Should the super fund invest in government-owned albatrosses?

By Peter V O'Brien

Friday 18th January 2002

THIN EDGE OF THE WEDGE: Is government ownership of Air New Zealand a pointer to the state's return to running the economy?

The government's expanding business interests are making it the country's biggest commercial conglomerate.

It controls an airline, has dabbled in other transport modes, is entering the banking industry, is developing an investment fund with the potential to become the country's major operator in financial markets and is strengthening long-established interests in postal communications and the media.

Individual "shareholders" in "New Zealand Ltd" had and have no say in this expansion of business interests, apart from the capacity to change the directors (but not the operational staff) at an election when a host of social and political matters are thrown into the mix.

The government justified its recent forays into business on social and - somewhat questionably - economic grounds.

Agreement or disagreement with that viewpoint depends on one's view of the social framework desirable for a country.

A common element can be seen in the government's approach to commercial activities, including the new ventures.

It is the old "the state will protect you from evil" attitude, whether applied to working conditions in the 19th and early 20th centuries or to the activities of trading banks, a teetering airline, individuals' old-age income and the "desirable" content of radio and television programmes.

The coalition government's social desirability and responsibility attitudes cropped up in strange places.

Newspapers are running advertisements for "Guardians of the New Zealand Superannuation Fund."

The advertisements quoted the New Zealand Superannuation Fund Act's requirements that: "The guardians must invest the fund on a prudent, commercial basis and, in doing so, must manage and administer the fund in a manner consistent with:

(a) best practice portfolio management;

(b) maximising return without undue risk to the fund as a whole; and

Items (a) and (b) were straightforward and applicable to any investment fund in the private and public sectors.

Avoiding prejudice to New Zealand's reputation as a responsible member of the world community could be interesting if politicians and their hangers-on meddled in the guardians' activities.

It is conceivable some people will object to investment in the swathe of chemical, pharmaceutical and food companies, organisations perceived to exploit third world nations through locating plants where wages and working conditions were considered substantially inferior to western standards and anything else deemed politically incorrect.

The advertisement's section on desirable qualifications for guardians started with the blanket requirement of substantial experience, training and expertise in the management of financial investments.

Additional "particular expertise" was also sought in "appointment of funds managers; academic or best-practice leadership in portfolio management; socially responsible investment; actuarial expertise; public-sector leadership; board governance; or international capital investment."

An interesting game could be played, based on the "armchair selector" approach to sports teams, to guess who could become guardians, assuming the availability of particular individuals.

It can also be assumed people already involved in administration/overseeing of managed funds would have a conflict of interest but some might be prepared to resign existing positions.

That would be a complication for armchair selectors.

Strange things happen in the appointment process to positions on the boards of government-backed businesses.

Thus former prime minister and current ambassador to the US Jim Bolger became the chairman of Kiwibank.

Mr Bolger would qualify as a guardian of the superannuation fund under only two headings: public sector leadership and board governance, assuming the country's cabinet is considered "board."

Politicians opposed to Kiwibank will be unmerciful in its early years.

It is unlikely the bank will return a profit, and/or a realistic return on investment, for some time.

That would be normal for any similar new venture, but opponents will fog the issue while proponents will make silly claims in the bank's defence.

Few people inside or outside the government would make silly claims for Air New Zealand, in which the government has an 82% stake after recent capital restructuring.

New Zealand Ltd committed $885 million to Air New Zealand's resource, with no guarantee that will be the end of the investment.

Airlines are in strife around the world due partly, but not entirely, to the aftermath of September 11.

A BBC documentary on Prime TV on January 10 and 13 examined the industry and the associated world of tourism.

The recipe for survival, which Air New Zealand personnel should adopt, came from cut-price flier Ryanair's chief executive, Michael O'Leary, who said his airline went for more volume at lower prices. "We are selling low fares and work desperately all the time to see costs are lower than the fares."

We can apply a useful test to the government's involvement in commerce.

Would the New Zealand Superannuation Fund's guardians be investing prudently, consistent with best-practice portfolio management and without undue risk if they bought into the government's interests, assuming they were all listed companies?

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