Keeping it Kiwi

Written By: - Date published: 4:26 pm, February 18th, 2008 - 19 comments
Categories: economy - Tags:

udder.jpgDairy farmers have rejected the Fonterra Board’s short-sighted plan to sell 20% of the company.

Fonterra wanted to raise cash with a stock-market float to fund expanding its dairying operations in other countries but in the long-run Fonterra would have paid out far more in dividends to (offshore) stockholders. The dairy farmers would end up working to line the pockets of foreigners and New Zealand’s current account would have suffered.

We already send nearly $4 billion a year offshore in dividends, mostly from companies like Auckland Airport, the Banks, Toll, Telecom, and Contact that were foolishly sold by governments in the 1980s and 1990s.

Good on the farmers for having the wisdom to keep their business kiwi-owned. (Now, work on that environmental impact)

Fonterra should fund its expansion plans by reducing the milk payout. That would reduce inflation and result in profits earned overseas returning to this country in the long-term.

19 comments on “Keeping it Kiwi ”

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  1. Brett Dale 1
    18 February 2008 at 4:49 pm

    The Government shouldn’t be in any private enterprise. Why the heck should they have any say in how an airport is run?

  2. Steve Pierson 2
    18 February 2008 at 4:55 pm

    The question is: why should a government, having spent millions developing an airport, sell it off cheaply?

    Our largest airport is not just a normal ‘private enterprise’, we’re not talking about a diary we’re talking about a major strategic asset.

    Take your ‘government out of the provision of goods and services’ argument to its logical next steps and we should privatise the road network.

  3. deemac 3
    18 February 2008 at 5:03 pm

    I would have thought the negative economic effects on the NZ economy of the sell-offs of the 1980s and 1990s (detailed on this site many times) were the perfect answer to Brett Dale’s dumb post. We’re still suffering as a result.

  4. andy 4
    18 February 2008 at 5:28 pm

    The farmers I know, were more worried about control. They have to buy a ‘share’ for every kilo of milk solid sold to Fonterra. They own it and controll it. With a 20% float farmers would cede control over that portion but continue to fund with thier personal capital. The deal was not clear enough about controlling interests, voting rights and capital raising. With equity markets not looking healthy at present it is prudent in my mind for farmers to bank the profit and pay down debt, then look at the structure of fonterra.

    BTW, who stood to gain most from the float. Management awarding themselves share packages, bonuses based on share performance not milk production and Investment banks generous fees. I think farmers rejected based on the fact that they would have to buy shares in there own company to keep control. Sounds almost like telecom mum and dad investors, who payed for it twice.

  5. Draco TB 5
    18 February 2008 at 5:42 pm

    The Government shouldn’t be in any private enterprise. Why the heck should they have any say in how an airport is run?

    Because it’s a natural monopoly and so doesn’t respond to the normal free-market forces which drive prices down to cost. Even Milton Friedman agreed that natural monopolies needed to be government owned to prevent private individuals (either individually or in corporate form (Remember Theresa Gatung’s words)) from scamming the populace.

    Natural monopolies found in modern societies include:
    Telecommunications
    Health
    Roads
    Airports
    Electricity (generation and reticulation)
    etc.

    What makes them natural monopolies is:-
    1. Barriers to entry – they’re just to expensive for everyone to set up their own.
    2. Physical space – there just isn’t enough room.
    3. Efficiency – It’s far more efficient and cost effective (due to scale) to have one of them and the bureaucracy that runs it than multiples. Multiple networks won’t drive the cost of broadband down but will, as a matter of fact, drive the prices up. All that cabling, labour and administration costs and those costs have to be recovered.

  6. the sprout 6
    18 February 2008 at 6:51 pm

    “We already send nearly $4 billion a year offshore in dividends”

    that is an utter disgrace.

  7. Gooner 7
    18 February 2008 at 9:52 pm

    Steve, I am not sure about that last paragraph.

    If Farmers appear to dislike the current plans, I am fairly sure they won’t vote for reducing their payout and hence their income!!!

  8. AncientGeek 8
    18 February 2008 at 10:08 pm

    Great summary Draco.

    There is just one thing I’d add. Often the natural monopoly is in the infrastructure rather than the services. For instance there is little point in setting up different telecomms networks side by side. But that doesn’t mean that those networks cannot have services run on top of them by different companies.

    For instance the most ISP’s share the same infrastructure for international bandwidth, but often purchase from the same suppliers.

    cap: in structural

  9. Phil 9
    18 February 2008 at 10:50 pm

    Draco / AG

    I disagree with some of your thinking.

    While I accept that natural monopolies exist, and need to be subject to non-market control, simply saying that “health” is a natural monopoly is a complete fallacy.
    Certainly there are aspects of health services that should remain in public hands (A&E being the prime example) but other componenets of a health system can, and do, run very well in market/competition models. Ryman Healthcare and the Medical Assurance Society come to mind here, so does F&P healthcare for that matter.

    Same goes for Telco’s – I agree completely that two sets of copper wires running the length and breadth of the country is woefully inefficient, but the advances seen in wireless technology make that less relevant – I am told by those much more tech-savvy than myself that throwing a satelite into stationary orbit and running a wireless network is actually not that (comparatively speaking) difficult or expensive.

    Roads too are not able to be painted as an all-or-nothing public good. A road from say, a forestry plantation to the closest railyard of port could quite concievably be a privately constructed road, held in ownership and subject to a toll.

  10. Phil 10
    18 February 2008 at 10:54 pm

    “”We already send nearly $4 billion a year offshore in dividends’

    that is an utter disgrace.”

    Would it be less or more of a disgrace if we had decided not to borrow the capital in the first place, and were nearly $40 billion in total revenue worse off?

  11. AncientGeek 11
    19 February 2008 at 12:28 am

    I agree with a lot of what you say. The situation is a case of it depends.

    For instance, there is virtually no way to run a public health (as vaccinations, outbreak control, sewerage, etc) on the basis of a private system. It has huge benefits for the country as a whole, but only if there is almost universal coverage.

    That being said, there is nothing to stop the state purchasing those public health services from private providers. But what happens when the private provider decides not to continue in that area of business. You are left with hole in your coverage, and a high level of risk. Now the obvious rejoinder is that will be other providers available. But they are likely to not want to increase their capital expenditure..

    I’m a bit tired so I won’t expand the argument. Suffice it to say, that frequently where there is a private coverage system, it is usually very patchy.

    I am told by those much more tech-savvy than myself that throwing a satelite into stationary orbit and running a wireless network is actually not that (comparatively speaking) difficult or expensive.

    Depends what you regard as a wireless network and what your position on earth is. It is a geometry and usage problem. Geosync sats are good at broadcast, and painful as a bidirectional systems.

    Geostationary orbit

    To have a geostationary orbit you need to position the satellites at an equatorial position at something like 35k km’s up (look up the exact figure). The half circumference of the earth by comparision is 0.5 * pi * 12k odd, but the usually you’re heading to something quite a lot smaller than that, say from NZ to Alaska.

    That is fine if you live at the equator, 35k up. Even there you are looking at latency problems. You hit speed of light limitations – at least 0.25 secs each way. These are present on land line systems as well – there are measurable speed limitations between here and aussie. But they are 4k km’s worth rather than 70k km’s (35k up and 35k down at best).

    If you live in southland, the angle means that you are probably at about 40k kms (find a calculator). However you have a lot more atmosphere because of the angle in the way, attenuating the signal through the last 20km’s or so of air and other assorted radio freq absorbers like water vapour.

    Thats not counting if you have a large hill between you and the equator. What I’m saying is that because of angles not all places are equal. Direct satellite coverage is patchy at best. You usually overcome this using local repeaters. Like the cell network, this works best in built up areas, and gets expensive pretty fast if you want to get wide coverage.

    That is one side of the problem. The other side is the uplink. You’re looking at considerable power to punch complex signals out of the atmosphere. Thats ok on the sat side because you’re punching signal over half the globe – becomes worth while. But if I’m sending signal from my location out to at least 35k to a small target, it becomes uneconomic pretty fast, especially when you’re doing at the household level.

    There are several solutions to the uplink issue (iridium,copper or microwave to transmitter etc), but they all add costs. In particular you’re talking about broadcast systems using high power with correspondingly high maintenance, compared to lower power and maintenance cable systems.

    The reason the uplink is important is that the net isn’t a broadcast medium. It is almost as important to me to send my video of the kid to the grandparents as it is to download the next blockbuster. Thats becoming more and more the case everyday.

    And in all of this you’re looking at latency. My experience of using sat systems hasn’t been good, probably because I use a lot of real time systems. The min latency or about 1/2 sec (and usually more like 1 sec in NZ) between me sending a request and getting an answer is a killer. Compare that with the average 0.225 secs I just got pinging my favourite server in the US. It gets hard to run an accounting system in the US from India with a satellite system.

    Teleoperating in various forms (like running remote servers) is getting more and more important these days economically. I avoid sat system like the plague these days – adequate for watching movies. Useless for remote desktop.

    Short answer is that sat is a good expedient where you don’t have good copper/fibre. Great where you want to do a rapid setup for people to view things on something like the web. Not particularly good when you wnat to do more direct economic things with the net. Will get replaced by cable systems as people go beyond just looking at things.

    Yawn & off to bed

  12. Andrew Jull 12
    19 February 2008 at 7:58 am

    “That being said, there is nothing to stop the state purchasing those public health services from private providers. But what happens when the private provider decides not to continue in that area of business. You are left with hole in your coverage, and a high level of risk. Now the obvious rejoinder is that will be other providers available. But they are likely to not want to increase their capital expenditure.”

    What AncientGeek says is quite accurate. Private health care providers are very canny about what will actually cover. Thus they are a happy to provide low risk surgical services (including quite complicated procedures, such as cardiac surgery, but to low risk individuals), but do not provide high risk services. Any surgical patient that moves from being low risk to high risk during their private hospital stay is transferred (without appropriate reimbursement) to the public system. For example, it is quite common for surgical patients to move from private to public if they develop complications that need further surgery or if they need intensive care. The private providers not only cherry pick what conditions they will treat, they cost shift their most expensive patients into the public sector.

    Examples of work the private sector is unlikely to pick up: any chronic condition (this is why they do not provide any non-surgical services for cardiac or neurological conditions, stroke, diabetes etc.), intensive and critical care work, emergency work, any training, etc. It is all just too expensive for them, because the work is in essence open ended. So private provision of hospital services is no panacea and it is quite mindless for politicians and other associates (thinking here of the slew of Health Ministers under National and Labour who were driven by monetarist ideology – David Cagill, Simon Upton, Jenny Shipley, Bill English, and possibly in the near future Tony Ryall) who have never been involved in the sector to think simplistic sloganeering will “fix” provision of services.

    By the way Phil, last time I looked Ryman Healthcare operated retirement villages, not private hospitals, The Medical Assurance Society provides insurance cover to medical insurance and financial services to health professionals and F&P Healthcare manufactures medical devices such as humidifiers for oxygen. Thus none of your examples are actually exemplary of private health care providers.

  13. Phil 13
    19 February 2008 at 9:19 am

    And there-in lies the problem in your argument Andrew – those companies are quite sucessfully involved in the health sector, and make good profit (haven’t looked at the results from the latest reporting season yet…) doing so. The whole point of my OP was that “health” as one diverse entity of services, products, and institutions, cannot and should not be thought of as being exclusively public or private in nature.

    With respect to AG’s thoughts on private sector services being dicontinued, I think thats a totally spirious argument. Having suppliers change, and needing to update your operational practices to take account of that, is Management 101 stuff. The ‘risk’ you describe seems to me to come from a failure of the public health provider to account for, or ensure against, that prospect arising.

  14. insider 14
    19 February 2008 at 10:48 am

    Surely sending $4b in dividends is not an issue if NZers are investing overseas and getting dividends back? Fonterra owns businesses overseas and sends dividends back to farmers. Is that a bloody disgrace?

    Seems like a rather childish whining. “I’m too small, I’m special, I need to be protected from all these nasty foreigners.” Yeah yeah, go tell that to the Singaporeans, Swiss or Luxembourgois

    I have westpac shares and get about $30 dividend a year so am doing my part. 🙂

  15. Draco TB 15
    19 February 2008 at 3:17 pm

    With respect to AG’s thoughts on private sector services being dicontinued, I think thats a totally spirious argument. Having suppliers change, and needing to update your operational practices to take account of that, is Management 101 stuff. The ‘risk’ you describe seems to me to come from a failure of the public health provider to account for, or ensure against, that prospect arising.

    This would be a viable argument if there was any competition supplying the required services. This is unlikely to be the case due to what AG said – private companies don’t do high risk. There is also the simple fact that the public health system is a very large undertaking and so any company that provides for it is likely to be in a monopolistic position and therefore any other company that bid for the tender would likely need to set up from scratch. There’s even a very nice example of this in Auckland where the competing bid pretty much depended upon them hiring most if not all of the doctors from the previous tender holder. Things didn’t go to well when most if not all of those doctors said they wouldn’t work for the new company.

    There are certainly exceptions to my list but they are the exception and not the rule.

    Surely sending $4b in dividends is not an issue if NZers are investing overseas and getting dividends back? Fonterra owns businesses overseas and sends dividends back to farmers. Is that a bloody disgrace?

    Yes, it is.

  16. Steve Pierson 16
    19 February 2008 at 3:31 pm

    Net flow of investment income is $3.2billion out of NZ.

    captcha: “cocktail City”, sounds like a nice place to visit

  17. AncientGeek 17
    19 February 2008 at 6:30 pm

    With respect to AG’s thoughts on private sector services being dicontinued, I think thats a totally spirious argument.

    It isn’t. Look at the epidemiology of disease outbreaks. Get a outbreak of something like measles or bird flu or something. The initial diagnosis and containment is always at the front end. If that is going through a ‘transition’ like say the med labs have been, it is bloody dangerous to the wider population.

    I’m afraid that primary health care is too important to be left to the private sector.

  18. AncientGeek 18
    19 February 2008 at 6:39 pm

    Phil: Just one point.

    Your arguments seem awfully familiar. They sound exactly like the ones used to justify deregulating building inspections. It wasn’t exactly a raging success at any level you want to look at it. It led to more regulation because the building standards dropped, and we had leaky buildings.

    Perhaps if you specified the obligations and penalties for the private industry if they did not fulfill their role. The obligations should include the extent of coverage, and the minimum contract periods. I’d start by specifying the insurance backing for liability, and the requirements for directors.

    In other words rather than look at benefits, make sure that the risks are covered.

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