'Spread wings' SOEs to be urged

State-owned enterprises are to be encouraged to spread their commercial wings by expanding into areas "adjoining" their existing businesses.

The policy shift - from the standard stick-to-your-knitting mandate - was announced by Minister of Economic Development Trevor Mallard in Dunedin yesterday.

Underpinning the new policy is a belief that commercialising innovation often involves costs and risks that require a substantial balance sheet. But in New Zealand's case, most enterprises of any size - Telecom excepted - are foreign owned, farmer owned or state owned.

Mallard said diversification would, except in rare cases, have to be funded from the SOEs' existing balance sheets, with no fresh injection of capital by the taxpayer.

Diversification would have to make use of their core competencies and be into "adjacent" technologies, products and markets.

Four of the five largest SOEs are in the same sector, electricity, suggesting that their scope for expansion will overlap.

But Mallard denies electricity consumers will end up paying for a lot of empire building.

"We do sometimes have a discussion about whether [the electricity sector] is competitive enough.

"But my view is that there is just no room for any cross-subsidy out of the electricity business."

Proposals would also have to demonstrate potential spill-over benefits for other businesses.

The expansion might take the form of a joint venture with private-sector partners in some cases, with the SOE providing capital and expertise.

When it involved more research and development, Crown research institutes might benefit, but so might private sector firms.

"If prototypes need to be made, for example, then generally the manufacturing work happens within smaller firms. And often going forward requires ICT solutions for software development," Mallard said.

"I don't want to oversell this. It is not the solution to the country's problems. But it is one of the things the Government can do to make a difference."

The Treasury and Ministry of Economic Development have voiced doubts about the new policy.

The Treasury said that if dividends from the SOEs were to be reduced "it is not clear to us that such proposals would represent better value for money than alternatives ... such as roading or support of business R&D".

And it worries about management taking its eye off the ball of its core business, which in the case of the electricity SOEs is vital infrastructure.

"Treasury clearly prefers the SOEs to be cash cows for the Government rather than make a broader economic contribution," Mallard said. "We differ from that."

Meridian Energy has already undertaken the kind of diversification the Government now seeks to foster.

A successful foray into Australia netted the Government more than $600 million profit and Meridian has invested in Whispertech, which makes a combined heat and power unit small enough to operate on a household scale.

Meridian chief executive Keith Turner said Whispertech, a joint venture between Meridian and electricity lines company Orion, was exploring how to scale up production from thousands to hundreds of thousands of units.

"What the Government is saying is 'Let's encourage other SOEs to be as enterprising'," he said.

"We have a lot of businesses in New Zealand that are really a market-share play by overseas owners. They are not using New Zealand as a base for their global growth strategy, which limits the potential for New Zealand to grow. So why not tap into some of the bigger [state-owned] enterprises and put their skills to good use?"

New Zealand Post has expanded into banking with Kiwibank and has embarked on a joint venture with international courier firm DHL.

NZ Post chairman Jim Bolger said that in the context of a policy of treating SOEs as long-term holds, the increased flexibility was positive.

"There's no open cheque book but a more flexible approach, so that if there's a sensible option it appears they are prepared to let that go forward."

National's SOE spokeswoman Katherine Rich said: "The last thing you want is for an SOE to diversify so extensively that it crowds out private-sector investment and continually engulfs private businesses."