2 June 2006

Change of policy for State Owned Enterprises

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State Owned Enterprises and Economic Development Minister Trevor Mallard today announced a change in policy for State Owned Enterprises, which will encourage them to get into new business areas to help build New Zealand's wealth.

"This new policy means that State Owned Enterprises will be a part of our work to transform the New Zealand economy. What I am announcing today is that from now on, State Owned Enterprises will be encouraged to expand into new areas of business that are linked to what they already do," Trevor Mallard said in a speech to the Otago Chamber of Commerce in Dunedin.

"To do so they will have to meet strict conditions, and their new business must have good spin-offs - for communities but also potentially for private firms.

"New Zealanders have agreed that we should keep state assets in public hands. But that does not mean that they should not be put to work for us.

"They're big commercial operations and that's why they're perfectly placed to play a key role in helping to change New Zealand into an innovative, high-wage and high-value economy.

"Essentially Cabinet has agreed to consider proposals from SOEs that broaden their scope of business by diversifying their technological, product and market portfolios and that extend the time horizon over which they seek to capture a return on investments. Yesterday I wrote to SOE chairs to outline this new approach.

"While the government is now actively encouraging SOEs to consider this opportunity, ministers don't intend to tell them how they might do this. It will be up to SOEs to come up with robust business plans that can preferably be funded off their own balance sheet and that meet the criteria.

"Each proposal will be considered on a case-by-case basis. There must be broader spillover benefits to the economy such as giving other companies opportunities to input into the new business with research and development or technology.

"There are risks, and the government is not about to play fast and loose with taxpayer assets. That's why certain criteria must be met before the okay is given to make sure that the focus on core activity is not lost.

"SOEs might start to think of putting up proposals for amended scope of business when they are developing their Statements of Corporate Intent for the 2007/08 or even the subsequent financial year. But I will not rule out favourable consideration of opportunistic investments outside of the planning cycle," Trevor Mallard said.

The criteria for diversification follows and are on www.beehive.govt.nz/mallard/ along with the cabinet paper.

Criteria for State Owned Enterprises diversification Diversification must be based on an effective utilisation of existing core competencies and it must be into adjacent technologies, products and markets. New activities should have a demonstrated potential to enhance the competitive competencies of other firms and industries, or - to use the jargon - that have spillover benefits. Other than in very rare circumstances, the diversification should be able to be financed off the existing balance sheet of the SOE. Any revised scope of business must be accompanied by robust evaluation processes using explicit performance indicators, leading to a clear exit route for ventures that are not going anywhere.

What are the State Owned Enterprises and how big are they? AgriQuality, Airways Corporation, Animal Control Products, Asure NZ, Genesis Power, Landcorp, Learning Media, Meridian Energy, MetService, Mighty River Power, NZ Post, ONTRACK, Quotable Value, Solid Energy, Timberlands, Transmission Holdings and Transpower.

They vary in size, but the largest are very big in the New Zealand context. The five largest by asset value - Meridian Energy, Transpower, Mighty River Power, NZ Post and Genesis - have assets in excess of $2 billion each, and the three largest are likely to rank among the top 20 biggest firms in New Zealand.

When and how does the initiative take effect? Immediately. SOEs are encouraged to review their existing scope of business and start to consider options for diversification based on their existing core competencies. However, any proposals for expanded scope are unlikely to be formally considered until the next business planning round, and be reflected in their draft statements of corporate intent (SCIs) for 2007/08.

SOEs will be responsible for suggesting new initiatives and/or lines of business, which may need to be reflected in amendments to their SCIs. The government will also amend the Owner's Expectation Manual to reflect the change in approach.

In the criteria that SOEs must meet in order to diversify, what is meant by spillover benefits? Spillover benefits are benefits that flow to other companies as a result of the SOE diversification. It is difficult to predict the specific types of spillover benefits that may be generated. However, in a general sense, examples could include opportunities for other companies to provide R&D or other specialised contracting services associated with a new SOE investment (egs. CRIs, university research departments), or opportunities to manufacture new products used as an input to a new SOE business venture.

ENDS

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