Govt and new corporations trapped in dilemma of incompatible claims

Press, 10 April 1987, Page 20

Govt and new corporations trapped in dilemma of incompatible claims

BRENDON BURNS, of our Wellington staff, on the S.O.E. row

A CURRENT expression in politics speaks about being caught between a rock and a hard place. It has a strong application to several areas of political life. The difficulties faced by the new coal corporation board in its negotiations with Treasury over assets is a case in point. Coalcorp is charged by the State-owned Enterprises Act with operating a profitable and efficient business. Its directors are instructed that they shall make all decisions on the operation of the enterprise.

No wonder two directors resigned and the chairman considered this course when faced with Treasury proposals on how to run State coal-mining. What is more, Treasury is not behaving in rogue fashion in promoting an earlier end to underground coal mining, and therefore more profits. The Deputy Prime Minister, Mr Geoffrey Palmer, chief helmsman of the move to the nine new corporations, endorsed Treasury’s handling of the negotiations. It had the full confidence of the Government, he said, and was acting within the limits which had been set for it by the Cabinet.

So, Coalcorp is caught between a Government trying to dictate the use of assets and the Government’s requirement of commercial rates of return.

Mr Palmer attempted to draw a distinction between telling the corporation how to run its business and advising on the best use of the assets. There is no distinction so far as the Coalcorp directors are concerned. They, like most new corporation directors, have been drawn from the cut and thrust of the private sector. In any company takeover, the failed business cannot attempt to say how its assets should be used.

Coalcorp is not alone in its view that the Government seems reluctant to step back completely from running the new S.O.E.S. The Electricity Corporation chairman, Mr John Femyhough, said his board had to fight Treasury attempts to present a plan on how the new corporation should be run.

Mr Fernyhough was the first of any S.O.E. directors to go public on the divergent views, on assets and their use, held by the boards arid Treasury (read Government). He is unrepentant that he

released his board’s $3.8 billion valuation for electricity assets along with Treasury’s $8.5 billion figure. He maintains the higher figure will result in power price rises — a claim which brought angry responses from the Minister of Finance’s office.

Not in the “medium term,” it protested in carefully phrased responses. But Mr Fernyough did not set a time for how long it would take for price rises to eventuate. What is more, he believes electricity tariff increases will result no matter which valuation is chosen.

Essentially, while there is a power surplus now, it is likely to become insufficient to meet demand at the turn of the century. Electricorp is now engaged in assessing its projected income over future years. But Mr Fernyhough says there are two choices ahead. The first is for

prices to gradually increase from a couple of years hence to produce enough capital to build extra power stations early next century. Alternatively, lesser increases now but steep rises in a decade to pay the capital costs of meeting extra demand. Mr Fernyhough seems inclined towards gradually raising prices, becuse that could lay the ground for competition in electricity production and supply. However, he points out, the purpose of competition is to lower prices, so it is not entirely logical to increase prices to attract competition. Whatever pricing policy is adopted, the purchase price of the assets will be reflected.

Electricorp has now adopted the tactic of freezing negotiations with the Treasury on the disputed asset value and working on its statement of corporate intent. This is a requirement of

the S.O.E. Act. It outlines the objectives of the corporation, the scope of activities to be undertaken, performance targets, and estimates of profits to be returned to the Crown. ’

The board is required to sub- > mit a draft to the Government and consider any comments made.

Clearly, in this instance, Electricorp is attempting -to gain benefit from the Government’s continuing ability to play a role in the S.O.E.S. It will be pursuing its case with Ministers that the Treasury asset estimate will produce steeper power price rises than required. The fact that such avenues are being used by underlines the words of one prominent politician, who said this week that unreasonable deadlines had been allowed for the S.O.E. negotiations.

"It’s never a good idea for negotiators to be hurried,” he said. “And I think these ones (Coalcorp) were hurried.” With those words, Mr Palmer was criticising his own Government’s rapid implementation of the move to S.O.E.S. He chairs the Cabinet S.O.E. Committees. Already, twice in the course of this Government, Mr Palmer has warned about "speed wobbles” and the effects of moving too quickly. Has he, too, been caught between a rock and a hard place? Forced to accept a speedier, if not smoother, move to corporatisation than he. believes advisable? That rocky' road is balanced by the resulting improvements in the Government’s balance sheet, with its flow-on effects for interest rates, overseas debt, and the economy in general. .