Debate on Crown Entities, Public Organisations, and State Enterprises — Transmission Holdings

I rise to speak on the review of State-owned enterprises, and particularly about the Genesis Energy review. State-owned enterprises exist to return a dividend to the Government—a dividend to the people of New Zealand—so they are a very important part of the composition of the New Zealand economy. It is very important that they operate effectively in the New Zealand economy, because they in turn add to the growth of the economy.

I was fortunate to be involved with the review of Genesis Energy this year. It was one of the first reviews I have been involved with. I compliment Brian Corban, the chairman, and Murray Jackson, the chief executive, of Genesis Energy on their honesty and on the way they presented their review to the Commerce Committee, particularly given how difficult it can be when one is before a select committee and has to be a little controversial. Both the chairman and the chief executive officer were prepared to stand up and be counted on the minzone and to criticise the Electricity Commission about where that minzone sat. It is a difficult thing to do. As it turned out they were correct; the minzone was some 15 percent under where they believed it should have been. It was a gutsy call, and it was good they were prepared to be heard.

Energy is a key component, a key input, to this economy, and is critical to the short to medium term outlook of this Government. Genesis Energy is indeed a key player in this. I just want to reflect on where real growth in GDP is. It is forecast at 2.8 percent per annum to 2010. Real growth in GDP per capita is now averaging only about 1.9 percent per annum. These rates of growth right now are well below the averages we have had since 1993. In fact, in September, as members well know, and December we have had rates of growth bordering on a recession, so we need to see some upside, some going forward. The warning signs are there, so it is critical that when we see Dr Cullen’s Budget on Thursday we see key indications about supporting the energy market and where we will go with that. Energy is a key input to our overall economy.

Just looking specifically at Genesis and its energy review, it is New Zealand’s largest retailer with 690,000 customers. It is not the largest but is one of the largest generators of electricity, with 1,640 megawatts of energy, multiple generation facilities, thermal power in Huntly, hydro power in Tongariro and Waikaremoana, and a significant ongoing investment now in wind farms in the Wairarapa and Waiuku, at Āwhitu. Genesis had an operating revenue in the 2004-05 year of $1.495 billion, with earnings before tax depreciation, and amortisation of $178 million. It is interesting that its net profit after taxation has fallen, back from $80.1 million to $70.2 million over that year.

If we look at that as a straight analysis from an accounting point of view, we see that it is a return of only 5.9 percent on average shareholders’ funds. It is a big decision on whether as a Government we take that huge investment, some $1.8 billion, into this particular company when we are not even getting the return we would get out of a bank at the moment. From a Government point of view, while they are a major investor the return on shareholders’ value is not that fantastic. In terms of the Office of the Controller and Auditor-General, it has a pretty good report—the rating is “good”.

I also want to talk about the key inputs of economic growth being energy, and two key factors. First is the surety of energy supply, and second is the surety of the spot price. As I said previously, Genesis expressed concern at the select committee over the operation of the minzone level. It was subsequently proven right, which I said earlier. It was proven that the minzone level was 15 percent under where it should be. At that point in time—and members will remember this—everyone was sitting around, praying for water to come out of the sky, because back in February-March the lake levels were as low as they have been since 1993. We were all sitting there, wondering, and waiting for the water to come down. But I guess the key point is we did not have the generation capacity to take over from hydro if hydro was not there. That is where the likes of Genesis have come in with some significant investments that it is now making in Huntly.

The key thing was where the energy spot price got to. It had a major impact on some of the industries in my own area of Hawke’s Bay. I can talk specifically about Pan Pac Forest Products, which is Hawke’s Bay’s largest consumer of energy. It consumes 35 percent of Hawke’s Bay energy.

I want to take time to talk about the financial review of Meridian Energy. I start by saying that Meridian Energy is the largest electricity generator in New Zealand, meeting something like 30 percent of New Zealand’s total electricity requirements. For the financial year under review, Meridian Energy made an after-tax profit of $218.2 million, which is an increase of $85.3 million on the previous year. I have taken the time to outline those figures because it is clear that Meridian Energy is the major player. In the financial review process, one of the key issues that was identified by the chief executive officer was this: “In terms of electricity supply, this is the tightest winter New Zealand has ever had.”

Hon Pete Hodgson: Oh, rubbish!

BRIAN CONNELL: His remarks—and I hear somebody in the House has already rubbished his remarks again—were not related specifically to storage levels, but rather addressed the overall supply and demand balance of our power system. Storage levels, as Mr Tremain has already pointed out, were low, and are still low even after the rain that we have had. But the key issue is that it is our supply and demand of electricity that is under threat. The chief executive of our biggest generator put New Zealand on notice and said that unless we took action we faced blackouts. Blackouts for New Zealand, as an investor destination, would be an absolute disaster. Whether he is right or wrong, when the chief executive of the biggest generating company in the country is saying that, there is an issue of confidence. What was the Government’s response?

Hon Pete Hodgson: That is rubbish.

BRIAN CONNELL: Already I hear “Blackout Pete” saying it is rubbish. But that is not the truth of the matter. The Government’s response and that of the Electricity Commission was that Dr Keith Turner, the Chief Executive of Meridian Energy, was being an alarmist—that he, along with other commentators who were saying the same thing, were being alarmists. That came from the Minister of Energy, whoever that is. Who is the Minister of Energy?

Hon Member: It’s not you, buddy!

BRIAN CONNELL: No, it is not me, I concur with the member on that. I do not know who it is, but let us say that—

Dr Jackie Blue: David Parker.

BRIAN CONNELL: Oh, it is David Parker. Sorry, but I would be forgiven for not knowing, because they move the chairs of the Titanic around a lot on that side of the House. Remember he was the Minister, then he was not, and now he is again. So let us get on with the issue. The Electricity Commission also came out and stated that the chief executive was being an alarmist. This is a commission that is so young that it still asks the Government to do up its shoelaces before it will make a decision. Keith Turner, on the other hand, has been in this industry forever. When he stands up and puts New Zealand on notice, we in the National Party take notice.

Hon Pete Hodgson: Will the member take a question?

BRIAN CONNELL: Māui gas is running out—the Minister can take a call when it is his turn, but in the interim will he just shut up and let me get on with it. Māui gas is running out, because this Government has sat on its hands for so long and did not, and will not, deal with the Resource Management Act. This country now has electricity generation issues. All the chief executive officers of our major generation companies are in concert when they say that the demand for electricity will be outstripped by demand—

Hon Clayton Cosgrove: Get it right. Take it slowly.

BRIAN CONNELL: The demand for electricity will be outstripped by supply.

Hon Harry Duynhoven: No, the other way around.

BRIAN CONNELL: The other way around, yes. The supply will be outstripped by demand in the year 2010. The issue is still one of critical importance. That is 3½ years from now. Three and a half years from now we will have a critical lack of capacity. The impact that that will have on this country as an investment destination, as I have already said, will be huge. The Government simply cannot grasp that the fundamental issue is that we do not have enough generation capacity.

That was, for the benefit of those—

Eric Roy: I raise a point of order, Mr Chairperson. I understood that our party was to have three calls on this matter. Does the Minister’s response indicate this is the conclusion of the debate?

The CHAIRPERSON (H V Ross Robertson): No, certainly not.

Brian Connell: I raise a point of order, Mr Chairperson. I was seeking another call, and it is normal practice in the Chamber that when a speaker seeks another call, he or she gets it.

The CHAIRPERSON (H V Ross Robertson): I understand, Mr Connell. You can, actually, have another call. The calls do not have to be taken together. I have already called the honourable Minister, so the reality under the Speakers’ rulings is that he will take precedence in this case. But I have recognised that you do want to take another call.

Hon CLAYTON COSGROVE: For the benefit of those out in the real world who did not know whom that was, I will say that was the “bard of Christchurch”, Brian Connell. After that speech, which was bereft of any detail—he could not get his demand and his supply curves quite right, and mixed them up—is it any wonder that he has been dropped, not only off the back row in the Chamber but right off the cliff?

We do not have a blackout power crisis. It may be in Mr Connell’s interest, of course, to scare the living daylights out of every pensioner in his electorate of Rakaia for his political gain, but here is the truth. If Dr Brash and Nick Smith went back to the lake and stood behind the foot-by-foot measure in the same place where they had that infamous photo opportunity, then they would be drowning. They would be underwater. Dr Brash is, of course, drowning—politically, that is—but the truth is that Dr Brash and Nick Smith would be underwater. Of course, that is a bit like walking the plank. There is not a lot of detail. National will whip an idea out, to see whether it flies. It takes a risk, and in that case that backfired.

Now let us look at Genesis Energy—a very, very solid performer. I can confirm, for the benefit of the National Party, that unlike it, we have no plans to sell the assets and no plans to sell the State-owned enterprises. Genesis Energy has, quite prudently of course, as a countermeasure to any blackout—mythical or otherwise—that may occur, stockpiled coal at Huntly in order to ensure that New Zealand’s power needs can be met if there is a low flow into the lakes. To that end, in 2004-05 the stockpile was running at 780,000 tonnes. That is not a bad countermeasure, I would say, and it will assure ordinary New Zealanders that if there are low lake levels—and there he is, Dr Smith, the man who, if he stood in the lake with Dr Brash at the same place as he did a couple of weeks ago for the photo opportunity, would be underwater. Some would say that he may be underwater now, given the way he carries on.

Genesis Energy paid $23 million in dividends to the shareholder, the Crown—the custodian of that company on behalf of the taxpayer—which is money that we can use in other areas. That company is also building E3P—a crucial power station next to the Huntly station that will generate, I am told, 385 megawatts of power through its gas-fired station. That station will be ready by the end of December. That is a massive investment of $530 million, and it is all good stuff.

So I say to the National members, as they attempt to scare the living daylights out of every pensioner, as I said, by saying there will be a mythical blackout, that this Government has put in place new hydro generation. This Government, through Genesis Energy, has got the coal stockpiles under way. We can look at what Keith Turner is doing in respect of the massive wind generation proposals that are being planned for and rolled out.

Brian Connell: You said he was an alarmist.

Hon CLAYTON COSGROVE: No, I said you were an alarmist, actually.

The CHAIRPERSON (H V Ross Robertson): Please do not bring the Chairperson into the debate.

Hon CLAYTON COSGROVE: So we have here a Government that went through a low flow and low lake level power crisis some years ago—it inherited a basket case of underfunded State-owned enterprises—and then put in place decent countermeasures. I pay tribute to the boards of Genesis Energy and Meridian Energy—

Hon Pete Hodgson: And Mighty River Power.

Hon CLAYTON COSGROVE:—and Mighty River Power, as my colleague Mr Hodgson points out, for the solid work they have done in progressing decent countermeasures.

Again, for a bit of historical context, I contrast that with the previous Government’s policy, which of course brought us to the situation we have now, in terms of the “Mad Max” Bradford reforms. Again—and it is a bit like the previous Government’s Crown research institutes policy—no one knows National’s policies on the State-owned enterprises. On some of those enterprises, that Government went to the country and said it would sell them, then it backed off that because it might have been slightly unpalatable to the country, and now no one knows its policy. The best the Opposition could do was to have Dr Nick Smith behind his leader as he walked the plank, and beside his leader as he stood at an empty lake—which would have filled up, 2 weeks later, to a level over Dr Nick Smith’s head, so that he would have been floating like a dead carcass on top of the lake, along with his leader, today. Well, we know the status of the dead carcass, in political terms. The body bags are out.

It is little wonder that the electricity industry and the International Energy Agency highlight New Zealand as a country where energy policy is a mess, when incompetents like Clayton Cosgrove give speeches like that in this Parliament. Let me tell members a few of the things that have been highlighted both in that report and by Keith Turner, whom Mr Cosgrove chose to quote. Let me say exactly what Mr Turner said about the state of our electricity system. He said there are lines in New Zealand that are so poorly maintained we are at risk of being in a Third World situation in respect of electricity supply. The Electricity Commission, an agency this Government set up, has had to admit it made a mistake of about 180 megawatts in the minzone, which amounts to the amount of electricity that would service 120,000 households.

Then there is the complete mess in Government policy. I wonder whether the Minister in the chair, Clayton Cosgrove, can tell us whether we are going to have a targeted carbon tax for the companies we are talking about. The silence is deafening. The Minister in the chair is not able to tell us even whether a carbon tax will be imposed on those companies. I ask the Minister in the chair how he can possibly get new investment in the electricity sector if he cannot answer even a basic question like that.

Let us recite what happened. At the Commerce Committee, when the representatives of Genesis Energy were before us, they told us they were sick of this Government relying on the Huntly power station to bail it out. Pete Hodgson told us in the House 5 years ago that this Government’s energy strategy was to ensure we had more renewable energy. Well, do members know that in the brief 6 years of this Government, we have trebled the amount of electricity produced from coal? That is what has happened under this Government.

Hon Pete Hodgson: We just switched fuels.

Hon Dr NICK SMITH: Mr Hodgson chips in, and says the Government had a strategy to increase the amount of energy produced from renewables—but it has achieved exactly the opposite of that.

We have had the Energy Efficiency and Conservation Strategy, and if ever there was a Government flop, it was that strategy. I notice the Green Party is represented in the Chamber; that strategy was its great brainchild. The strategy stated we would achieve a 10 percent gain in efficiency by 2006, and we have actually achieved far less than was achieved in the last 5 years of a National Government. Then, the Government has talked about developing an energy strategy. Five or 6 years after Labour has been in Government, we are finally to get a strategy out of it! Well, I have news for the Government: that strategy will have as much credibility as the energy efficiency strategy, of which not a single target has been met—

Hon Tony Ryall: Not a single target?

Hon Dr NICK SMITH:—not a single target. Whether in terms of renewable sources or of efficiencies, that strategy was not worth the paper it was written on. This Government has spent $100 million on that strategy, yet it is fascinating that under National there was a 0.75 percent improvement in efficiency each year, whereas under this Government it has been less than that—only 0.5 percent. That is what the public has received in return for its $100 million.

In respect of transmission, there is huge confusion within the sector as to who is calling the shots: the Commerce Commission, Transpower New Zealand, or the Electricity Commission. There is huge uncertainty in the sector about the Government’s Kyoto policies. Every single part of those policies is in tatters. There is no policy. How can we possibly expect there to be any investment in new generation when there is a policy shambles, the like of which I have not seen in any area, as great as that in respect of climate change? The Minister in the chair says wind power is the answer. Well, I have news for the Minister: even after the wind farms have been constructed—and two have been cancelled in the last month—the reality is that the amount of energy produced by wind will be less than 1 percent of total generation. And I know that the Minister in the chair knows that Project Aqua and the Dobson River scheme should have gone ahead, so that we were not in this difficult situation.

Dr Smith has been talking about climate change, and he is quite right—it probably is the single biggest environmental threat facing humanity today. Carbon dioxide levels in the atmosphere, at 380 parts per million, are higher now than they have been in the last 650,000 years, which include five glacial and interglacial ice ages. The West Antarctic ice sheet is breaking up at an unprecedented rate. Arctic sea ice is disappearing, and the ocean exposed is absorbing heat and accelerating the process. Glaciers are in retreat around the world. The Gulf Stream, the warm current that keeps Western Europe inhabitable, has weakened by 30 percent, and we are seeing the gradual melting of the tundra in Siberia and northern Canada, and the release of thawed methane.

As Dr Smith noted this weekend, the Government’s response to climate change has been pathetic. It has abandoned the only economic mechanism it was prepared to consider in order to reduce greenhouse gas emissions—the carbon charge. It has abandoned the animal emissions levy, and it is now presiding over the destruction by Landcorp of 250 square kilometres of forest, in order to turn it into a dairy farm. That is an area 40 percent the size of Lake Taupō.

Members should remember that for every hectare converted from forest to pasture, greenhouse gas emissions are increased by about 800 tonnes of carbon dioxide equivalents. So the 25,000 hectares we are talking about will contribute 20 million tonnes over the 20 years of the conversion. Unbelievably, that is a 1.4 percent increase in our total emissions from this country every year, and in 20 years we are talking about a 27 percent increase over our current levels. That is unbelievable—an extraordinary amount.

Why on earth would a State-owned enterprise be doing that? Landcorp is already the largest farming operation in New Zealand, with 1.54 million stock units on 112 farms, which total 370,000 hectares in size. We have to ask whether this is just one more manifestation of the Government’s absolute obsession with economic growth and damn the environmental consequences. Landcorp, of course, has an agreement not to acquire any more land unless it sells an equivalent amount, but the lease arrangement that relates to that land gives the corporation effective control over a greatly increased area.

Two subsidiary companies, Landcorp Developments and Landcorp Pastoral Ltd, will convert 25,000 hectares over 20 years. That will involve intensive stocking, which is associated with very high nitrogen inputs, both as fertiliser and as urine from those animals. It would be nice to see Landcorp lead the nation by example, and institute devices to measure contamination by leachates, and to see it agree to adjust stocking rates and fertiliser applications if they exceed thresholds. But I fear we are very unlikely to see anything so progressive. On the permeable volcanic soils of the area, there is likely to be significant leaching of nitrogen and other nutrients from farms, which will perpetuate the problem of nutrient enrichment of lakes and rivers—another significant environmental problem that New Zealand faces today.

Sensibly, the water use application was denied by Environment Waikato, which said that the leachate from the Landcorp property would negate all of the work it is doing to prevent nutrients ending up in streams and lakes through its clean streams initiatives. It is absolutely bizarre that this State-owned enterprise seems to be actively hostile—not just neutral—to any prospects of this country meeting our Kyoto commitments or cleaning up our polluted waterways. It is an absolute disgrace.

I thank the member for his contribution, but I want to take a short call to rebut a couple of the points he made. First, in my view, Landcorp is one of our premier State-owned enterprises. As a member of the Primary Production Committee some time ago, I paid a number of visits to Landcorp facilities and farms, along with a couple of other members. It is a premier State-owned enterprise. For instance, in the last 2 years it has returned to the Crown a dividend of $36 million.

I want to touch on a couple of points that Mr Tanczos made in respect of deforestation and the decision on that. The decision was not Landcorp’s. I will give an example of what happened. Landcorp decided to take up a contract offered by Kiwi Forests, which was the owner of some land, to convert that land for dairy farming. If Landcorp had not taken up the contract, it would have been offered to someone else and the land would have been converted for dairy farming anyway. So the decision to deforest the land was not the State-owned enterprise’s. If deforestation would have occurred anyway, my view is that the State-owned enterprise should be in there as the superb farmer that it is, making money for the Crown.

I also say that if one looks at the performance of the Landcorp entity, one can see that it has performed outstandingly on the back of strong commodity prices. It oversaw the transition of ownership of Molesworth Station to the Department of Conservation. Landcorp continues to farm on that property now, despite the dire predictions that I recall came at the time from the Opposition. I think Mr David Carter waxed eloquently at the time, making dire predictions about the handover of that land and what it would mean in terms of reducing Landcorp’s ability to farm it. As usual, the reality was different from the predictions. Also, if one looks at the lambing percentages, one can see that they are incredible. They are 135.8 percent, which is a record high compared with the previous year’s 127.9 percent.

Landcorp is a really good, solid State-owned enterprise. It is one of our premier State-owned enterprises, run by a fine board with a fine chief executive and by a very solid management team. Landcorp also contributes to something that I think is important in the farming sector and in rural industry, which is training. It does an impressive amount of training and upskilling, which is then re-injected as people pass through that entity and back into the farming communities.

To conclude, I want to touch briefly on a bit of history. Landcorp was previously on the hit list. I recall, when Labour came into Government, going to a Landcorp dinner and being told it was fantastic that the Labour Government had come in and told Landcorp squarely that it was not for sale. I was told that because Landcorp knew it was not for sale, given those parameters it could actually get on and make some money for the taxpayer and improve the State-owned enterprise by doing some long-term planning. Prior to 1999, Landcorp was on the block. Labour defeated the National Party at the election then, and put that issue to bed. Not to be outdone, a great strategist—probably Murray McCully, I suspect—decided to revisit that proposal in 2002 and again in 2005, and to say to the country we should sell off one of our biggest landowners, probably to the foreign interests that come in, start to subdivide land, gobble everything up, and then compete with it.

We say again to Landcorp, to the people of this country, and to this Parliament that, under the stewardship of this Government, the Landcorp asset—which is a huge asset in the public mind and in the community context—is not up for grabs. I welcome the next election, because I assume the National Party will recycle for the fourth time its failed policy of going to the public and telling them that we should sell Landcorp to foreign interests, have it carved up, have somebody else come and take over, and reduce to zero the dividend that our taxpayers receive through the Crown.

It is very appropriate that I follow on from the remarks just made to us by the Minister in the chair, the Hon Clayton Cosgrove, because at this point in the debate on the State-owned enterprises I want to talk about the ownership of Genesis Energy, Meridian Energy, and Mighty River Power. United Future believes that the current view of never selling any of the State-owned enterprises and retaining 100 percent State ownership is a very, very deeply flawed policy, when looked at from the point of view of determining what will maximise New Zealand’s economic growth and how to take steps to ensure that happens. If the 20th century taught the world one thing very, very eloquently, it was that Governments are not good at running businesses. Having sat through the committee of inquiry into Television New Zealand (TVNZ), I can tell members New Zealand is no exception to that, and we should not think we can do something here that has failed in every other country.

We have Labour’s view of never selling anything. National has changed its position on the State-owned enterprises, because at the last election we were told by Dr Don Brash that it would not sell anything either, except for a few small farms and a wee bit of Solid Energy. The ACT party’s view is to sell them all and just go in for straight market economics and so on. United Future has a different position, and it is one that I believe is fundamentally sound and the House should look at. United Future’s view is that the partial sale of the State-owned enterprises to mum and dad investors could completely revitalise those businesses, lift local savings and investment, increase the returns to the Government, and relieve the Government of ongoing capital demands. It could also build wealth for many thousands of mum and dad investors and ownership societies. United Future therefore proposes that about 40 percent of the State-owned enterprises should be sold.

However, I say immediately that we propose that that 40 percent be sold to New Zealand mum and dad investors in the various ways in which they invest in shares—through managed funds and superannuation schemes, etc. We would put safeguards in place to ensure that no more than, say, 20 percent—and certainly less than that in the case of TVNZ—of those shares could ever migrate overseas, into the hands of non-residents. That would give New Zealand continued majority ownership and control of the State-owned enterprises, going forward. That policy is unique to our party, and I believe the House should look at it very seriously.

I can understand that New Zealanders are nervous about selling even 40 percent of the shares in State-owned enterprises. I completely understand that and sympathise with them, following the debacle of the 100 percent sales of Air New Zealand and New Zealand Rail, which have rightly made Kiwis very nervous about asset sales. But I stress that in both cases, those enterprises were sold 100 percent and, certainly in the case of New Zealand Rail, were sold to asset strippers. We certainly do not suggest we go down that street. Australia, for example, has its four pillars policy in place, which ensures that banks, financial institutions, and the media remain under Aussie control. The United Future policy represents a Kiwi equivalent of that very wise Australian position.

We estimate that such a partial sale would release somewhere between $5 billion and $7 billion for reinvestment by the Government in other areas. The reinvestment of those funds would provide a new and an exciting range of opportunities for New Zealand. For example, some hundreds of millions of dollars could be invested long term to produce income for universities that would enable them to award scholarships for postgraduate work across a range of high-level scientific and engineering skills. That skill set, in and of itself, has the potential to significantly lift New Zealand’s economic growth, by creating a knowledge-led economy. We cannot have a knowledge-led economy without that really top-end, PhD level of scientific input and engineering skill. A similar investment could be made in the top end of medical technology by our major hospitals, so that New Zealand could establish and maintain First World status in all major surgical and diagnostic areas.

The land transport funding problems in Auckland, Tauranga, Wellington, and elsewhere could be overcome by utilising the money realised from the 40 percent sale of the State-owned enterprises, thus eliminating congestion and providing the New Zealand economy with a major productivity boost. The drag on our economy at the moment of that congestion is very, very material, indeed. If any money is left over after that, we could use it to repay Government debt, although I point out that the Government is now in a net credit rather than a debit situation. In other words, our net financial assets now comfortably exceed our net financial liabilities.

Reports noted..

I understand that the next group—

Eric Roy: I raise a point of order, Mr Chairperson. I am not sure where you are getting to, but I seek leave that the next debate be taken as one question.

The CHAIRPERSON (H V Ross Robertson): Thank you, Mr Roy, I was just getting to that.

Eric Roy: I am here to help.

The CHAIRPERSON (H V Ross Robertson): I know you are. I know that you were a former Assistant Speaker, so I know that you are here to help. I understand that the next group of entities that members wish to debate is district health boards. Is it the wish of the Committee that the district health boards and Pharmac be taken as one question? Is there any objection to that course of action? There is none.

District Health Boards

Pharmaceutical Management Agency