ISCR releases SOE study
19 June 2000
Prof. Lewis Evans
ISCR releases SOE study
The New Zealand Institute for the Study of Competition and Regulation today released a study of the economic performance of five State-Owned Enterprises (SOEs) in the period 1989 to 1998. The five SOEs studied were Airways Corporation of New Zealand Ltd, Landcorp Farming Ltd, Television New Zealand Ltd, Vehicle Testing New Zealand Ltd and New Zealand Post Ltd.
Key points from the study
There was considerable variation in SOE performance. One produced steady productivity gains that are very good by any standard. Another of the SOEs studied produced good productivity gains through most of the period, but its productivity fell with a change in market conditions towards the end of the period. Two of the SOEs have not produced good productivity growth.
Cumulative Productivity Average Productivity Period of Analysis
Airways Corporation +65.7% +6.6% 1988 – 1998
Landcorp Farming +16.0% +1.4% 1988 – 1998
TVNZ +36.3% +3.5% 1989 – 1998
Vehicle Testing -33.1% -6.6% 1994 – 1998
New Zealand Post +32.3% +3.23% 1988 – 1998
TranzRail +68.0% +7.0% 1989 – 1998
Telecom NZ +63.0% +9.0% 1987 – 1993
There is some evidence that the threat of competition induced productivity gains, but this was not universal. The transition to a competitive market led to costs that reduced measured productivity.
Television New Zealand is the only SOE in the study that was in a competitive environment for all of its business over the whole period. It showed steady, but not spectacular, gains in productivity.
Television New Zealand Ltd
Airways Corporation showed strong productivity gains through
the whole period. It faced the least competition of the
SOEs in the study. Its productivity gains were shared
between shareholding taxpayers and Airways’ customers:
profitability improved, and real prices fell through a
policy of price restraint.
Airways Corporation of New Zealand Ltd
For most of the period New
Zealand Post Ltd had fairly strong gains in productivity,
but it flattened off in 1996. This performance may have
been affected by investments in improved customer
satisfaction that were not reflected in New Zealand Post’s
measured output for the productivity calculation.
New Zealand Post Ltd
Vehicle Testing New Zealand lost productivity throughout the 1995 to 1998 period, although it remained profitable by increasing its revenue. It was the only SOE in the study to raise its prices. Its productivity performance would have been affected by more stringent regulatory requirements. It has since been sold.
Vehicle Testing New Zealand Ltd
Landcorp Farming Ltd diversified into meat processing but stopped by the end of this study. Resulting record problems made it impossible to assess productivity of the business overall and difficult to reliably assess productivity for the farming operation. Farming operation performance was quite flat.
Landcorp Farming Ltd
All SOEs in the study attempted some form of diversification over the period. Those at the cutting edge of changing information technology, such as New Zealand Post Ltd and Airways Corporation, have systematically sought to maintain or advance their business in this way. Two SOEs (Landcorp Farming and Vehicle Testing NZ) were not successful at diversification, but developments inTVNZ’s subsidiary Broadcast Communications Ltd were impressive over the period and materially contributed to a solid TVNZ performance.
The study contrasted this group of SOEs with Telecom and Tranzrail, two former SOEs that had been sold. None of the five SOEs studied achieved the productivity gains of these two counterparts. Over the period 1989 to 1998, the five SOEs averaged productivity growth of 3.4% per annum. Tranzrail’s was 7.5% per annum over the same time frame, and Telecom’s was 9.5% in the 1987 to 1993 period.
The industries of the companies studied are quite different in competitive status, life-cycle and technological change. Hence, only limited generalities should be made from cross-company comparisons on the basis of this study. Each SOE faced unique challenges and opportunities.
In order to draw general conclusions and
to make valid comparisons of performance, ISCR sees value in
further study of factors such as:
the different regulatory regimes applying to these SOEs, and the different degrees of change in those regimes
the market conditions each SOE faces, and their market strategies
relationships between the managers, Boards and their owners (shareholding Ministers)
the different rates at which new technology affects the relevant industries
The report was commissioned by the Treasury. ISCR acknowledges very considerable assistance from senior staff at each of the SOEs studied: Airways Corporation, New Zealand Post Ltd, Television New Zealand, Landcorp Farming and Vehicle Testing New Zealand.
The full study is available on the Internet at www.iscr.org.nz/research
David Boles de Boer
NZ Institute for the Study of Competition and Regulation