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State-owned enterprises

by Rob Laking

Banking, mining, forestry, electricity generation, rail, air and shipping transport, radio and television broadcasting – over the years the government has been involved in many commercial activities. From 1986 many of these commercial functions were performed by state-owned enterprises – some of which were then privatised.


What are state-owned enterprises?

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

State-owned enterprises’ performance

Treaty of Waitangi issues

A major issue raised by the State-Owned Enterprises Act 1986 was whether the transfer of land and other assets to state-owned enterprises could proceed without taking account of the Crown’s obligations to Māori under the Treaty of Waitangi. In what became the first of many similar provisions in other acts, Section 9 of the State-Owned Enterprises Act stated, ‘Nothing in this Act shall permit the Crown to act in a manner that is inconsistent with the principles of the Treaty of Waitangi.’

In June 1987, six months after the passage of the act, the Court of Appeal ruled that the transfer of specific assets to state-owned enterprises could not proceed without a system in place to consider whether it would be consistent with the principles of the treaty. The following year, the act was amended to make land transferred from the Crown to state-owned enterprises subject to ‘resumption’, whereby it was still available for treaty claims. These decisions paved the way for some significant Māori claims over land and assets vested in state-owned enterprises.

Fast corporatisation

Corporatisation of state assets proceeded quickly – it was only 16 months from the first policy statement in December 1985 to the new corporations beginning operation in April 1987.

1980s to 2000s

In the years after the State-Owned Enterprises Act came into force, some new state-owned enterprises were created, while others were partly or entirely privatised. The government sold either some or all assets (land, buildings or equipment) of state-owned enterprises to private buyers, or it sold the whole enterprise as a going concern to private investors. By 1999 the total value of assets sold came to over $19 billion. Significant state-owned enterprises that were sold included Petrocorp, Contact Energy, the Post Office Bank, State Insurance, the Rural Bank, Air New Zealand, the NZ Railways Corporation, Telecom and the Forestry Corporation. Radio New Zealand and Television New Zealand were converted from state-owned enterprises into Crown-owned companies in 1995 and 2003 respectively. They remained in public ownership.

Re-acquisitions

Some formerly state-owned enterprises were bought back by the government. The government repurchased a controlling interest in Air New Zealand in 2001, to save it from bankruptcy. The creation of Kiwibank in 2002 as a subsidiary of New Zealand Post in effect re-created the Post Office Savings Bank as a full-service commercial bank. The government also resumed ownership of the national rail system in two stages: first by assuming ownership of the track in 2004 and then by repurchasing the rail and ferry businesses in 2008.

Controversy

The sale of state-owned enterprises, sometimes known as ‘asset sales’, has been controversial. The fourth Labour government, which created these enterprises, began to sell them off in 1989, but it was the National government elected in 1990 that carried out most of the sales. Proceeds from the sales went towards paying off New Zealand’s overseas debt. Polls in the early 2000s suggested that many people opposed further asset sales. After the 2011 general election the National-led government commenced the partial sale of some state-owned enterprises.


Governance of state-owned enterprises

State-Owned Enterprises Act

As well as being subject to the State-Owned Enterprises Act 1986, state-owned enterprises are registered as limited liability companies under the Companies Act 1993. The minister of finance and the minister for the relevant area hold all the shares in each state-owned enterprise. Except for the specific provisions of the State-Owned Enterprises Act, state-owned enterprises are governed by the same law as companies in the private sector. Each enterprise has a board of directors, appointed by the shareholding ministers, with the same obligations under the Companies Act as directors of private-sector companies.

The act says that the principal objectives of a state-owned enterprise are to:

  • be ‘as profitable and efficient as comparable businesses that are not owned by the Crown’
  • be ‘a good employer’
  • exhibit ‘a sense of social responsibility’.

The act also provides for the government to pay state-owned enterprises directly for any non-commercial services it wishes them to provide.

Powers rarely used

A senior executive from one state-owned enterprise outlined in 2006 how the relationship with the government worked in practice: ‘There’s a lot of informal contact with the government. The direct powers that the government has under the SOE Act, and others, to interact with us, are rarely if ever used.’1

Statement of corporate intent

The government’s control of state-owned enterprises is exercised through a document called a statement of corporate intent. The board of each state-owned enterprise prepares an annual draft statement of corporate intent for consultation with the shareholding ministers. The consultation covers, among other things, the types of business the enterprise engages in, the composition of its balance sheet, how the board will set its annual dividend, and any non-commercial objectives.

The shareholding ministers have the power, if required, to direct the board in writing on these matters. The agreed statement of corporate intent, including associated targets for performance for the next three years, is then tabled in Parliament. State-owned enterprises report to Parliament annually on their accounts and on their achievement of the objectives of the statement of corporate intent. The controller and auditor general audits their accounts.

A special unit of the Treasury, the Crown ownership monitoring unit, monitors and evaluates enterprise performance, advises the government on future policy for investment in each enterprise and its profit objectives, and assists with the appointment of directors by managing the process and advising on potential candidates.

Footnotes
  1. Quoted in Belinda Luke, Strategic entrepreneurship in New Zealand’s state-owned enterprises: underlying elements and financial implications. PhD thesis, Auckland University of Technology, 2009, pp. 123–124, http://aut.researchgateway.ac.nz/bitstream/10292/658/4/LukeB.pdf Back

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How to cite this page: Rob Laking, 'State-owned enterprises', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/state-owned-enterprises/print (accessed 18 July 2019)

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