Softening up

Written By: - Date published: 2:22 pm, March 5th, 2009 - 26 comments
Categories: ACC, economy, spin - Tags:

A few points on the ACC issue and one on Kiwirail.

Nick Smith says that, with assets of $10 and liabilities of $21 billion, if ACC were an insurance company it would have gone under years ago. But it’s not an insurance company. Because its costs can be met by the sovereign revenue raising power of the Crown, it doesn’t need to be solvent any more than WINZ does. That said, building up a pool of reserves against future liabilities now will allow lower levies in the future and hedges against the rising number of claims from baby-boomers. Both National and Labour have policies of doing so and the ratio of unfunded liability to assets has improved in the last decade.

Part of the so-called ‘blow out’ is attributed to ACC’s financial assets losing value due to the credit crunch. That’s no reason to cut services. Unless you believe this is the end of capitalism as we know it (in which case we have bigger problems), the stock-market will recover and so will the value of ACC’s assets.

ACC spends next to nothing on admin (far less than health insurance companies in the US do) and it doesn’t make a profit. Nearly all the money it takes in is paid out covering health costs or compensation for lost income. ACC can’t control the price of health-care. There are only two ways to cut ACC’s costs significantly: cut the services (ie. cover less medical treatment, give less income compensation) or reduce the people who get covered. Private insurers do both by denying vast numbers of claims and by pricing people out of getting cover altogether. National has committed to universal coverage, so it will slash services instead starting with physiotherapy.

Physiotherapy is highly cost-efficient because it accelerates rehabilitation (getting people off treatment and compensation faster) and it prevents minor injuries becoming major ones that need more expensive treatment. Cutting the relatively small cost of physio is penny wise, pound foolish.

Competition cannot make accident compensation cheaper. The bulk of costs are outside the insurers’ control, ACC already has much more efficient admin, and private insurers need to make a profit. Profits don’t come out of thin air and they can’t come by slashing what is already minimal admin. To make a profit while not charging higher levies than ACC, private insurers would have to cream off the most profitable customers, leaving the taxpayer to pay for the rest, and avoid paying out for claims whenever possible.

Finally, a point on Kiwirail. Bill English says it has negative value. Of course, that’s untrue in the sense that it has assets that could be broken up and sold for a return. And even if it’s true in the sense that it won’t give any profit to government as a going concern, and will require the Government to put in more money, so what? If that were the criteria for whether owning an asset is worthwhile, we should get rid of the state highway system for a start – it costs the Government over a billion a year and there’s nearly nil revenue. It’s the externalities that matter. Having a working rail system, liking a working road system, allows the economy to work much better than it otherwise could. That produces tremendous wealth, even though it doesn’t show up on Kiwirail’s balance sheet.

In the past fortnight, we’ve seen some extremely dodgy economic arguments from the Government on ACC, Kiwirail, and the Cullen Fund. Clearly, this is part of a softening up exercise. You can expect major cuts are coming in the Budget.

26 comments on “Softening up ”

  1. The only problem with your post Steve, is that a Government Department working for people and not for profit will be seem absolutely absurd and illogical to the righties out there.

  2. BLiP 2

    Surprise surprise.

    Wonder if those nongs that voted National are beginning to realise what they’ve done?

    • gingercrush 2.1

      Yes I think they have. It also seems that former supporters of the Labour party have seen that a government run by National is far better than any government run by Labour. That would certainly explain National’s high polling in both the TV2 and TV3 political polls.

      • leftrightout 2.1.1

        This is dead right, who could possibly argue with the absoluteness of those polls.

        • bobo

          Lets see the polls after the new changes kick in and actually directly effect individuals before we get carried away with high poll ratings.

    • Akldnut 2.2

      Blip I doubt it, if they were sucked in in the first instance then they sure aren’t gonna see this coming. Most of the people I work with don’t even know whats going on and they all switched from Lab to the Gnats. Idiots

  3. Matthew Pilott 3

    Given that a frequent refrain from the Right is that the Government shouldn’t be in the business of turning a profit (and I agree, but from an ideologically polar perspective), what do you think they’d make of hearing that Kiwirail isn’t going to turn in megabox?

    I don’t get it – it’s an important piece of infrastructure, it’s not as if the Government is doing what the private sector wants to be doing (I guess because there’s not enough money to be made) so what is the problem with it? I suppose that’s the cue for bandwidth-wasting talk of train sets and financial constraints – the govt has spent $22bn on roads in the last 14 years or so – makes the trains seem a bargain, even after the private sector has largely negleted and asset-stripped rail.

  4. Rich 4

    Basically, I’ve been paying ACC for 5 years and never made a claim. Now National are going to steal the coverage that I’ve paid for.

    ACC provides a service that costs a fortune in countries with a private insurance / litigation model. In the UK, my rego was $500 and my insurance about $2,500. In NZ, on the same car, I was paying well below half of that amount.

    It’s the point Labour didn’t get over – the Nats might give out a few dollars in (soon to be cancelled) tax cuts, but they’ll claw it all straight back with the money people will need to pay for basic services.

  5. Greg 5

    Does anybody remember what happened to quoted private insurence levies when National was in the process of privitising it in the late 90’s? They plummeted! How can you argue that ACC is efficient in light of this?

    Also the private insurence/litigation model is not the only other option. I’d advocate a compulsary private insurence model. Everyone is covered, they just get to choose by whom.

  6. vinsin 6

    John Key was on bfm this morning doing the same softening talk around ACC. I imagine if he keeps talking about astronomical figures people could be scared into privatization, which is definitely coming unless Johnkey gets scared that his popularity might take a huge beating from the fallout of scraping ACC.

  7. George Darroch 7

    Does anybody remember what happened to quoted private insurence levies when National was in the process of privitising it in the late 90’s? They plummeted! How can you argue that ACC is efficient in light of this?

    They decreased somewhat. That’s because as private companies, they were able to offer cheaper services to their clients – businesses. They did this by cutting back on payouts to employees. As you would expect them to.

    ACC on the other hand is run for the benefit of everybody, including those pesky little employees. Never mind that prompt and comprehensive treatment and compensation have a great number of social and economic benefits.

    ACC is extremely efficient at providing high quality care in the interest of everyone – as independent reviews have shown. It is not efficient at providing low cost care in the interest of business owners.

    Privatisation, says National and cheerleader David Farrar -” that is the way of the world”. Meanwhile, the rest of the world looks at ACC in envy, and wonders how they can implement such a system – just have a look at the public health (sorry, banned word) literature.

  8. Greg.
    a) the private insurers have a big interest in getting lots of businesses to come on board in the first place to bed in privatisation. So like any new provider trying to make an impact on a market by offering low costs up front, then rising them later.
    b) any private insurer will attempt to cream off the most profitable clients, so they offer good rates to them, leaving the taxpayer to shoulder the burden of the rest.

    See, the money for the priavte insurers’ profits can’t come out of thin air and it can’t come out of cuting admin (there’s bugger all to cut).. it’s got to come out of either creaming and dumping the rest on we taxpayers or by not paying out for claims.

    • Greg 8.1

      Thats the brilliant part Steve. Everyone thought they were loss leading – but they weren’t – quite the reverse actually. Insurence premiums were higher than they had to be because the insurence companies had to cover themselves for the possibility that Labour might get into power and reverse the privitisation (indeed this is exactly what happened).

  9. “we should get rid of the state highway system for a start – it costs the Government over a billion a year and there’s nearly nil revenue”

    I take it you don’t own a car or a diesel truck! As such you won’t have fallen victim to our predatory police traffic division either (that would be almost everybody in a uniform too by the way).

  10. On Kiwirail, you say “so what” if it doesn’t make a profit. Well let’s look at the record here:
    – $665 million to buy a company that had a publicly listed market value of around two-thirds of that, and wasn’t able to pay its bills (track access charges) is a LOT of capital from taxpayers. If you don’t generate a return from that capital it is a destruction of that wealth from taxpayers. It is clear you could not sell Kiwirail as a going concern or as scrap for anything near what has been paid for it. Why destroy the wealth of taxpayers (and continue to do so by taking more money to pour down this depreciating “asset”) to subsidise the freight movements largely of Solid Energy, Fonterra, freight forwarding companies and forestry companies?
    – The notion that the State Highway costs a billion with nearly nil revenue is abject nonsense. It cost $1.3 billion in the year ended 30 June 2008 and the National Land Transport Fund generates $1.8 billion across all roads (with the majority generated from state highways). $632 million is spent on local roads as well from that. Add the soon to be dedicated Crown revenue component of fuel excise adds another $300 million. The state highway network generates enough revenue to maintain AND improve it.

    Prove the “tremendous wealth” it generates, because it is basically a transfer from taxpayers to the forestry, dairy and coal businesses. The externality arguments are at best marginal, the evidence from the previous government’s own Surface Transport Costs and Charges study was that, when specific case studies on freight traffic were undertaken, the difference between rail and road was small, and in one case road freight had LOWER externalities than rail.

    In short, you’ve subscribed to the faith based belief that rail is somehow “good” and deserves large amounts of taxpayer largesse to keep it viable. You have no evidence of this.

    Matthew: If it is such an important piece of infrastructure you have to ask why freight forwarding, forestry, dairy and coal businesses can’t pay the full costs of using it. They pay for electricity, which is a far more important piece of infrastructure, but somehow when it is trains people’s brains turn to mush, go all gooey and say “they are different”.

    • Matthew Pilott 10.1

      Given the private industry has made such a hash of management of the NZ’s rail, yet managed to pull a fair bit of cash out of it over the years even without the sale cost, perhaps you’d do well to work on the odd rational conclusion yourself before accusing others’ brains of having mushy qualities, libertyscott.

      It’s funny that you described the exact conditions that lead most people to the obvious and correct conclusion, yet you are entirely unable to see it – I’ve never seen such a stark example of ideological blindness before.

  11. Murray 11

    “Because its [ACC’s] costs can be met by the sovereign revenue raising power of the Crown, it doesn’t need to be solvent any more than WINZ does.”

    You lot just love spending other peoples money don’t you.
    A message for all you do-gooders out there, do good with your own money.

  12. vinsin 12

    I found this particularly good cartoon in the granny today

    worth a look if you’re down for a chuckle.

  13. Stan 13

    Private Insurers were set to enter the market place some years ago but Helen & the labour Government vetoed it. Its a well known fact that private insurers can operate more efficiently than Government bureaucracy. Economists have long joked that if you give a Government department a dollar for a service you will be lucky if see ten cents of that reaching its destrination. This is true the world over,
    Government departments are like a snowball rolling down a hill they increase in size and speed alarmingly.
    I am not at all surprised to ACC in the gun, $14,000 to prison escaper paid out after an ankle broken jumping over a prison wall. The list goes on.
    NZ needs to privatise this sector and quickly,

  14. Matthew Pilott 14

    Its a well known fact that private insurers can operate more efficiently than Government bureaucracy.

    Define “efficiently”, champ.

    By hiring screeds of lawyers to find loopholes in order to screw people out of payouts, thus reducing the benefits from the system while keeping the costs the same?

    No thanks Stan.

  15. Matthew: The private sector made money out of it because the economy came out of recession in the mid 1990s, and there was precious little need to pour capital into it. However, once there was a need for renewals there was not enough surplus to make it a profitable investment.

    So what is the obvious conclusion Matthew, that the rail network is capital intensive, and without focusing on what it is good at (instead of thinking it is some saviour) the surpluses the profitable parts of the business generates get soaked up propping up uneconomic routes like Northland and Napier-Gisborne.

    I take off my ideological hat on all of this, because this is actually my profession. I personally love railways, I know a damned sight more about railways in NZ than you ever will, you probably can’t draw a map of every single line in NZ and know the difference between a DX, DC and DBR, I can. I would like all lines to run profitably with several trains a day, but I also know that it’s unreasonable to expect others to subsidise this – which for me is enthusiasm about railways, and for you is a political act of religious worship.

    Railways in NZ can be saved, if only a hard head is applied to the network, and the profitable parts allowed to thrive of themselves, and generate enough money to invest in new trains and renewed infrastructure profitably. Like the road transport sector does.

  16. Matthew Pilott 16

    I support railways and you support railways. My support of railways is gooey mushy and yours isn’t, because you profess to know more about them than I do. You clearly seem to know me well, and personally, which is strange – I tend to avoid those I see as obnoxious. Maybe you’re nicer in person – or maybe you don’t know me at all and are talking out your arse. That aside, what’s the argument here?

    I wasn’t specifically arguing for a way it should be done, so what was the point of you blazing in here with bollocks like “but somehow when it is trains people’s brains turn to mush, go all gooey and say “they are different’” apart from an attempt to waste my time with your self-important chest-thumping and one-eyed, bigoted assumptions… Who said rail was ‘some kind of saviour‘? Is there an imaginary Matthew here that you’re engaged in discussions with?

    I said “it’s an important piece of infrastructure”. Maybe you need to rethink your interpretation of ‘taking off your ideological hat’ because you sure as hell can’t think rationally in this thread, so either you’ve a mental disorder, or ideology makes you imagine things in other people’s comments when it comes to trains.

    Again, work on those rational conclusions.

    Start with this: The private sector made money out of it because the economy came out of recession in the mid 1990s, and there was precious little need to pour capital into it. However, once there was a need for renewals there was not enough surplus to make it a profitable investment.

    What’s the logical conclusion there? What do you usually call it when a company makes profits from a form of natural monopoly but invests none of those profits into the upkeep (let alone further investment) of that monopoly and it subsequently does poorly, or needs a hefty capital injection?

  17. Matthew: Fair point Matthew I shouldn’t have made a kneejerk reaction, I was largely blindly reacting to the bollocks behind the original post regarding roads, I apologise.

    Why is it important infrastructure? It is hardly a natural monopoly otherwise it could extract monopoly rents and we wouldn’t be discussing this as the private owner would be having a great time. The only commodity that hasn’t got a relatively easy replacement mode (though there is one which isn’t cheap) is the coal traffic, which as I said is profitable and would stand on its own.

    It is notable that when Tranzrail offered to Solid Energy, Fletcher Forestry and Fonterra to sell all the rolling stock, and in one case the line itself, they all refused. It wasn’t THAT important to their businesses.

    If you read the ISCR presentation which Frogblog discussed a week or so ago you’ll find that TranzRail DID put a lot of money into sleepers, although track replacement was less that state ownership the long term trend of state ownership before that from the 1980s was not high anyway. Yes Tranzrail ran down a business that wasn’t worth replacing, a perfectly legitimate action for a business that sees the return on capital from replacing assets isn’t worth it. The reason the government got into this was because TranzRail announced it was closing the Napier-Gisborne, and Rotorua lines as part of this wind down of the unprofitable parts of the network, and the rest is history. Had it been allowed to wind down (although I’d have open access on closed lines if others want to run trains), it would naturally shrink to the economically rational profitable network.

    A report from the early 1990s by The Treasury investigated what would happen if the entire rail network went under (for freight, not Wellington commuter services), the conclusion was that the additional RUC collected would cover road maintenance costs, but that the only location where there would be serious issues was Wellington – because Ngauranga Gorge had no room for additional capacity. Railways are not road, electricity or water, they are a duplicate infrastructure that either should add value or go.

  18. RedLogix 18

    So while most other developed nations in Europe, China, Russia, are building (or planning to build) new, modern, high speed and conventional rail networks as hard out as they can… Mr Libertarian Scott tells us that the New Zealand railways are a ‘duplicate infrastructure’ and presumably because he doesn’t believe they add value, (despite his barely credible claim to be a great rail enthusiast), that they should be ripped up.

    LibertyScott is a professional, he knows lots of facts and numbers in this area, but he uses them to bullshit us:

    The notion that the State Highway costs a billion with nearly nil revenue is abject nonsense. It cost $1.3 billion in the year ended 30 June 2008 and the National Land Transport Fund generates $1.8 billion across all roads (with the majority generated from state highways). $632 million is spent on local roads as well from that. Add the soon to be dedicated Crown revenue component of fuel excise adds another $300 million. The state highway network generates enough revenue to maintain AND improve it.

    In other words he claims that road users fully pay for their road network. But of course this is spread over ALL road users, trucking companies only pay a small portion of this, while incurring much of the costs in terms of loading designs and repairs. Big trucks cause many, many times the damage to roads than do normal vehicles. It is the normal car user who subsidises the trucking industry, while the rail industry is made to ‘pay all it’s way’.

    Frankly if I am going to have to pay to subsidise heavy transport in one form or another, I would much sooner the money was spent on trains, getting the big ugly behemouths off the road and making life more pleasant for us ordinary folk who are actually paying.

    If ever you had to spend 30 mins crawling over the Rimutaka Hill Rd behind a couple of laden logging trucks, whose loads damn well should be on rail wagons in the perfectly good tunnel under the hill…. then you would know exactly where I am coming from.

  19. expat 19

    Stevie says “You can expect major cuts are coming in the Budget.”

    Thats because the country is nearly insolvent again.

    get it?

    [lprent: The country is having to go into debt largely because of the taxcuts. There was no ‘surplus’, it was a myth created by the NACT’s selectively using the wrong figures from the government accounts. It was then taken up by morons like you who have no conception of fiscal responsibility over the longer term and who think that the world always runs in a bull market.

    Of course NACT being caught in a political/fiscal trap of their own making will make the wrong decision and make arbitrary cuts because they are too impatient (and probably incompetent) to make the cost-saving structural changes in any effective manner. They should reverse the taxcuts. That would be fiscally responsible, and ensure that the current generations largely pay for their excesses rather than future ones.

    Get it?

    expat is in auto-moderation so I can embellish his comments because most lack a basic level of understanding. However I’m sure that he can be brought up to standard with a lot of work]

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