Lisa Owen interviews Finance Minister Bill English

Reveals Government is “digging into” state-owned Landcorp’s 25,000 ha dairy conversion in the Waikato but says it may be bound by long-term contracts.

“They’ve indicated that they’re having a good hard look at it. They’re a bit uncomfortable with it, so we’ll see how they work it through.”

Rejects calls for a ‘Plan B’ to help boost the economy amid slumping dairy prices saying “Plan A is a flexible, resilient economy”

Owen: But businesspeople who are on the front lines – 75% of the top business minds in the Mood of the Boardroom – they want you to have a plan B. Are they wrong?
English: Well, I’ve asked them about what their plan B is, and none of them have a plan B.

Finance Minister raises prospects of joint ventures for TVNZ, New Zealand Post and KiwiRail, acknowledging they have some “real challenges”. But they won’t be sold because the public “want to keep these assets”.

“We will need to look at a range of opportunities, joint ventures, mixing and matching how they run their different businesses to try and preserve some taxpayer value..”

Nothing in particular about the economy keeps Finance Minister awake at night but acknowledges the dairy industry is “worse than bumpy” at present

“You have to say everyone has been caught out. Everyone has been wrong up till now about dairy prices.”

Big question is when and by how much dairy prices will improve but won’t predict, saying only that commentators expect price to rise by start of 2016

English denies Government played a role in Solid Energy’s demise saying it just “put commercial pressure on this organisation”

Impact of yuan’s fall on Chinese tourism will have “some influence at the margin” but says industry will be boosted by kiwi dollar’s drop against other currencies

Owen: Okay, well, while we’re talking about China, do you think that their official statistics paint a true picture of what is really going on there?
English: Well, look, it’s the Chinese government’s statistics, so we take them at face value. If you talk to people operating in China, there’s any number of them who will tell you the economy or their part of it is growing more slowly. So for instance, discussion about China tends to be dominated by infrastructure investment and property investment and also the sharemarket, and those bits aren’t growing at 7%. I think that’s pretty clear.

Lisa Owen: If you've been listening to the latest run of economic news you could be forgiven for thinking it's all downhill from here. In fact the BNZ used those very words this week. Our biggest export... dairy... is in the doldrums and china's currency devaluation has unsettled markets. This past week we also saw the demise of Solid Energy on Finance Minister Bill English's watch. The falling coal price crippled the SOE, but the Government had urged it to take on more debt and pay higher dividends... so I began by asking Mr English if it was National's bad management that pushed it over the edge.
Bill English: No, I don’t agree with that. It’s the coal price that’s sunk this company and the assumptions that it made five or six years ago about where that coal price would be. They thought it would be twice as high as it is now. In fact, their estimates then were higher than the market. So as the new Government came to grips with what the company’s plans were, there was disagreement between the company and the Government and the Treasury. There were changes in the board, changes in the management, and we’ve been in a process since dealing with this ever-dropping coal price.
But you kept taking dividends – 160 million over four years. You encouraged the debt, so do you accept that some of this is bad management on your part?
No, I don’t accept that. I accept we put commercial pressure on this organisation, but the way it spent its money back in that period was on fairly large-scale, if not grandiose, schemes about alternative energy, building a very large staff of head office and overhead. As we came to grips with that in the early stages of the mixed ownership process, because, remember, it was originally scheduled as an SOE we would sell, the due diligence on the company threw up all these issues. We were aware of some of them but not all of them before that, and at the same time the coal price started dropping. And so we’ve taken every step we can, as the company has, particularly staff in the coal mines, taken every step they can to try and secure its viability, and, actually, they’ve done a pretty good job, because the alternative was liquidation.
Okay, well, your instinct was, though, to sell Solid Energy a few years ago, and just a few weeks ago, you had the same instinct about TVNZ, New Zealand Post and KiwiRail. So is it time to put them on the block to stop this happening again?
No. The Government’s policy’s pretty clear about those organisations. In fact, crystal clear. They’re not going to be sold. But like Solid Energy, they’ve got some real challenges. New Zealand Post’s postal business is shrinking pretty rapidly. Free-to-air broadcasters around the world like TVNZ are struggling. So we’ve got to— we are applying a great deal of effort to try and preserve the value of the taxpayers’ investment in these businesses when they’re quite challenging businesses. KiwiRail would be the same.
But National’s mantra has been that it’s going to make evidence-based decisions. So the evidence from Solid Energy – doesn’t that make you want to shift your position on this in terms of selling these off?
Well, they’re not for sale, but we will need to look at a range of opportunities, joint ventures, mixing and matching how they run their different businesses to try and preserve some taxpayer value in the face of changes that aren’t driven by the company, just technology, for instance, you know, Lightbox and so on is undermining the future of TVNZ.
So you are prepared to move away from making a decision on that because you’re scared of the politics of it?
No, it’s not a matter of being scared of the politics; it’s a matter of being clear about the alignment between the Government’s intentions and the owners. The owners are the New Zealand public. They want to keep these assets. It’s our job as stewards of these assets for the time being to do our best to preserve value, and that’s what’s going on in each of these organisations.
Recently, we’ve had a string of bad news about the economy, and the BNZ says it’s all downhill from here, so what element of that keeps you awake at night?
Well, nothing in particular keeps me awake at night, but the more concerning element—
Shouldn’t it, though? Shouldn’t it, though, Minister? We’ve just cut out $7 billion from the economy with dairy prices, potentially 100% of farmers are making a loss this season and we’ve got a topsy-turvy China. Shouldn’t some of that be keeping you awake?
Well, look, there’s elements of it that are concerning, but you need to have confidence in the New Zealand economy, and the Government certainly does. And that is an economy that can move quickly to react to these kinds of changes. We’re a small, open economy. The waves generated by the global economy wash up here, and we have to deal with them. So in this case, there’s positives and negatives. So the dairy industry is really under pressure. There’s no doubt about that. A lot of our farming families are really feeling the pressure of a bad winter, the work pressure of calving, which they’re flat out in right now, and bad news about the payout. That’s dragging the New Zealand dollar down.
Worse, Minister, than just bumpy, which is the way you described it a few weeks ago? Worse than bumpy?
Well, for the dairy industry, it’s worse than bumpy, but for the New Zealand economy as a whole, that is dragging the New Zealand dollar down and that is boosting the profitability of our second-largest industry, which is tourism. And the numbers there continue to grow, and investment and jobs continue to grow in that industry.
But, Minister, we’ve seen a drop in the yuan, and that’s going to stop people travelling – Chinese people travelling. That’s going to hit you in tourism.
Well, it’ll have some influence at the margin, but the growth in tourism, whether it’s China or Australia, is pretty strong, and our drop against the US dollar is much greater than the yuan drop against the New Zealand dollar, and there’s other industries enjoying some of the same sort of benefits – kiwifruit, ICT. Meat and wool prices have held up pretty well. In fact, wool prices seem to be moving up a bit, the wine industry. So across the whole economy, the investment is going to move. There’ll be less of it flowing into dairy, more of it flowing into these other industries, because we’ve got an economy that has confidence about how to make decision, and that’s why I don’t lie awake at night.
Okay, well, while we’re talking about China, do you think that their official statistics paint a true picture of what is really going on there?
Well, look, it’s the Chinese government’s statistics, so we take them at face value. If you talk to people operating in China, there’s any number of them who will tell you the economy or their part of it is growing more slowly. So for instance, discussion about China tends to be dominated by infrastructure investment and property investment and also the sharemarket, and those bits aren’t growing at 7%. I think that’s pretty clear.
Okay, well, so right now China’s taking a lot less dairy from us. What if it goes the same way as Australia with iron ore and coal?
Iron ore is still being— the price for iron ore is still above the cost of production for the large operators like Rio Tinto. In dairy, the current price is below the cost of production for every producer in the world, so it has to rise at some stage.
At what stage?
It’s just a matter of how long it will take.
At what stage do you think that the price slump is going to pick up?
Well, I think we’ve all learnt not to guess here. The indications that the commentators who look at the industry closely are giving us that around Christmas, getting into next year, the price will be rising. The big question for the industry is whether— how high prices will come up. I think they will come up. It’s just a matter of how far…
But as Minister of Finance—
…and are they going to—
As Minister of Finance, this is a significant chunk of our exports and economy, when do you think the prices are going to pick up?
Well, I’m not going to make some uninformed guess about that. We listen to the market and what it’s saying. You have to say everyone has been caught out. Everyone has been wrong up till now about dairy prices. They’ve fallen further and faster and they look like they’ll stay down for longer than anyone anticipated as recently as two months ago.
So, Minister, here’s one you—
So I’m not going to hazard a guess.
Here’s one you probably can answer, then. What’s that going to do to your surplus next year?
Well, we’ll get an update of that going into the half-year update in December. So Treasury’s just starting the process there of re-forecasting what’s going to happen, so we’ll get some information in September-October about the surplus or otherwise for the last financial year. Probably looking ahead, we’ll be looking at it a bit differently. Bear in mind the surplus target was put in place when we were in a deep hole with an $18 billion deficit and we had to climb out of it. Now that we’re close to or at surplus, we’ll be looking ahead across an economic cycle, and we’ll probably formulate the target a bit differently. But that’ll all unfold in the next few months.
Okay, well, given the situation with dairy, I’m curious – state-owned Landcorp is pushing ahead with a massive conversion from trees to dairy in the Waikato. Is that still a good idea, do you think?
Well, there’s— I mean, you’d be best to talk to Landcorp about the detail of it, but our advice is that they have long-term contractual arrangements that mean they have limited choices about how to proceed with respect to that project. And that’s something the Government’s digging into in a bit of detail because we do need to understand exactly what their obligations are and what choices they have…
So if they could—?
…because a contract drawn up in—
If they could, Minister. You’re looking for wiggle room there, aren’t you?
A contract drawn up in—
So if they could, would you like them to pull back from that if it’s a possibility?
Well, these arrangements were put in place back in the mid-2000s – 2005, 2006, 2007 – and, of course, the world looks a bit different now.
But you’re a bit uncomfortable with it? Pushing forward in this climate?
Well, they’ve indicated that they’re having a good hard look at it. They’re a bit uncomfortable with it, so we’ll see how they work it through.
All right. Well, I’ve been wanting to ask you about an All Black analogy that you say, ‘They’re good at rugby and they should stick to it in the same way that New Zealand is good at selling raw materials to Asia, and we should stick with that.’ And to quote you from last month, you said, ‘We’ve got all our eggs in the All Black basket.’ Is that still your best plan?
Well, it’s not a matter of our best plan. We run economic policy that underpins a flexible, resilient economy, so if prices are down in one area, we would expect people to— we’ve got a set of rules that enable them to react fairly quickly to that, and we don’t try and hide the message the world is sending us, for instance, about dairy prices. And lots of other countries, they’re increasing subsidies to farmers in order to brush over and hide that price signal. So this economy will diversify if there are other markets which are willing to pay more for our products. That’s where the investment will flow. And the good news on the horizon is that the US economy is recovering. It’s the world’s largest economy. It’s showing signs of sustainable growth. And that New Zealand businesses are responding to that positively, and I don’t agree with politicians—
But, Minister, that’s your plan A. That’s your plan A. Where’s your plan B?
Plan A is a flexible, resilient economy. If plan B is about politicians sitting on the sideline deciding where hundreds of millions of investment should go next, then we’re not interested in that sort of plan B. It will fail, as it’s failed in the past.
But business people who are on the front lines – 75% of the top business minds in the Mood of the Boardroom – they want you to have a plan B. Are they wrong?
Well, I’ve asked them about what their plan B is, and none of them have a plan B. They’re certainly inviting—
Maybe they’re relying on you for plan B, Minister.
They’re certainly not inviting politicians to say, ‘Right, we’re going to shift a couple of hundred billion— a couple of hundred million of investment from industry A to industry B.’ They are backing the Government approach, which is to ensure that we keep our costs down, the Government invests in infrastructure, because no one else can do that, we work on the pipeline of skills into the labour market so there’s people there that they can employ, and they make their risky commercial investment decisions, and that’s what they’re doing right now. Right around the country, businesses will be thinking about where to direct their investment, given that dairy’s not looking so good for the next year or two; tourism, wine, ICT is all looking better for the next two or three years. And they’ll make those decisions a bit more precisely and more sensibly than government would.
Okay, before we go, Minister, what about infrastructure spending? Have you got anything up your sleeve?
Well, look, there’s plenty in the pipeline about infrastructure spending. We’re publishing the next 30-year infrastructure plan next week. There’s a lot in the pipeline. That pipeline continues to grow, and we continue to fund more investment and infrastructure, and that will certainly help with providing jobs and economic activity.
All right, thank you so much for joining us this morning. Bill English, Finance Minister, thanks for your time.
Thank you.
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