NZ POLITICS DAILY: Capitalism 101

Last week’s frenzied finger-pointing has probably left most taxpayers none the wiser as to why they are down a $369 million hole with Solid Energy. But it seems the SOE model itself may be a big part of the problem. Their shareholder ministers seem to have a double standard points out Tim Watkin: ‘Of course this story is rich in political hypocrisy.

Through the prism of Solid Energy, you can see National encouraging SOEs to take on more debt, while being incredibly conservative towards and protective of its own balance sheet. Debt? Bill English and others in government have warned repeatedly of its dangers and spoken in almost religious tones of the importance of returning to surplus, all the while nudging SOEs in the opposite direction’ – see: Solid Energy and the battle for economic cred.

It’s Capitalism 101: higher returns come with higher risks. While most of our SOEs have very broad and stable customer bases, some are inevitably going to run into trouble – particularly if they are being pushed (internally and/or externally) to constantly grow the dividends. The lesson from Solid Energy for many is simple according to Martin Van Beynen: ‘Isn't the debacle of Solid Energy a salutary lesson about the taxpayer owning commercial companies? If you want to own state assets, you have to accept the risks as well as the benefits’ – see: Paid in solid gold brickbats. The problem is that even getting shot of them doesn’t always get the taxpayers off the hook. The painful lessons from both Air New Zealand and KiwiRail suggest that ‘too big to fail’ doesn’t just apply to multi-national banks.
The SOE model was supposed to get the politicians out of commercial decisions and some have argued that political influence was still a problem with Solid Energy, particularly investments in ill-fated renewable projects. But most analysis actually seems to identify a lack of political oversight as a major factor, including The Press: ‘The ministers' fault was one of insufficient oversight and intervention; the company's fault was one of exuberance and imprudence. The latter is at least as bad as the former’ – see: Emerging narrative of Solid Energy's collapse shows all players at fault.
If the answer is more ‘commercial discipline’ – which the Government promises the Mixed Ownership Model will deliver – then are we are putting more faith and trust in the likes of Mr Elder and Mr Palmer to make the right decisions? While their ambitions were supersized (see Hamish Rutherford’s Solid Energy 'wanted to be resource giant') their ability just to manage what they had was clearly smaller. 
The massive expenditure required seems to have assumed some sort of private capital injection via partial or full privatisation. Would that have stopped the ‘financial mismanagement by the company’ which Tracy Watkins says is ‘the real story of Solid Energy’s failure’? – see: Solid questions still remain unanswered. Would it have re-instated better internal oversight, particularly the relationship between Elder and Palmer which some have identified as far too close? As Jane Clifton has written, ‘While the passion with which Palmer defended Elder against the often vituperative criticism he has come in for is laudible, it’s fair to ask whether there was a prudently impartial relationship between the chairman and CEO in this case’ – see: Hot air and Solid Energy: Don Elder and co at the select committee.
Wherever the blame is finally apportioned it is clear the Government has taken some hits. It has certainly distracted from what should have been a triumphant period following the Supreme Court’s green light and Key’s own quickness to blame Solid Energy for being over geared with debt came back to bite him. John Armstrong says ‘Unfortunately for Key, Labour found some quotes from him last month pointing his finger at high gearing as one of the factors responsible for Solid Energy's financial predicament’ – see: Labour must think laterally to win war. Armstrong thinks Clayton Cosgrove has done well so far but that Labour will need to be clever to shift the focus to the privatisation policy itself.
The Government will be on the lookout for another ‘perfect storm’, which is how both Ministers and managers have described the circumstances that led to Solid Energy’s collapse. The Hollywood movie of the same name may be a better metaphor than they realised says blogger Andrew McMillan: ‘It was a story of desperation, greed, and recklessness’ – see: Solid Energy’s Perfect Storm.
Two other humourous blogposts also shine a light on the matter – see: Solid Energy blames financial trouble on David the intern (from the excellent new satirical news site, The Civillian, and my own blogpost: Images of Solid Energy.
Other recent important or interesting items include the following:

Bryce Edwards
NZPD Editor

Today's links:

Paul Glass (Herald): More scrutiny will help everyone
Cathy Odgers (Cactus Kate): Solid Debacle or Xero Problems?
Martin Van Beynen (Press): Paid in solid gold brickbats
Hamish Rutherford (Stuff): Solid Energy 'wanted to be resource giant'
3 News Online Staff (TV3): Solid Energy inquiry not needed – Young
Greg Presland (WaitakereNews): Has John Key jumped the shark?
Mike O’Donnell (Stuff): Ethics, leadership and Elder statesmen
Nicole Mathewson, Tracy Watkins, Nicola Brennan (Stuff): Rain falling but NZ's drought costs soaring
Cathy Odgers (Cactus Kate): Hooton On WFF - Welfare For Farmers
3 News/RadioLive (TV3): Drought could cost NZ $2 billion
Rebecca Stevenson (Stuff): Teachers caught up in car park tax wrangle
Matt McCarten (Herald): On bosses' side over carpark tax
Richard Medows (Stuff): What to do if you can't park at work
Peter Wilson (TV3): Car park tax could be doomed
David Cunliffe (RedAlert): The no credibility car park tax
No Right Turn: The cost of tax evasion
Inequality, poverty, employment
Rodney Hide (Herald): The underclass have no hope
David Farrar (Kiwiblog): The union view on jobs
Catriona MacLennan (Herald): Stop dodging tax and we can end child poverty
Laetitia Laubscher (Salient): A Grey Area
Labour Party
Cameron Slater (Whaleoil):Jacinda, going for the easy points
John Armstrong (Herald): Labour must think laterally to win war
David Farrar (Kiwiblog): More clear stances from Labour
National Party
Standard: Mr F*cks It
Ele Ludemann (Homepaddock): Two choices
Pete George (YourNZ): Manufacturing a crisis
David Farrar (Kiwibog): Another capital hungry SOE
John Drinnan (Herald): Hedge funds eyed Sky slice
Christchurch Rebuild
Stuff: Quake-prone buildings policy looking shaky
Maori Politics
Rod Oram (Stuff): Govt bulldozing good design
Bernard Hickey (Herald): Hard talk on housing
Russell Blackstock (Herald): Govt cool on heat plan
Brian Rudman (Herald): Planning to move with the times
Education and Novopay
Tracy Watkins (Stuff): Parata's high staff turnover queried
Chris McIntyre (Salient): Funding Hova
Phoebe Fletcher (DailyBlog): Key and the Pacific Solution 2.0
RadioLive/3 News (TV3): Charges possible over soldier's death
David Fisher (Herald): Spy boss left out in cold
Neil Reid (Stuff): Afghan role 'improved US thaw'
RadioLive/3 News (TV3): Charges possible over soldier's death
Hamish McNeilly (Herald): Racing clubs targeted over pokies
Fran O' Sullivan (Herald): Key's Latin American trip adds to our shine
Sean Plunket (Stuff): MRP shares: To pre-register or not?
Tim Hunter (Stuff): Mighty river of gold unlikely
Tom Peters (World Socialist Website): New Zealand government launches asset sales
Michael Coote (NBR): More Sharing Services
Rodney Hide (NBR): Problems solved

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3 Comments & Questions

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I don't pretend to be an economist but isn't a budget surplus the same as the government taking too much money from us? "We know how to spend it better" syndrome?

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This is a penny pinching Govt. Though they have backed down on car park tax there are so many that have gone unnoticed or with no one to fight for them. One example is the taxing the paper boys. Other is do you know from 1 April 2012 your employer contribution to KiwiSaver is taxed and unless you are willing to pay the tax on it from the wages what the employee gets is the net amount.(amount after taxes). In the meantime the rich are legally avoiding taxes and are getting away scot free. The poor are getting screwed.

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Yep - they might be trying to avoid taxes by somehow conveniently "forgetting" an account with $50K or more in it, but karma has a way of making one eat one's own words...

Shearer will need to borrow Leftie-Len's face palming slaps for this one!

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