John (Jeykell) Key and Bill (Hyde) English

The (New Zealand) Minister of Finance Bill English is obviously getting worried. Recently he pulled all his State Owned Enterprise chief executives into a huddle and rarked them up about the need to achieve a reasonable return on capital.

like 9%.

To which I respond, "Are you insane?"

Look around man! Who in the private sector is making a nine percent return on capital at the moment? Come to think of it, in some sectors who is making any return on capital at all?

The whole objective of the Government charging for capital is a sensible one. It is about opportunity costs. If we let Whangerei District Health Board spend $3 million on a Magnetic Resonance Imaging machine then that is three million denied to other users of the health system. If it cheaper to get all MRI patients down to Auckland by bus, ambulance or helicopter then we should encourage Whangerei DHB to do that instead. That means we have to operationalise the cost of capital - and we do.

But. And this is a big but. It relies on the Government being a bit realistic about the opportunities for returns it might get from this capital. And in the current economic environment these are not high.

Because its all very well to say that bank deposits and ten year bonds may return 5% but that is for cash. Not used MRI machines or car manufacturing plants or other illiquid assets. Indeed some of these may have no saleable value whatsoever.

This brings us into a chicken-or-the-egg question of valuation. Should these State Owned Enterprises write-down the value of their assets because of their reduced ability to generate income or be sold? Well, not yet because that hasn't been proven. On the other hand keep the target for return on capital high and it soon will be because customers will rebel.

And this brings us to another point.

Why does the Government own NZ Post; 75% of the electricity industry; huge swathes of farmland; ACC; Air New Zealand; KiwiRail and numerous other enterprises? Well because they are near monopolies or it is too politically sensitive to sell the buggers. In other words these companies are held by the Government not private interests because the capital they have invested is regarded as having an element of public good about it.

And the Government wants them to return a usurous return on capital?

We know where it will come from already. It will come from customers most of whom are the taxpayers the Government has just given a moderate tax credit too. So the Government is planning to give with one hand (financial stimulus and all that) and take with the other (cripes we're in deficit!).

It's like we have John Key as Dr Jeykell and Bill English as Mr Hyde. How long will it take the brainless dizzies in the Press Gallery to tell the nation this? Maybe when somebody tells them because they'd never work it out for themselves, that is for sure.

In some sectors like electricity it is very hard to see what benefit the deregutaion/SOE model has actually brought. Simplification makes sense. In others like NZ Post the SOE model has worked well. In all cases one has to look at the circumstances.

In my view the short answer is yes, pour the acid on the whole state sector to cut costs and rein in spending. Its hopelessly, stupidly bloated and needs trimming. But don't set stupid numerical targets like a high return on capital that will encourage political and economic stupidity at SOE boards in a time of financial delicacy.

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