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It is time to question how we manage investments for the benefit of Kiwis. Craig Stobo: Government assets sheet needs right balance

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Posted 12 March 2015 - 01:35 PM

Craig Stobo: Government assets sheet needs right balance
5:00 AM Thursday Mar 12, 2015 3 comments

Asset sales
NZ Government

It is time to question how we manage investments for the benefit of Kiwis.


It is almost one year since the NZ Treasury published the Crown's 2014 Investment Statement. For the first time this provides us with information on the Crown's comprehensive portfolio of assets and liabilities, that is, what we as taxpayers own and what we owe.

Broadly speaking we own $244 billion of assets made up of equity of $70 billion and liabilities of $174 billion.

The assets are mostly property, plant and equipment ($110 billion) such as conservation land, roads, housing and schools, increasingly marketable securities and shares held for example by NZ Super Fund and ACC ($61 billion) and tax receivables/student loans ($17 billion). Liabilities include borrowings ($100 billion), insurance liabilities ($38 billion) and retirement liabilities ($12 billion).

While our equity or net worth is $70 billion it is $35 billion worse than 2008 due to liabilities, especially debt, growing faster than assets.

The Investment Statement also lists the Crown's commercial assets valued at $19.4 billion such as the SOE Solid Energy, the Crown company Air New Zealand and the Crown entity Public Trust. The Treasury's analysis highlights issues with our current management of our balance sheet.

A clear need is better quality information including performance management data, which will be forthcoming in the next statement due in 2018. It is time to start raising queries on how we organise ourselves to think about this information and manage it for better outcomes for New Zealanders.

Firstly, as one wise actuary told me, there are no assets without liabilities.

Does our political process clearly enunciate the electorate's desired spending outcomes such as healthcare, pensions and education and how they should be financed? What sort of contingency should we have (for example debt or asset recycling capacity) for disasters?

Each Government lamentably inherits the previous Government's asset mix despite changing liability preferences. Simplistically, why should we own a coal miner whose fortunes are tied to energy commodity prices when our retirement costs are tied to demographics and wage indexation? Doesn't that strike you as an incompatible hedge?

What investment would be a better hedge and how can we recycle assets and manage the transition? What agency in Government has the capacity to think about matching these risks and effecting change at arm's length to politicians?

Secondly our decentralised departmental and Crown agency decision-making structure means we have no aggregate picture at any one time of our exposure to risks.

For example, at any one time do we know the Crown's total exposure to Air New Zealand either directly or indirectly through entities such as the Guardians and/or ACC, which may mean we have an unintended total exposure?

Do we know the impact of falling oil prices on both our roading maintenance costs and our investments such as Solid Energy? What is the opportunity cost of owning undeveloped land?

Thirdly, while we have partially recycled our commercial assets from 100 per cent ownership to a mixed ownership model (MOM) for our electricity assets it is not clear that this is a good balance sheet outcome.

How does the Crown recycle our scarce balance sheet capital if all MOM electricity company boards undertake a rights issue?

Does the Crown automatically say yes to all, to remain a majority shareholder when the capital has a higher and best use in one of them or better use elsewhere?

Do we need to own all these electricity companies when arguably we have too much exposure to power prices and we should be a better industry regulator?

Finally how do we engage with the electorate to build a better understanding of the importance of a stronger balance sheet, its impact on improved flexibility to manage shocks, how it can lead to improved credit ratings and reductions in financing costs for the Government, corporates and households?

But most importantly how better management of our balance sheet can lead to an improved standard of living for New Zealanders.

• Craig Stobo is chairman of the Local Government Funding Agency and chairman and shareholder of investment firm Elevation Capital.

- NZ Herald

By Craig Stobo


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