated ownership arrangements, they fall into three categories. The first category comprises a number of "state-owned enterprises" (SOEs) which are subject to the State-Owned Enterprises Act and are expected to function very much like and in competition with private business enterprises. This category is well known internationally. Several SOEs have been divested, such that by the mid-1990s New Zealand was one of the world's leading privatizers. (1) The second category consists of various "crown-owned companies", such as Housing New Zealand Limited (Ltd), the crown health enterprises (which existed from 1992 to 1998), and the crown research institutes, with the legislation concerning their business and social obligations being the Housing Restructuring Act, the Health and Disability Services Act, and the Crown Research Institutes Act, respectively. The third category includes the local government equivalents of the SOEs. These are "local authority trading enterprises" (LATEs) which are owned by local governments and run pursuant to provisions of the Local Government Act.

The discussion here covers enterprises in each of these three categories. Of particular interest are developments and trends over the period since the last general election in 1999.

A Change of Government

In late 1999, the National party (which by then was in power as a minority government) lost office to a coalition between the Labour party, as the dominant member, and the Alliance party which is ideologically to the left of Labour. The Labour party (1999a) had campaigned on a platform that:

Labour will not engage in a programme of privatization of state assets. Labour supports the state owned enterprises model because SOEs are efficient, profitable, and owned by the people of New Zealand ... Labour does not see SOE status as a halfway house to privatization but a sustainable, permanent mode of operation. This policy commitment was confirmed in the Governor-General's "Speech from the Throne" at the opening of parliament for the year 2000 (following the 1999 election). The speech included the statement that:

My government will not have a state asset sales programme. Accordingly, Treasury has been instructed to cease all work on options for implementing such a programme. It will be made clear to the Boards of SOEs and other commercial organizations that their job is not to prepare assets for sale but to enhance their value and ability to contribute to economic and social growth and development as state-owned entities. Clearly, a major change was heralded in the relationship between the state and its public enterprises. The change is still evolving and is likely to do so for some time yet. Nevertheless, there is already enough evidence for this discussion to consider the shape of things to come. This is especially so concerning the organization and management of public housing and health facilities, along with a few other areas of public enterprise activity.

Several important lessons can be drawn for the experience to-date, with questions rightly being raised about the robustness of the company structure in cases where a government has significant noncommercial policy objectives at stake. It seems clear that it is not feasible to combine commercial and social objectives in the one organization constituted in the company form.

Housing and Health Facilities

State Housing

In 1992, the National party government restructured its policy and operational interests in housing. The former Housing Corporation of New Zealand, which had combined a policy advisory role with the provision of state rental housing (involving approximately 67,000 rental units) and subsidized mortgage lending, was stripped of most of its functions. The state housing portfolio was transferred to a newly-created state-owned company, Housing New Zealand Ltd, which was then expected to operate as a successful business in its role of providing housing for low-income members of the community. The policy advisory role was passed to a new Ministry of Housing, consistent with an emphasis on separating responsibilities for policy advice and implementation. The Housing Corporation was left with residual roles in providing mortgage finance for groups with special needs and rental housing (on market terms) for community groups. Its primary function was to continue the process of selling-off the state's substantial portfolio of low-income mortgages.

In respect both of subsidized rental housing and of low income mortgages, the government was of the view that the need targeted by its housing programs was one of ability to pay and thus was best addressed through the social benefit system. Rentals on state houses were increased to market rates, as were interest rates on low interest mortgages (except in those few cases where the mortgage document did not include an interest review clause). The existing forms of assistance were replaced by an accommodation supplement available to all home occupiers regardless of the ownership of their houses or the origin of their mortgages.

As part of the restructuring of its housing interests, the government extracted significant capital from Housing New Zealand by requiring it to borrow on commercial markets and to return capital as part of a policy of minimizing the government's investment in housing. The company was also required to reduce its housing stock through various sales programs, including a partly-subsidized program of selling houses to existing tenants and on the open market.

The Labour party's 1999 election policy included a commitment to return to an income-related rental for state housing tenants, and effectively to reverse the former government's restructuring of its housing interests. In conformity with this commitment, the Labour/Alliance government took three initiatives. First, it amended the Housing Restructuring Act to state that the principal objective of Housing New Zealand is to "help meet the Crown's [government's] social objectives by providing housing and related services in a businesslike manner". The purpose of this change was to remove the company's profit-focused objective of operating as a successful business. Second, the government abolished market rentals for state housing tenants and replaced them with an income-related rental set at 25% of income. Third, with effect from 1 July 2001, it recombined its housing interests in a new statutory corporation, Housing New Zealand Corporation. This body is now the government's principal policy adviser on housing, with Housing New Zealand...

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