Story: State-owned enterprises

Page 1. What are state-owned enterprises?

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State-owned enterprises are government-owned companies created by the State-Owned Enterprises Act 1986. They are often referred to by the acronym SOE. In the government's accounts for the year to June 2010, 17 state-owned enterprises plus Air New Zealand had combined total assets of $53 billion and revenues of over $13 billion. Air New Zealand is not technically a state-owned enterprise, but is treated as one in the government accounts.

In 2011 the biggest state-owned enterprises were:

  • KiwiRail
  • New Zealand Post (including Kiwibank)
  • Genesis Power and Mighty River Power, which generated and sold electricity
  • Transpower, which operated the national electricity grid
  • Landcorp, the farming and land sales business
  • Solid Energy, which mined and sold coal.

1920s state-owned enterprises

In 1925 Prime Minister Gordon Coates called for 'greater concentration on business-like management and organisation'1 of state departments, expressing the feeling within the government, Treasury and the business community. The policy resulted in equivalents to late-20th-century state-owned enterprises – notably the major commercial departments, the Railways and the Post Office. The finances of both departments were separated from the government's revenue accounts and managed as a business, and they controlled their own staff (the rest of the public service was controlled by a public service commissioner). In 1931 the railways were further separated from the public service by being placed under an independent board. They returned to direct government control in 1936.

Origins of state-owned enterprises

State-owned enterprises were created in 1986 from existing government departments or corporations. Since the later 19th century public enterprise has played a role in New Zealand’s development. At various times, the government has either fully owned or had a majority stake in enterprises involved in banking and finance; insurance; farming; forestry; mining; electricity; petrochemicals; rail, air and shipping transport; postal and telephone services; hotels and travel agencies; and radio and television broadcasting.

Governments have invested in market activities for many reasons, including:

  • to take direct control of important national assets, such as electricity generation and transmission, postal and telephone services, or railways
  • to provide employment or training for a growing workforce (such as apprenticeships in the Post Office or Railways)
  • to ensure adequate competition for private companies in sectors such as insurance
  • to break in new land for pastoral farming and then sell it to private farmers
  • to promote the growth of a new sector of the economy, such as tourism.

The government often subsidised the operations of public enterprises or protected them from private-sector competition. Governments justified this assistance because of the national importance of the enterprises and their contribution to employment and other sectors of the economy.

Reasons for their creation

The Labour government that introduced the State-Owned Enterprises Act in 1986 justified it on the basis of improving the profitability of public enterprise. The existing mix of commercial and social objectives, and centrally imposed bureaucratic controls over salaries and staff, were seen as impediments to the efficient operation of government-owned businesses.

The fundamental idea of the act was to create a new class of public enterprise where profit would not necessarily be the sole objective, but any other non-commercial objectives would be specifically identified and the enterprise would be paid an explicit subsidy equivalent to the loss it would make in providing the service.

The Treasury was responsible for much of the policy development leading to the act, and argued that setting up enterprises as separate legal entities under the Companies Act would limit the government’s liability to lenders to the enterprise. They also argued that giving state-owned enterprises’ boards the same powers as those available to private-sector companies would limit the scope for detailed ministerial intervention in the management of the enterprise.

Inefficient dinosaurs

A major reason for the creation of state-owned enterprises was the inefficiency of some large government departments. In 1983/84 the Ministry of Energy received a return of 4% on its electricity division and minus 3% for state coal mines. At the time, the corresponding average return in the private sector was around 11%.

Removing protection

At the time that state-owned enterprises were set up in 1986, several government businesses were protected mainly by restricting or prohibiting competitors’ access to their markets. For example the Post Office had monopolies over both mail delivery and the national telephone network. Electricity generation and transmission was almost entirely government-owned. Competition for the Railways Department freight business from road transport was restricted by limits on how far trucks could carry freight.

Removing special protections from some government businesses had a significant effect on their competitiveness – for example, the rail freight business lost market share to road transport.

Assets such as electricity transmission or land-line phone networks gave other government businesses significant monopoly power. Limiting the use of this power has been a continuing issue for economic policy. In the case of electricity, the government sought to increase competition by splitting the single state-owned enterprise, Electricity Corporation of New Zealand (ECNZ or Electricorp), into several businesses. Transpower, which owned and managed the national grid, was separated from Electricorp in 1994, and in the later 1990s the government split Electricorp into four independent energy suppliers – Contact Energy, Meridian Energy, Mighty River Power and Genesis Energy.

Footnotes:
  1. Quoted in Malcolm McKinnon, Treasury: the New Zealand Treasury, 1840–2000. Auckland: Auckland University Press in association with the Ministry for Culture and Heritage, 2003, p. 90. Back
How to cite this page:

Rob Laking, 'State-owned enterprises - What are state-owned enterprises?', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/state-owned-enterprises/page-1 (accessed 21 May 2019)

Story by Rob Laking, published 20 Jun 2012, updated 17 Feb 2015