The Government Investment statement published yesterday raises real questions about what the Government should own
and how it should manage what it does own..
It portrays a negative picture of the Crown as manager of publicly owned assets like schools, hospitals, social housing and the defence estate and it highlights the poor return it gets from many of its investments in commercial entities.
It also reveals the outcomes of a number of stress tests on the New Zealand economy which show what would happen if a natural or financial disaster were to strike New Zealand.
The news is not good and may go a long way to explaining why both the former Finance Minister, Steven Joyce, and the current one, Grant Robertson, are both so dedicated to getting net debt down to 20% of GDP.
But the big story within the statement was the questions it raises about crown ownership of assets and its management of them.
However, if the statement could be thought of as implying the Government should dispose of some assets, Robertson last night was ruling that out.
“The Government has no intention of selling assets,” he said.
“Our focus is on the way to improve the performance of the assets that we do own.”
At the same time, the statement proposes that we look at more than simply the bald numerical value of the Government’s assets and the financial return that some produce; instead it is applying Treasury’s Living Standards’ Framework concept of “wellbeing” as an additional measure of the value of the Government’s assets.
But in the meantime the figures are stark.
The big bill coming on asset maintenance
As at 30 June 2017, the value of government assets totalled $314 billion.
Almost half of them, $145 billion, made up the social asset portfolio.
Nearly half of that was held in three areas: transport, social housing, and primary and secondary schools.
The overall picture shows that across the social asset portfolio, because of changing demographics there is a growing mismatch between assets and demand and many of the them are nearing the end of their useful lives.
For example, over 19 percent of hospital assets (by book value) are rated in poor or very poor condition
“A number of DHBs reporting underspends in maintenance also had net deficits, suggesting that some DHBs may be deferring repairs and maintenance to redirect operational expenditure to other areas,” the statement says.
“DHBs are relying heavily on the government for additional funding to replace assets rather than financing them from their own resources.”
All up, Treasury forecasts that the DHBs’ ageing asset base will require capital expenditure estimated at $14 billion over the next ten years.
The statement says Housing New Zealand has limited financial scope to concurrently maintain or refurbish ageing housing stock and build new houses.
Many assets are nearing the end of their functional lives, with approximately 40 percent of houses constructed prior to 1966.
For 2018, over 1,400 replacement and new homes are expected
“However, it still remains challenging to maintain a net rental income sufficient to sustain future portfolio activity.
“Depreciation reserves will be insufficient to cover the required investments,” it says.
The overall picture is that of the previous Government skimping on spending to maintain the Government’s asset base.
But it is not just age and lack of maintenance that threatens that base.
Sudden events can create massive challenges for the Government.
“Corrections’ prison network is forecast to be operating close to capacity until approximately 2021, meaning the network is vulnerable to sudden events that could reduce capacity, such as earthquakes, fires, riots etc.,” the statement says.
Treasury’s “what if” the big one happened
And Treasury has run some “stress tests” on the economy to see what would happen if certain events happened.
- It calculates that a major earthquake in Wellington could have a total financial impact on the Government of $65 billion. (Current Treasury estimates cost the fiscal impact of the Christchurch earthquake at $17.5 billion.)
- A six-month foot and mouth disease outbreak could cost the Government $22 billion.
- And a sharp decline in commodity prices which led to a 20% drop in the terms of trade could cause a seven per cent unemployment rate and cost the Crown $157 billion.
These tests have been obliquely referred to in the past by the former Finance Minister, Steven Joyce, as a reason for the National Government’s commitment to have government debt be held at 20% of GDP by 2020; Robertson has the same target but by 2023.
Treasury says both the Wellington earthquake and the fall in commodity prices would push debt to GDP above 30%.
However what is happening now is also threatening, albeit on a smaller scale.
The record of the Crown investments that the Government actually manages portray a picture of skimping on maintenance, which suggests inadequate management.
Why continue to own poorly performing SOEs and companies
And there is a hint in the Treasury statement that the Government should consider whether it is worth continuing to own some of these entities; a hint reinforced by an unfavourable comparison of their performance alongside that of the partially Crown owned companies which are listed on the stock exchange.
The list of wholly owned commercial assets includes 11 state-owned enterprises including KiwiRail, Landcorp, NZ Post and Transpower; five crown companies including several airports and TVNZ and one Crown entity, the Public Trust.
“The government’s expectation is that these entities will be as profitable and efficient as comparable businesses owned by the private sector.
The government realises returns from the portfolio primarily through dividends, and the dividend yield is low; the focus should be given to improving dividend yield or expanding options for realising returns.
“Beyond commercial returns, there are few other reasons to own companies.
“Where returns are relatively poor and risks are relatively high, the strength of those other reasons need to be frequently examined to make sure the case for public ownership continues to be sufficiently strong.”
Apart from the cash cow that is Transpower, dividends from the commercial portfolio have been low.
“In the absence of capital returns, dividends are the government’s only means of realising returns.
“Dividends to the government since 2013 were $1.42 billion.
“Excluding Transpower, dividends for the same period were only $0.35 billion, despite the government’s preference for cash dividends.”
Total shareholder returns since 2008 have been below those of the companies in the NZX50 index.
In contrast, the four Crown companies listed on the sharemarket — Air New Zealand, Mercury, Meridian and Genesis energy companies — have outperformed the NZX50 index.
Treasury doesn’t say so — but the message is clear. The discipline applied by outside investors and the public scrutiny faced by sharemarket listed companies has literally paid dividends.
Treasury says there is more to life than pure numbers
But Treasury are arguing that simple numerical performance may not be all.
They have chosen the Investment Statement to introduce their Living Standards Framework as an economic management tool.
Speaking yesterday in Christchurch, Treasury Secretary, Gabriel Makhlouf said an ongoing challenge was to sharpen our understanding of how assets lead to improved living standards.
The statement said that historically, reporting and monitoring on government performance had generally been centred on financial and economic indicators, such as the government’s debt position and national income (GDP).
“Assessment of government agency performance and project proposals has also relied heavily on financial and other operational metrics.
“A more mature approach informed by the Living Standards’ Framework would recognise that traditional economic and financial measures miss important aspects of wellbeing.
“The approach would embed more fully all government activities, including government asset and liability management, within a broad conception of national wealth.
“Balance sheet objectives would be linked explicitly to the overarching aim of enhancing the wellbeing of current and future generations.”
This can veer into obtuse economic theory
As an example, in a discussion within the statement on how to value so-called “Natural capital”
Treasury point to the challenge of how to place a value on knowing a forest exists, regardless of any intent to ever visit it.
Ultimately the growth and development of the Investment Statement will pose an existential challenge to Labour.
Since the point of the statement is to define the value of Government-owned assets, what happens if the assets have no or little value?
For a party as committed to Government ownership and as opposed to privatisation as Labour, this will be a difficult question to answer.