Issues with Balls
Poor decisions at the top Government involvement in business in this country is sending some very strange messages, says Ashley Balls.The recent budget provides a useful opportunity to reflect on and consider the business focus of ‘NZ Inc’. Like most business owners, I suspect many will look at the budget from a personal perspective (how […]
Poor decisions at the top
Government involvement in business in this country is sending some very strange messages, says Ashley Balls.
The recent budget provides a useful opportunity to reflect on and consider the business focus of ‘NZ Inc’. Like most business owners, I suspect many will look at the budget from a personal perspective (how does it affect me?) and move on, having realised it is personally benign. Thankfully, for the past ten to 15 years budget day has been something of a non-event, as a ‘no surprises’ policy has become routine. Business leaders go off to breakfast with the Finance Minister on the following morning and indulge in a mutual back-slapping ritual.
Sadly too few are lifting the lid and looking closely at what really matters to our futures, regardless of political affiliation. Starting with the budget – this is nothing more than an annual show where the government makes a statement about how well it is balancing its books and what its spending priorities are. What few commentators have bothered to point out is the significance of a budget which only reports on the state sector. According to Treasury the government sector accounts for less than 40 percent of the economy – a figure which places New Zealand ahead of the OECD average of 42 percent. It is currently government policy to return a surplus (i.e. where government expenditure is less than revenue) by 2014/15 which all sounds wonderful BUT, what about the larger non-government sector? Does the private sector earn more or less than it spends and what is the trend? These are the data that matter to business.
At present annual expenditure by the private sector is $10 billion per annum more than it earns and that figure is set to grow. In simple terms, this means that every year the private sector has to borrow that sum on the financial markets just to keep us afloat, placing us completely in the hands of foreign bankers. This annual current account deficit is running at 4.7 percent and is set to rise. That should be a warning signal to all in business and shows we are borrowing and spending, not producing.
In essence the government shrinks in size and industry goes on a spending spree.
Sadly, the private sector receives many of its business messages from government who presumably tacitly approve of the present situation. After all, we are constantly being told this is a government with a business focus: containing several ministers who claim to have business credentials. Yet government involvement in business is sending some very strange messages:
Selling the family silver. Whether you believe government should have a role as a business owner or not is irrelevant. When the cost of government borrowing (bond rates) is lower than the rate of return, why sell the asset when it reduces your income?
Solid Energy is $400 million in debt and rising. Quite how a business can rack debts of more than $320,000 per employee without the shareholding Minister noticing has to be a mystery. It didn’t happen overnight, it took years.
49 percent of Meridian Energy is to be sold through an IPO. No real problem with that BUT Meridian has one customer (Tiwai Point) who takes a significant proportion of their output. The exact percentage is unknown but we know Tiwai consumes 15 percent of all electricity generated in New Zealand. This is a risk for various reasons: the price per unit is known to be very low and effectively subsidised by all other Meridian customers; Tiwai is old technology, makes a loss and the output (aviation grade aluminium) can be produced cheaper elsewhere, and, the electricity supply contract is under review.
Sky City casino has done a deal whereby its gaming income is protected for 35 years. No sane business person ever does a deal where they underwrite income and profit for that period and moreover the question of the number of permanent jobs created (1,000 claimed) and the need for a new conference centre has never been robustly established. The number of local institutions and businesses who could fill the projected venue could be counted on both hands, meaning its success is predicated almost entirely on attracting overseas business. Yet established alternative venues exist throughout Australia and Singapore.
Spending billions on ‘roads of national significance’ is justified on highly spurious numbers when no return on capital is expected, yet railways are treated differently. No investment is available for railways unless a projected return can be seen. Quite why these two forms of land transport are treated differently is unfathomable.
I could go on but I think you get my drift. These are distinctly amateur business decisions. But perhaps of greater significance is the government’s continual compounding of what has been referred to as the ‘Auckland effect’. Whether it is housing supply and demand, or corporate relocation or investment decisions, there is a presumption that all meaningful economic activity has to take place in Auckland. The result is land prices through the roof, distorted wages and congestion. It all begs the question, why no regional development policy? In the OECD only one country has a larger proportion of its population in one place and that is Dublin/Ireland. Is it beyond the wit of government and business to come up with a better plan?
If this were a university business assignment it would get a ‘fail’.
Ashley Balls is senior partner of LegalBestPractice.