Ryan Greenaway-McGrevy reviews how the TPPA will affect our State Owned Enterprises and state-owned monopolies, now, and if we wanted to build new ones, or sell some

This is the fifth in a series of articles Interest.co.nz has commissioned reviewing the key chapters and issues for New Zealand in the Trans-Pacific Partnership Agreement (TPPA). Links to all the analysis in this series are below.

Ryan Greenaway-McGrevy*

State-owned enterprises and designated monopolies are covered in Chapter 17 of the TPPA.

State-Owned Enterprises sell goods and services to the public for profit - this is primarily what sets them apart from other government organisations, such as those in health and education. Air New Zealand is perhaps our best-known SOE, with the government currently holding a 52% stake in the company. Meanwhile a designated monopoly refers to any enterprise that holds exclusive rights to sell a set of goods or services by virtue of government regulation. Zespri, for example, holds an export monopoly on kiwifruit.

The main purpose of the chapter is to ensure a level playing field between the private and public commercial enterprises of TPPA signatories.

The chapter has implications for how SOEs and designated monopolies are run and managed, but is largely silent on many of the related issues that attract controversy in New Zealand – such as how SOEs are created and privatised.

A brief history of SOEs in New Zealand

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The purpose of a state-run commercial enterprise is not always clear.

Before corporatisation in the late 1980s, our own state trading organisations were subject to opaque political influence and carried overlapping social and trading objectives, not the least of which was to act as an employer of last resort. My seventh form economics teacher would tell us that back in the day you could always head to the local railyard if you couldn’t get a job elsewhere. This all changed after the reforms.

The primary objective of our SOEs became the pursuit of profit, and the big employers, such as Electricorp, Telecom and the Railways shed between half and three quarters of their workforce. And, as we all know, many of the SOEs then were sold off.

Only a handful of state-owned enterprises remain from the former state trading sector. Some of the big ones - such as three of the four electricity generators and Air New Zealand – are partially privatised, with the government maintaining a majority shareholding. Others, such as NZ Post, remain wholly government-owed. And as the State-Owned Enterprise Act of 1986 makes clear, the purpose of these SOEs is to make a profit.

A level playing field

If there is a common theme underpinning the TPPA, it is that there should be a level playing field between foreign and domestic business enterprises.

Chapter 17 fits that general paradigm. SOEs in other countries are often subject to preferential regulatory treatment or other forms of government assistance, thereby allowing them to undercut their competitors. SOEs can also be used to favour domestic enterprises over foreign ones through preferential purchase or sales agreements. These anti-competitive practices would become infringements under the TPPA. The two primary clauses of the chapter are Article 17.4 (Non-discriminatory treatment and commercial considerations) and Article 17.6 (Non-commercial assistance).

Article 17.4 prevents SOEs from being used to play favourites with domestic industry. It requires that, in both the sale and the purchase of a good or service, SOEs and designated monopolies accord the same treatment to all commercial enterprises, regardless of who owns the enterprise. This would, for example, prevent an SOE from adopting a “buy New Zealand made” policy. It also means that SOEs cannot sell their product at a discount in order to nurture domestic business. Obviously, SOEs that are only focussed on profit should not have a problem complying with the provision.

There is however an exemption to the clause for goods and services that the SOE provides under public mandate. For example, New Zealand Post, which is an SOE, is also heavily regulated in order to provide various public services, such as providing a postal service six days a week.

Article 17.6 obligates parties to let their SOEs stand on their own two feet. It prevents a government from providing non-commercial forms of assistance that cause “adverse effects” to the enterprises of other Parties. These non-commercial forms of assistance include things like grants or subsidies, and loans and loan guarantees on more favourable terms than those available to other enterprises. And although the chapter sets out just what constitutes “adverse effects” under Article 17.7, like much else in the agreement, the true definition no doubt lies in the courtroom.  

In addition, both Articles 17.4 and 17.6 can be temporarily suspended to allow governments to respond to a national or global economic emergency under Article 17.13.

Scope

Article 17.1 makes it clear that the chapter only applies to government-owned entities that operate on a for-profit basis, and in which the government holds a controlling stake (such as a majority shareholding). Non-profits and enterprises that operate on a cost-recovery basis are exempt. This means that the health and education sectors here in New Zealand are not directly affected. The chapter also applies to SOEs owned by sub-central levels of government (local government), but these are currently exempt from many of the specific provisions in the chapter relating to anti-competitive practices (under Annex 17-D). Small SOEs that do not generate a minimum level of revenue (currently $400 million NZD) are also exempt.

Here in New Zealand this means that the article pertains mainly to government organisations that are covered under the State-Owned Enterprises Act of 1986. We should not have any trouble meeting the obligations in chapter 17, both because the Act requires SOEs to operate on a for-profit basis, and because our largest SOEs do not generally receive favourable treatment via regulation or other measures. The chapter is more likely to affect how SOEs are run in other countries.

Other Implications

In reading the chapter we kept an eye out for implications on the more controversial issues relating to SOEs here in New Zealand. Despite public opinion being against them, the National government partially privatised the electricity generators, and NZ Post has recently announced that part of Kiwibank will be put on the auction block.  In fact, it was not so long ago that the government was acting as entrepreneur – creating its own new banking business.  Meanwhile NZ Rail and Air New Zealand were both run into the ground by the private sector, only to be rescued by the government. What would the chapter have to say about these events? Very little, as it turns out.

Creating a new SOE

Kiwibank turned out to be a nice little earner for the government - and turning post offices into banks has turned into something of a cottage industry for the little old New Zealand government (remember Postbank?). What if a future government once again feels the call to entrepreneurship? As it turns out, the chapter explicitly states that signatories are free to create new business enterprises as they wish. Article 17.4.9 states:

Nothing in this Chapter shall be construed to prevent a Party from:

(a) establishing or maintaining a state enterprise or a state-owned enterprise; or

(b) designating a monopoly. 

Too big to fail

I had been living in Washington D.C. for a year when Lehman Brothers rolled over in September 2008, triggering the worst financial crisis in the US since the Great Depression. It was an exciting time, in the terrifying sense. A quote from a friend working at the Federal Reserve continues to resonate with me: “Communism would have survived if it got a trillion-dollar bail-out”.  You’d be forgiven for thinking Marx was almost right when he prophesised that Capitalism would eat itself. Lucky for Capitalism that the American Taxpayer was apparently willing to keep her on life support.

Here in Godsown we are not immune from the self-destruction of the market. Air New Zealand was run into the ground by the high-flying captains of industry, again leaving the taxpayer to come to the rescue.

What if the private sector needs another bail out – can an SOE be used to rescue a flailing business? Or what if one of our SOEs needs rescuing?

Article 17.4.2 makes it clear that a government can directly or indirectly through an SOE step in to rescue any financial institution. It states:

Nothing in this Chapter shall prevent a Party, or one of its state enterprises or state-owned enterprises from undertaking activities for the purpose of the resolution of a failing or failed financial institution or any other failing or failed enterprise principally engaged in the supply of financial services.

This naturally begs the question: what about the other non-financial sectors that are too big to fail?

It is possible that rescuing an SOE would be challenged under the non-commercial assistance clause. Article 17.6 does permit non-commercial assistance, including loans on favourable terms, or provision of capital, provided that it does not result in adverse effects for the domestic industry of another signatory to the agreement. No doubt the government and the private sector will disagree regarding just what constitutes an adverse effect – and perhaps for this reason, we sought and secured exemptions from Article 17.6 for communications infrastructure and air and maritime transportation.

This means that a future government could keep any SOEs in these critical sectors afloat without the threat of a lawsuit. (Solid Energy is also exempt from the obligations, but presumably for reasons other than national importance of the coal industry.) The electricity sector – another critical cog in any economy - is notably missing from the exemptions.

Selling-off the silverware

With Kiwibank to be the latest SOE to be put on the auction block, is worth asking whether the chapter has any implications for the sale of SOEs. In particular, would NZ Post be able to sell Kiwibank to ACC and the Superfund if the TPPA is ratified? (I’ll admit, the timing of the announcement – before the ratification of the agreement – piqued my interest.)

The chapter has few implications for the sale of an SOE.

A footnote to Article 17.4 does make it clear that the purchase or sale of shares by an SOE is exempt from critical parts of the non-discriminatory treatment and commercial considerations clause – meaning an SOE is free to discriminate when purchasing or selling shareholdings in another enterprise. It seems then, that under the TPPA, NZ Post would be free to sell Kiwibank to whomever they like, at whatever price they like. Which is a good thing, since Rod Oram thinks that ACC and the Superfund are getting it on the cheap.


*Ryan Greenaway-McGrevy is a senior lecturer at the University of Auckland in economics. Prior to that he was a research economist in the Office of the Chief Statistician at the Bureau of Economic Analysis (BEA) in Washington DC.

Amber Carran-Fletcher contributed to this article.

The series so far:

Investor-state dispute settlement

Labour standards

Settling disputes

Intellectual property

SOEs and designated monopolies

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2 Comments

"Lucky for Capitalism that the American Taxpayer was apparently willing to keep her on life support." ???? Did the tax payer have any choice? More like the political establishment, advised by the banks committed tax payer funds without asking their permission. If it had been put to binding referendum would the tax payer have been supportive of the trillion dollar bailout of private banks?

As far as subsidies are concerned, would the TPPA consider that trucking comapnies are subsidised here? They don't pay the full cost of all the damage they do to the roads, or the cost of having to reinforce all the bridges when the Government approved an increase in truck sizes? Those costs get spread across all road users. Kiwi Rail would be able to compete with trucks if they got the same level of support.

Meanwhile a designated monopoly refers to any enterprise that holds exclusive rights to sell a set of goods or services by virtue of government regulation

These anti-competitive practices would become infringements under the TPPA

Like Patents and Copyright they are licensed monopolies.