Comment

SOEs need to be good corporate citizens

It was never intended that state owned enterprises should use their monopoly commercial or regulatory power to stifle competition, yet it is at least arguable that is what has happened in television and in weather forecasting, writes Peter Dunne.

An old, and unfortunate, political taunt came to mind last week in the wake of the announcement from Mediaworks that it was putting its cash-strapped television business, TV3, up for sale. The announcement immediately occasioned much comment and speculation about the reasons why, and whether the channel had been subject to unfair competition from its state-owned rival, Television New Zealand.

When the Labour Government of the 1980s decided to establish state-owned enterprises as a way of divesting itself of much of the risk associated with running what had become a disjointed plethora of government owned businesses – including broadcasting, tourism,  banking, insurance and many other commercial interests – the model was immediately attacked by the National Party. The new entities were nothing but “economic transvestites” it railed, because while they would be free to compete directly with their private sector equivalents on a fully commercial basis, they would also retain the full financial backing of the state to ensure they did not fail.

The level playing field on which the state-owned enterprises were to be set free to compete upon, was in actual fact therefore anything but, their argument ran. Rather than injecting new competition into the marketplace, and freeing up some government capital for other projects, these new bodies would really become the new monopolies, not competing with the private sector, but stifling it, the critics said.

TV3’s current plight is a stark reminder of both the overwhelming challenges of trying to run a traditional television service in today’s digital environment and not having the financial backup of a sugardaddy like the government when the going gets tough.

For its part, the government of the time said that these new state-owned enterprises were the taxpayer’s best guarantee that they would never be privatised, and that the dividends they returned to the state would contribute more to government coffers than they drained out of it, which would help keep taxes low, and debt down.

That commitment lasted less than three years, as first Telecom, and then a steady stream of other lesser entities were privatised to help the government balance its books, and to meet the insatiable capital demand from the new state businesses, free from the constraint of decades of chronic under-investment and mismanagement.

Television New Zealand was always held back from the sale block, first because of the perceived political sensitivity of selling the official state broadcaster, and then second because of the imagined potential earning power of its more commercial channel, TV2.

But that was not a simple process either, because Television New Zealand exerted its corporate freedom in the new and rapidly changing market of digital services to operate on an entirely commercial basis, so casting aside any pretence of being a public service broadcaster, for even a part of its time.

That, in turn led to governments developing a range of mechanisms, from the funding agency New Zealand on Air, through to the broadcasting charter, to try to preserve even a modicum of public service broadcasting, but the wider commercial pressures were too great, leading it to eventually even give up seeking an annual dividend from the increasingly financially pressured company.

TV3’s current plight is a stark reminder of both the overwhelming challenges of trying to run a traditional television service in today’s digital environment and not having the financial backup of a sugardaddy like the government when the going gets tough.

It is also a warning of darker times to come for established businesses, including competitors Television New Zealand (with or without the Government behind it) and even subscription operator, Sky Television. This rapidly changing space demands a far more considered and thoughtful response from the Government than the bayard responses so far from some senior Ministers, more interested in settling old scores than promoting sound policy.  

Absurd weather

Another area of rapid change which is posing a significant challenge to the integrity of the original state-owned enterprises model is occurring in the unlikely field of weather services.

Here, the state-owned enterprise, MetService, and the Crown Research Institute, the National Institute of Water and Atmospheric Research, have established an effective duopoly in providing weather information. 

Aside from the absurdity of this situation where the Government is effectively competing against itself, the extraordinary thing is that it is by no means clear how it actually eventuated.

It apparently dates from the early 2000s, but there does not seem to have been any Cabinet or Ministerial decision mandating NIWA to expand its services to include weather forecasting. At best, it appears the NIWA Board and management at the time saw it as a logical extension of their core business, which did not need Ministerial approval to proceed.

Consequent upon the duopoly, MetService’s and NIWA’s attitude to private sector competitors in the field has been condescending and dismissive to say the least.

A Pricewaterhouse Coopers report to the Ministry of Business, Innovation and Employment in 2017 noted there was a belief that “that MetService and NIWA used their monopoly on weather data to stifle competition in the market for value-added services”.

The report also concluded that “the New Zealand model is at the most commercial and restrictive end of cost and limitations on data”, compared to other countries. This is not really any surprise, but it leads to perverse outcomes.

It is unsatisfactory in the extreme, a massive waste of taxpayer provided resources, that risks turning the state-owned enterprises model into a joke.

One major private sector weather forecaster finds it easier and cheaper to source New Zealand weather data from overseas, rather than pay the high prices demanded by the two government weather services in New Zealand. By contrast, weather data is provided largely free of charge in the United States, or at much more reasonable prices in the European Union countries. According to the Pricewaterhouse Coopers report, New Zealand is in a league almost of its own.

This is bad enough, but last week, the MetService and NIWA duopoly plummeted to new extremes with a public disagreement between the two government forecasters over warnings issued for a specific weather event. So not only do we have two government owned weather services competing with each other, we now have the two of them fighting with each other over the best way to interpret particular weather events.

It is unsatisfactory in the extreme, a massive waste of taxpayer provided resources, that risks turning the state-owned enterprises model into a joke.

Ministers, who have shown a distinct unwillingness to become involved so far, despite many contrary promises over the years, can no longer stand idly by.

The time has come for shareholding Ministers to take a more active role and start asking hard questions about why and how this situation has been allowed to develop; why the New Zealand  model is so expensive, anti-competitive, and restrictive; and, who actually benefits from this. Certainly, neither MetService’s nor NIWA’s forecasting record for adverse events is so has been so unblemished that a demonstrable public benefit from the duopoly can be argued credibly.

The premise behind the establishment of state-owned enterprises was that they would benefit from competition with the private sector, and the standard of their performance would lift accordingly.

It was never intended that they should instead use their monopoly commercial or regulatory power to just effectively stifle competition, yet it is at least arguable that is what has happened.

If state-owned enterprises are to survive, shareholding Ministers will need to ensure they return to acting like good corporate citizens in the interests of their shareholders – the long-suffering New Zealand taxpayer.

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