The Test Pattern Syndicated

It's the billboards. Yeah Right.

Desley Horton — Thu, 29 Mar 2012 03:25:18 +0000

Everyone wants to believe in happy endings. And that's what the alcohol industry is selling. Whatever your fairytale, your opportunity to be fun, desirable or sophisticated lies but a drop or two away. For older, savvy consumers the effects of alcohol advertising are well documented - prompting a switch between brands rather than increased consumption (a point I understand Joe and Dan agree with). But there are more grounds for thinking that it has an effect on the less discerning.

According to the research, our attitudes towards alcohol and corresponding consumption patterns are formed in our teens. Exposure to alcohol advertising in formative years (particularly via television) results in young people having a greater knowledge about alcohol slogans and brands, more favourable beliefs about drinking, increased intentions to drink as an adult and increased underage drinking. A number of institutions suggest this correlation is borne out in the research undertaken since New Zealand relaxed its alcohol advertising laws in 1992. They point to the fact, amongst others, that alcohol consumption has more than doubled amongst our 14-17 year olds since that time.

But is further regulation of alcohol advertising the answer? As Dan notes, the ASA's Code for Advertising Liquor is already quite detailed and fairly restrictive. Should we consider, as Sarah suggests, banning alcohol advertising altogether? Despite a ban being the favoured policy approach in a number of countries, the likely effectiveness of that proposed measure suggests that the answer to Sarah’s question should be no.

Traditional alcohol advertising appears to be but one of the many factors that encourage young people to consume alcohol - and not even an especially important one. Young people seem much more likely to be influenced, for example, by the billions of dollars spent by the alcohol industry sponsoring cultural and sporting events - events at which youth are primed to have a good time and enjoy themselves (usually with a choice beverage in hand). In New Zealand, those events include "Jim Beam Homegrown" or the Big Day Out, sponsored by Jim Beam, Smirnoff and Jagermeister.

The relationship between alcohol and sport is perhaps one of the alcohol industry's greatest achievements to date. Although alcohol consumption impairs athletic performance, the association promotes the idea that alcohol consumption is healthy (it must be if our top athletes are doing it, right?), and attaches to alcohol the attributes of success, mateship and loyalty. Our national sporting icons, the All Blacks, are sponsored by Steinlager. New Zealand's Super 15 teams are sponsored by Speights, Waikato Draught and Tui. International teams are similarly branded with Bundaberg Rum, Famous Grouse and Brains, competing in tournaments such as the Heineken Cup at stadiums or grounds named for brands of alcohol. Nor is sponsorship isolated to rugby. Cricket, rugby league, AFL, football, golf, Formula One racing and NASCAR teams are all beneficiaries of the alcohol industry's largesse. To watch or attend a sporting fixture or cultural event in New Zealand is to be saturated with the alcohol

industry's messaging - circumventing many of the restrictions which are, ostensibly, in place to protect youth.

And it's not only sports or music festival sponsorship that circumvents the guidelines. Pop culture is perhaps the best advertisement for the alcohol industry. Movies,television shows and music lyrics sanction, encourage and glorify consumption of the "devil's water". Whether it’s the antics of a group of guys in Las Vegas (in the imaginatively entitled movie "The Hangover"), Ke$ha washing her teeth with a "bottle o' Jack", or less overt displays of alcohol consumption, the messages about alcohol are consistently positive. Pop culture – indeed culture generally – is likely to have much more of an influence on young people than traditional TV, radio or billboard advertising.But culture obviously (and thankfully!) cannot be controlled by regulators in Wellington.

So I think tightening restrictions on alcohol advertising even further would be largely pointless. I’m not suggesting we abandon attempts to influence young people altogether when it comes to alcohol. But we need to be realistic about the factors which feature most in young people’s alcohol-related decision making. Most agree, for instance - even the anti-alcohol lobby – that it is futile to consider alcohol advertising in isolation. Rather, price, distribution, and point of sale activity all appear to contribute more to alcohol consumption by young people than traditional advertising ever could. I suggest that

should be our focus.

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I’m not suggesting we abandon attempts to influence young people..but we need to be realistic about the factors which feature most in young people’s decision making

A glass of your cheapest lager, please.

Joe Connell — Thu, 29 Mar 2012 03:24:03 +0000

A friend of mine often makes an unusual request of bartenders. “Hello,” he says, “I’d like a glass of your cheapest lager please.” It sounds a bit ridiculous when you’re standing next to him, and the bartender is surprised he isn’t asking for a branded beer. But truth be told it isn’t ridiculous at all. Most of us, in a blind taste test would have as good a chance of telling the difference between a Steinlager Pure and a Stellar as a pink and white marshmallow, which is to say, none.

Alcohol advertising is at work here. It sells an identity and an association between a particular beer and a particular postal district. But here’s the thing, and here’s where I diverge from Sarah and Dan: that doesn’t mean there’s a case to ban alcohol advertising, or even that it’s particularly remarkable.

First off, my sense is that alcohol advertising, especially the sorts of Tui and Speights campaigns that the others have pointed to, switches consumption between brands, rather than increasing it. The literature on this point pulls a bit in both directions, but intuitively it seems unlikely advertising increases consumption much. It isn’t like the Pespodent campaign that sold the tingle of toothpaste and made toothbrushing a regular habit for the first time in the mid twentieth century. Our drinking habits are already influenced by a well woven social fabric which predates mass media advertising.

There’s a collective action problem that stops advertisers seeking to increase drinking across the board. If the inference we get from a marketing campaign is “drink more” what’s to say we’ll drink more of the drinks the marketer offers, rather than those of their competitors? The pattern of advertising we see reinforces the idea that it’s about switching brands. We see the most intense campaigns for the products that are least easily differentiated by taste which means lots for low cost beers (Export et al), fewer for the mid range (Heineken and such) and basically none for boutique beers.

If there’s evil to be identified amongst alcohol advertising it probably isn’t the high profile campaigns that have received attention here. The full page broadsheet ads in newspapers from liquor stores that show which dozen beer is cheaper in a given week (probably Viking - “conquer the taste”) and which alcopop is on special (flavoured green, purple, or blue) might be seen as encouraging binging. It’s ads like these, or promotions that offer many drinks at once, or free drinks for girls, that are closest to insidiousness. Notably these campaigns don’t come from the producers but the retailers. They might have an interest in gratuitous consumption, but producers want to maintain the equilibrium where alcohol use isn’t significantly restricted, because it is consumed at a reasonable level.

Sarah goes so far as to suggest that alcohol is an evil in all circumstances. “The fact is,” she says “even when consumed in moderation, alcohol is addictive and has long-term effects on one’s health.” I just don’t buy this. There are certain ways of drinking alcohol that are unhealthy, sure, but in moderation it’s manageable, enjoyable, and can actually have a range of health benefits. Alcohol is different from tobacco. If it were invented tomorrow, I don’t think we’d ban it.

I have to say I was surprised by the broad brush arguments made by other columnists that it isn’t the products being sold, but the advertisements themselves that give cause for a ban. I am concerned by the very worst offenders (like making light of domestic abuse) and there’s a case to tighten advertising standards to stamp them out. But banning ads with unrealistic consequences? You’d also be banning the woman who has an orgasmic relationship with her conditioner, or the man turned pied-piper-of-women by new deodorant, without good reason.

As for the gendering of alcoholic beverages, it probably isn’t a good idea if you want to increase consumption (why limit your market?), and certainly isn’t unique to alcohol. We don’t even need to go outside of beverages to find examples. Coke Zero and Diet Coke are ostensibly the same, save that they’re marketed to guys and girls, respectively. FreshUp, believe it or not, is produced by the same company that makes Just Juice, but they’re targeting different market segments (sporty types, and families). Which is to say nothing of cosmetics, toiletries, or most obviously, fashions.

Look the “yeah right” campaign has lost its lustre. It’s been around too long. And some of the stuff about Speights is laughable at best. But it’s advertising. There isn’t a strong case that it increases consumption, less so that it increases unhealthy consumption. And there isn’t a case that it’s different from the myriad of other ad campaigns that push gender, humour and fantasy across our airwaves to get us thinking about brand more, and price and taste less.

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Alcohol is different from tobacco. If it were invented tomorrow, I don’t think we’d ban it.

Likes: Beer. Dislikes: Liberty.

Jesse Wall — Thu, 29 Mar 2012 03:20:52 +0000

Almost two-thirds of us, and nearly half of our secondary school students, binge drink each year. It is estimated that 600 to 1000 New Zealanders die each year from alcohol related causes. Approximately one-third of all Police apprehensions involve alcohol and half of serious violent crimes are related to alcohol.

Now, I like beer. I drink beer often, and I agree with Joe that alcohol can “manageable” and “enjoyable”. But we have an attitude problem: the misuse and abuse of alcohol is socially acceptable, if not valorized.

As Desley is correct to point out, our attitudes to alcohol are created and sustained by much greater forces that just alcohol advertising. The use and abuse of alcohol in film, television and music all contribute to this problem. And censorship of these vehicle for expression is something no-one is considering here. Nor should we.

But we should still ban alcohol advertising.

Although alcohol advertising is not the leading culprit in creating and sustaining unhealthy attitudes to alcohol (it may be barely in medal contention after popular culture and retail advertising take gold and silver). But alcohol advertising is nonetheless still a culprit.

As Sarah argues, alcohol adversing presents drinking as a consequence free activity. And it is exactly on this territory that the current cultural battle is being fought. The Alcohol Advisory Council (ALAC) runs adds - “its not what we’re drinking, its how we’re drinking”, “nice one munro”, “I can’t remember” and “ease up on the drink” - that attempt to combat the attitude that drinking is consequence free. Then, in the same add-break, we have bourbon-drinking Agent Mulder (or Hank Moody) telling us that the “streets are paved with possibility”.

And yes, as Dan notes, we ought to be to be precious about the way we present drinking. It is fine for the Garnier Fructis range to over-promise the benefits of shampoo because I can see no social harms that follow from attitude that ‘it must be truly wonderful to be able to keep my hair straight for up to seven washes’.

So, (if you agree with me so far) we have identified a harm. But you’re right to doubt the gravity of the harm. Surely, the minor role that alcohol advertising plays in contributing the social ills isn’t enough to ban alcohol advertising altogether?

Yes, it is, and so we should still ban alcohol advertising.

This is because it contributes to a problem, without contributing - really - anything else except market share for breweries. We all agree that the alcohol advertising does not work to increase the overall consumption. One of the main reasons for this is because there is no information gap between the product and the consumer. We know what beer is, we know that it is a bit fizzy, a bit malty and a bit hoppy. And so on. Advertising is not going get us to buy a product we wouldn’t otherwise not have brought but for the information in the advert.

Alcohol advertising works to shift consumers between producers of the same product. So the battle between “yeah right” and “good on you mate” is for the market share of medium priced beer.

The “yeah right” and the “good on you mate” adds are run to make Lion Nathan or Dominion Brewers more profitable (and we can’t blame them, it is their job to be profitable).

But its that really that important? We should permit alcohol advertising because Lion Nathan ought to be able to compete in an add war against Dominion Brewers whilst inadvertently undercutting the efforts of ALAC?

Herein lies the background problem. We ask that opponents of expression to identify a harm. When opponents of expression identify a harm, we then make a qualitative assessment as to how important it is to avoid the harm. Yet, we don't hold proponents of expression to the same scrutiny; we assume that proponents of expression are protecting something worthwhile.

Here, alcohol advertising contributes to a problematic social attitude towards drinking and we apparently put up with this because battle between “yeah right” and “good on you mate” is somehow worthwhile. It suggest that it is not.

*Jesse is a post-graduate student studying at the University of Oxford.

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we should still ban alcohol advertising ... because it contributes to a problem, without contributing - really - anything else except market share for breweries.

Using a sledgehammer to crack a stubbie

Daniel Pannett — Thu, 29 Mar 2012 03:18:13 +0000

“Guinness is good for you.”

As much as many St Patrick’s Day revellers would want to take this famous advertising line at its word, Guinness – and most other alcohol – isn’t really that good for you. In fact, drink enough of it, and it could be incredibly bad for you.

It would be surprising to see a “Steinlager is good for you” billboard at the top of Queen Street. New Zealand seemingly has moved past the misnomer that a pint a day will keep the doctor away.

That said, there are an untold number of other good things, both tangible and more of the je ne sais quoi variety, that will come to those who drink in New Zealand. Drink Speight’s, and your ability to survive in back country New Zealand will increase exponentially. Drink Export Gold, and people will flock to your house for parties because, ah, you drink Export Gold. Drink Woodstock Bourbon, and everyone from your mother’s friends to your best friend’s girlfriend will find you irresistible. Drink Tui and you will become capable of outsmarting the bevy of attractive women who create and protect your brew of choice from your unrequited thirst.

These untold social riches are unfortunately unlikely to fall into the collective laps of New Zealand’s alcohol consuming population. Nevertheless, alcohol advertising guidelines are currently worded so as to imply that these scenarios are achievable realities, showing in the clearest light possible that some element of those guidelines need to change.

There is little room to argue that alcohol consumption is linked to a raft of societal difficulties. Moreover, as has already been outlined by Sarah Keast in her excellent column, the lamentable stereotypes that are perpetuated in alcohol advertisements are misleading, harmful and tiring all at once.

However, the guidelines are not nearly strongly restrictive to prevent these messages being pushed in advertising. The fact that the advertisements in question exist is testament to this.

Further, the enforcement of the guidelines seems to be very weak. For example, Principle 2 of the guidelines states (amongst other things) that

“[a]dvertisements shall not depict or imply offensive, aggressive or irresponsible behaviour or unduly masculine themes or portray unrealistic outcomes.”

Organising a premeditated break and enter raid on an all-female run brewery using decoys such as stilettos heels and plastic ducks to steal significant quantities of beer would seem to at least have a case to answer against at least a couple of elements of that guideline. One also has to wonder about its compliance with guideline 4(a):

Anyone visually prominent in a liquor advertisement depicting liquor being consumed shall be and shall appear to be at least 25 years of age with their behaviour and appearance clearly appropriate for people of that age or older.

And yet, an advertisement to that effect has been broadcast on New Zealand television, strongly suggesting that the operation of the guidelines need some work.

My overall impression of the guidelines are that they are surprisingly prohibitive and specific, with only a few guidelines being worded to allow some discretion on the part of advertisers, such as the guideline relating to “unduly masculine themes”, and a requirement that “particular care is needed in advertising products such as RTDs which may appeal to the younger section of the adult market.”.

The real difficulty may then be one of two things:

i. The guidelines’ enforcement is currently ineffective and could be improved; or

ii. The standards imposed are effectively unenforceable in their current form.

I tend to think that the first option is the most likely, given the reasonably prescriptive nature and applicability of the guidelines. Whilst accepting that some of my friends and contemporaries have moral compasses which point in a multitude of different directions, I find it difficult to accept that “behaviour and appearance clearly appropriate for people” aged at least 25 is a mystical and unobtainable phenomena that cannot be defined with at least the level of precision that proper enforcement of the guidelines would require.

One other thought is probably worth mentioning. There has been some discussion as to whether alcohol advertising should be eliminated altogether, or at least severely curtailed in a manner similar to tobacco advertising. However, this argument rests on the assumption that alcohol advertising actually encourages people to buy alcohol, rather than merely shifting existing market shares.

I tend to think that the latter is true, at least in respect of the advertising of New Zealand’s largest brewery companies (so-called “boutique” alcohol companies which have to fight for a market share may be an exception). I struggle to accept that an 18-year old boy would rather buy a 12 pack of Tui than Sprite simply based on a “Yeah Right” billboard. The fantastic nature of the advertising we currently have probably means that no nexus between purchasing alcohol and advertising exists.

That then means that the best course of action might be to stop offensive or problematic elements of advertising that, perhaps ironically, serve an entirely different purpose from that which was intended.

*Daniel is a lawyer working in Auckland who greatly misses Emersons Pilsner on tap. He also writes on 'set pieces of rugby politics' in The State of Union.

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The guidelines’ enforcement is currently ineffective and could be improved...given the reasonably prescriptive nature and applicability of the guidelines.

Alcohol advertising: what are they selling?

Sarah Keast — Thu, 29 Mar 2012 03:14:10 +0000

Words have power. Any suggestion that advertisements don’t influence people, or that the messages they communicate don’t matter, is at best naive and at worst an attempt to disguise the harms inherent in the way alcohol advertising is presented. It would be pointless for the alcohol industry to spend millions of dollars a year on alcohol advertising if that didn’t impact consumers. Apologists for the alcohol industry argue that the purpose of advertising is to affect brand choice and increase market share, rather than increase overall consumption. This may well be the case, but the question that this column asks is: aside from the product, what are alcohol ads really selling?

First, alcohol advertisements, in particular beer ads, are often laced with latent (or not so latent) sexism. Beer is targeted at a male audience, with ads that insult or alienate half the potential market. The gendering of a beverage is in itself strange- it promotes ideas of gender essentialism that one would hope are relics of the past. Many women enjoy beer, just as some men prefer a glass of pinot noir. Beer ads place at the centre of their universe the quintessential “kiwi bloke”, with themes of mate-ship, boorish behaviour, and sometimes just scantily clad women. Women, and men who don’t fit into this norm, are “othered”, as either the subject of mockery or objectification. The typical response to those who take offence at such ads is that it’s “just a joke”. Indeed, the Advertising Standards Authority has dismissed complaints about potentially offensive ads simply because they’re intended to be humorous.

But when a company resorts to making light of domestic violence (“The missus walked into a door- yeah right”), sexual harassment (“Her butt walked into my hand”), and child sexual abuse (“MJ touched me too”), they’re not just selling beer anymore. They’re selling the idea that it’s okay to make rape jokes. That it’s okay to make fun of vulnerable people in society, as long as your target market is laughing.

And the harm doesn’t end with words. There is a documented correlation between alcohol use and crime; for instance New Zealand police statistics state that alcohol is a factor in about a third of all family violence incidents. Similarly, the Department of Corrections has found that 75% of prisoners have abused or been dependent on alcohol. Of course, correlation does not necessarily mean alcohol plays a directly causative role in domestic violence and other crime. But it would be equally fallacious to discount it as a factor, as that would require the assumption that the lowered inhibitions associated with alcohol consumption have no effect on a person’s behaviour. On the other side of the coin, an associated problem is that when a crime is committed under the influence of alcohol, the offender and complainant may shift all the blame onto the alcohol, rather than addressing the offender’s individual responsibility for the crime.

This link is one example of the second broad problem with alcohol advertising. It presents alcohol as a risk-free product, normalises the idea that you can’t socialise without drinking, and associates it with healthy pursuits such as sport. The fact is, even when consumed in moderation, alcohol is addictive and has long-term effects on one’s health. People may prefer to risk such effects than be a teetotaller, but it is surely incumbent on the manufacturer of a dangerous product to not mislead people by suggesting those effects don’t exist. The problems associated with alcohol are not confined to a minority group of “problem drinkers”, yet the industry presents a glamorised, consequence-free picture of alcohol consumption.

Granted, the relationship between ads and society is not as simplistic as this analysis may appear. It’s not a case of ads presenting a message, then consumers mindlessly accepting that message. To an extent ads act as a mirror of society, framed in a way to appeal to their target audience by tapping into social norms and widely-held beliefs. Perhaps beer companies have discovered that themes of gender equality and respecting women are not necessarily relevant to its target market, and present their ads accordingly? On this approach, alcohol ads could be seen as an effect, rather than a cause, of attitudes about gender identity and alcohol consumption.

But a more nuanced approach recognises the interaction between media and society- the Tui “yeah right” catch-phrase is a good example of how advertising messages become embedded in the cultural consciousness. Ads not only reflect, but encourage and perpetuate social attitudes. And if those attitudes are damaging, that’s an issue.

The question becomes, what should be done about alcohol advertising? It is clear that the harms associated with alcohol are multi-faceted, and there is no “quick fix” to what is essentially a cultural issue. But a good place to start is to address advertising as a significant factor in perpetuating those harms. Granted, there’s no law against being a sexist binge-drinker, and alcohol companies are simply exercising their right to freedom of expression. But when companies are marketing a product that causes such widespread harm as alcohol does, there must be a measure of social responsibility exercised.

There are guidelines for alcohol advertising, but ads often fall through the cracks under the guise of humour. Ostensibly, alcohol ads are not permitted to “glamorise liquor or association with it”, or “be sexually provocative or suggestive”, yet this is laxly enforced. The guidelines were also watered down in 2011, when the ASA removed the guideline preventing “unduly masculine themes" from being portrayed. This guideline was in the original code to promote social responsibility given the harms associated with alcohol, including violence towards women.

Rather than imposing stricter advertising guidelines, we could require alcohol products to have warning labels, as has been attempted overseas. But, in light of studies suggesting that warning labels and partial bans are ineffective, perhaps the best way to drive the change needed is to follow the precedent of tobacco regulation and ban alcohol advertising altogether. This is a positive first step in ending the harmful messages being dispensed to us by the alcohol industry.

*Sarah Keast recently graduated from the University of Canterbury with a conjoint Law/Arts degree, and enjoys craft beer in moderation.

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The problems associated with alcohol are not confined to a minority group of "problem drinkers", yet the industry presents a glamorised, consequence-free picture of drinking

Unfounded Claims About Savings and Ownership

Tim Wilson — Wed, 22 Feb 2012 10:05:49 +0000

The government has made two unfounded claims about the potential impact of the proposed mixed-ownership model. The first is that proceeding with the model will lift national savings. The second is that New Zealanders will be at the front of the queue to buy the ownership shares up for sale. Both claims are very shaky under scrutiny. Neither provide a strong foundation for proceeding.

Context

Max has highlighted the potential costs in proceeding with the government’s policy to sell ownership shares in four SOEs and Air New Zealand. In particular, legal accountability mechanisms may be lost as well as the ability to use the organizations as market rudders. At the same time, Marcelo brought forward historical examples that illustrate why it is important to proceed with caution.

In response, Chris pointed out that ownership is not essential to ensure that the electricity industry functions in the public good. In fact, effective regulation can adequately serve this purpose.

Sitting behind the clash of these compelling arguments is the effect of the policy on national savings.

Why Savings Matter

National savings play an important role in any economy because they provide a buffer from unexpected shocks to income, such as the grizzly, on-going financial crisis or tragic earthquakes. New Zealand’s rates of saving are low. This leaves the country vulnerable, as the Savings Working Group reported last year.

At the same time, savings play another important role – they help the country to grow. By directing a share of income into productive assets that grow over time, average incomes will be lifted without any extra effort. In fact, the difference in saving levels across countries is one of the strongest explanations for differences in incomes.

So savings matter. They reduce vulnerability and they lift incomes. This suggests that any claim that a policy will improve New Zealand’s dismal savings level is worthy of some attention.

The Claim

The Minister of Finance’s Press Release announcing the government’s intention to pursue the mixed ownership model contained a section titled “Mixed-Ownership Model - Fact File.” Aside from casting doubt about the factual context of the rest of the press release, the title was clearly intended to imply that some aspects of the model are beyond argument. They are facts. One such fact was that the policy will improve New Zealand’s savings - “we [New Zealand] need to lift national savings” and “The Government needs to play its part.” Evidently, it is playing its part by selling some of its assets.

Yet this link is very difficult to understand…

Selling Assets Does Not Increase Savings

There is no guaranteed link between the sale of national assets and an increase of savings. In fact, the very notion seems contrary to intuition. All else considered, if the government sells some its assets, and then spends even a fraction of the proceeds on expenses, then accumulated savings will reduce.

To be fair, it is possible for savings to increase. This will happen if three things occur. First, New Zealanders must purchase the assets up for sale. Second, those New Zealanders must use funds that do not come from existing savings to make the purchase (i.e. they don’t sell some other asset to finance the purchase). Third, the government must spend the proceeds of the sale on new assets. All three events must occur otherwise savings will remain the same or else reduce.

There is a raft of different reasons why these steps are unlikely to occur. To start, New Zealanders will not be the only buyers. More on this below. Besides this, the possibility that New Zealanders will finance their purchases entirely through new income, without selling existing assets or borrowing, is remote to say the least. Real incomes haven’t exactly flourished in the wake of the Great Atlantic Crisis. Yet even if this does occur, the Government must then spend all of the proceeds on new assets. To be fair, Ministers have said that they aim to do this. To be realistic, it seems unlikely that all proceeds will be reallocated into new assets. Any dollar not invested back into assets, all else constant, is a reduction in savings.

At the same time, every dollar bought by overseas investors, all else constant, is also a reduction in national savings. This brings us to another sketchy claim.

Full Ownership Will Not Remain in New Zealand

The Prime Minister has promised that he will only proceed with the sale so long as he is confident that New Zealand investors will be “at the front of the queue for shareholdings” and there will be “widespread and substantial New Zealand share ownership.”

Cabinet is satisfied of these matters, yet it is difficult to see how. The cabinet paper agreeing to the policy refers to “discussions with market participants” without any mention of a quantitative analysis or technical study. The best that can be found is within the Treasury’s advice to the government when it engaged a Crown Advisor to conduct a survey in May 2011. The survey covered 4,951 respondents. 90% of the respondents said that they would be interested in investing in one of the assets. Yet being interested in investing is a far cry from actually doing so. Further, the survey made no claim to having selected a representative sample. At the same time, the survey question asked about all of the assets collectively. We have no idea whether the respondents’ interest is entirely limited to just one of the assets or all of them. This leaves open the possibility that there is very little interest in one or more of the assets.

Meanwhile, further tension becomes evident when returning to the cabinet paper. In that paper, the Ministers of Finance and State Owned Enterprises recognize that “overseas investors have an important part to play in providing pricing tension to support the government’s fiscal objectives” (paragraph 22). It is difficult to see how overseas investors can play an important role without taking some non-trivial stake in the assets.

To be sure, overseas investors are unlikely to muscle out the locals and buy up all the assets. Instead, the key point is that the government’s satisfaction that there will be widespread and substantial New Zealand ownership lacks empirical foundation. It is a ‘best guess’ at most.

Selling the Public Short

The government has sold the mixed-ownership model on the basis that it will lift savings without losing full New Zealand ownership. Neither claim has a strong foundation, yet both are being sold to the public as foregone conclusions. To be fair, there may good reasons to sell the assets and undertake the policy, as Max, Marcelo and Chris have thoroughly debated. Unfortunately however, the government has managed to cloud the debate with unfounded claims. Lets hope it is better at selling our assets than it is at selling its ideas.

*Tim Wilson is a graduate student at Columbia University and the London School of Economics and Political Science.

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The government has clouded the debate with unfounded claims. Lets hope it is better at selling our assets than it is at selling its ideas

Forthcoming

Gareth Richards — Wed, 22 Feb 2012 10:03:24 +0000

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(gets the last word on the ownership of state-owned enterprises)

The Benefits of Neither Approach, but the Costs of Both

Chris Pearce — Wed, 22 Feb 2012 10:01:30 +0000

It is no matter of historical accident that power companies are widely owned by governments. Electricity is a necessity for modern societies and economies, and there are significant issues of social equity associated with decisions on pricing and access. Other writers in this column have expressed a view that in order for the electricity industry to deliver a set of socially desirable outcomes, it is necessary for the government to maintain its ownership stake, and maybe even renationalise the entire industry.

I take a different view. Ensuring that the electricity industry functions in the public good is not, in my view, primarily an issue of ownership, but one of regulation. If we lay out and enforce a clear regulatory regime that specifies the obligations of the power companies – reasonable terms of access for low volume users, no cutting off the power to people who will die without their medical devices etc – ownership becomes much less of an issue.

The experience of the past couple of decades in New Zealand illustrates fairly clearly that government ownership certainly does not ensure that we achieve socially desirable outcomes. We've been treated to the rather unedifiying spectacle in recent years of the New Zealand Government conducting an investigation into itself to determine whether it's own power companies had been systematically overcharging the New Zealander public for electricity. There have been running battles between the electricity lines companies and the Commerce Commission as to what cost of capital should be used when setting prices. And the tragic death of Folole Muliaga occurred when a government owned electricity retailer decided to cut off her power supply.

So, while it may be that case, as Max argues, that government ownership provides some additional legal protection for the public by potentially subjecting them to judicial review or the Bill of Rights, it's not clear that this has actually done anything to protect the public. In my view what is needed, regardless of ownership, is government ministers who are prepared to put in place, and then enforce, a strong set of regulations that ensure the public interest is served.

If I see it as possible for New Zealand to achieve its social objectives in regard to the electricity industry under either public or private ownership, I fear that in regard to our economic objectives the political compromises needed to secure support for the mixed ownership model may mean we end up with the benefits of neither approach, but the costs of both.

This is particularly the case with the government's main objective from the sales, which is to raise capital to pay down debt. This makes sense to the extent that the sale price is sufficiently high to justify foregoing a share of the companies future earnings and a degree of strategic control. However, the nature of the assets and the range of political compromises the government has put on the table to date are likely to weigh fairly heavily on valuation come sale time.

Precisely because of the social importance of power companies, investors will always run the risk that the government does decide to regulate in some manner that compromises the profitability of the companies. Last term Joyce forced an asset swap between two of the companies to ensure a better balance of generating assets between the North and South Islands. Against a backdrop of climate change, limits on fossil fuels and reliability of renewables, there's every chance such changes may be needed again. Similarly, supplying customers like Folole Muliaga who need power but struggle to pay may make good social sense, but the cost ends up falling on investors. Fresh from the Telecom process, regulatory risk is likely to be front of mind for many investors when they're forming a view on pricing the company shares.

Furthermore, uncontent to rely purely on regulation to control the power companies, the government has also proposed to retain 51% ownership of the companies. This will mean that other shareholders have little to no strategic control of the company, and therefore no assurances that the companies will be run in their interests, as opposed to those of politicians. We also give up what is supposed to be one of the big benefits of privatisations; stopping politicians running companies for political purposes rather than commercial ones.

Past issues of control, the aim of the sales has repeatedly been presented as raising funds to pay for schools and hospitals and reduce debt. It's hard to see how the companies raise any capital to fund growth with the restrictions being put in place; they can't just sell more shares to the public, as the government will then lose its 51% shareholding, and if paying down debt is such an imperative to warrant the sales in the first place, its hard to see the government wanting to invest new capital in the companies or to forgo dividend payments in favour of retaining earnings. The end effect is that we end up hoisted on our own petard – wanting to grow but not wanting to pay for it and not wanting to lose control of key assets either.

Finally, the structure of the process also risks compromising value. The government will want to ensure the public have a good experience with their investments. There's no way the government will be going to the polls with mums and dads across the country having lost millions from buying overpriced shares. Equally, to maintain investor interest through the sale of three consecutive power companies, the government is likely to want to see some material uplift in price post listing. These factors strongly suggest there will be a bias toward underpricing shares, especially in the earliest (and biggest) sales.

Ownership restrictions from the 10% maximum cap on individual investors, to explicit targeting to mums and dads versus institutions, all necessarily impact value. The biggest impact of all is the insistance of maintaining the 51% stake preventing a takeover bid, which again will be reflected in price.

I'm not convinced we've seen the last of the political compromises either, and each one we make takes us further from achieving our economic objectives. But that said, the economic issues at stake here have never seemed to be of huge significance. Yes the companies might be run marginally better with a higher degree of public scrutiny. Yes its probably useful to reduce debt short term if we can secure a sensible price for the assets we sell. But for all of the noise that is being made, and all the factors I outlined above, I suspect that we're talking about the difference between public, private and mixed ownership maybe having a total impact over the next couple of decades of $1 billion.

Stepping back from the minute of the specific policy decisions involved with asset sales however, I'm left feeling like the whole process is something of a distraction from a much more pressing set of economic discussions that the country needs to be engaging in. The economic challenges the country faces are not primarily to do with how we might fill a short term $6 billion gap in the budget for infrastructure.

Rather, as a country, we need to step back and start to have a really serious discussion about whether we can afford the long term fiscal trajectory we are currently on. This is an issue that cuts right across the political spectrum; we have a huge crunch coming from our superannuation obligations over the next few years, we want to give ourselves tax cuts, and we also want programmes like working for families and interest free student loans. Something has to give here, as we can't keep filling budget gaps with asset sales. And it would be dissapointing to think that the most popular and charismatic Prime Minister in a generation ended up spending a large proportion of his political capital pushing through a policy of relatively minor economic importance when there are much more significant decisions that are going to have to be made in the years to come.

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Ensuring that the electricity industry functions in the public good is not, in my view, primarily an issue of ownership, but one of regulation.

Repeating the mistakes of the past?

Marcelo Rodriguez Ferrere — Wed, 22 Feb 2012 09:58:24 +0000

Max has already provided the factual context of the Government’s mixed-ownership model proposal for four state-owned enterprises and Air New Zealand, and how the benefits and disadvantages do not necessarily stack up in the way the Government has portrayed. I wish to look at some further specific risks of the proposal, and use history to show why those risks are just far too high.

A popular justification for the Government’s proposal – and why public opposition to and apprehension of it is misplaced – is that divestment in such assets is not unprecedented. For example, Bill English cited Air New Zealand as a “living, breathing example” of the mixed ownership model – an exceptionally disingenuous example to use, given the history of why the government owns Air New Zealand shares in the first place. The government’s sale of Contact Energy in 1998 is also cited as evidence that the sale government assets has a direct and stimulating effect on the New Zealand economy by allowing those infamous “Mum and Dad” investors to dabble in the stock market and reap the rewards.

It is this example that I want to target, for quite opposite from providing New Zealanders comfort, it is precisely why public weariness of the proposal is certainly not misplaced.

Three out of the five government assets included in the mixed-ownership model proposal are ‘energy companies’: Genesis, Mighty River Power and Meridian Energy are all in the business of electricity generation (and also selling it to consumers). All three were created by 1998 legislation which split up and disbanded ECNZ – also a state-owned enterprise. Contact was a little ahead of the game, becoming a state-owned enterprise in 1995. It was privatised at the same time as ECNZ was split.

This whole business of splitting up ECNZ and selling Contact was all part of wider and significant reform of the electricity market. That reform commenced in 1987 by creating ECNZ – an entity which essentially owned and operated the New Zealand electricity system (both generation and transmission). Gradually, ECNZ’s control of that system was reduced, first through splitting off of certain assets (like the national transmission grid) and the creation of an electricity market. It reached somewhat of fruition with the 1998 reform.

All of this context is important, because like the current proposal, these reforms were touted as increasing transparency, efficiency and a better deal for the New Zealand consumer. Yet the reforms did quite the opposite. At the time the last National government was about to sell its 1998 reforms, Auckland was in the dark, with profit maximising the likely culprit. Consistent failures in the electricity market regulating itself led to several attempts at further reform and investigations by the Commerce Commission, but still did not prevent a 200% spot price spike for industry. Contact decided to raise its prices by 10% during the 2008 financial crisis, but doubled its directors’ fees at the same time. Recently it announced it would raise prices by 14%. Neither the goals of market efficiency nor that efficiency leading to lower prices for consumers were realised.

The lessons to be learned from this experience are twofold. First, “the market” is not a universal panacea – it does not necessarily increase efficiency as compared to government ownership. Second, and more importantly, it shows that government actions in changing the ownership of assets has wider repercussions than changing the current government’s bank balance.

It is clear that while selling Contact in 1998 doubtless improved the market capitalisation of the NZX, it also hit the pockets of the same Mum and Dad investors it was supposed to help in the form of higher power prices. The New Zealand public has a right to feel weary about a plan which touts the benefits of any private ownership as a universal good and government ownership as a universal bad.

In fact, the issues faced by reform of the electricity market provide good fodder for more government ownership than less. Minister English’s comments about Air New Zealand were disingenuous because the government only needed to get involved in ownership of Air New Zealand after private ownership drove the company into the ditch. Similarly, Government ownership of the electricity network seemed to deliver lower power prices and fewer supply issues than before it was turned into a market-based system. And when it comes to network assets like airlines and power companies, we cannot afford to gamble them away.

History, unfortunately, tells us a sorry story of privatisation. It is that story that gives the New Zealand public the right to question the validity of the Government’s proposal and to question whose interests it really has at heart.

Marcelo is a former Wellington-based Lawyer and now studying as a graduate student at the University of Toronto.

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History tells us a sorry story of privatisation. It is that story that gives the public the right to question the validity of the Government’s proposal.

State-Owned Enterprises Reform: A Wrong Turn for New Zealand

Max Harris — Wed, 22 Feb 2012 09:55:37 +0000

Public debate over the National Government’s proposals to reduce the government share in five state-owned enterprises (SOEs) to 51% has been polarized and there has been misleading advocacy from all parts of the political spectrum. The Labour Party cried “privatization” in the lead-up to last year’s election, whilst the National Party in its pre-election campaign dressed its SOE plans ups in the language of “the mixed ownership model”. In truth, the National Government’s proposals have seemed to represent a move towards privatization rather than any genuine belief in the merits of a mixed model: no real attempt has been made to defend the unique virtues of a 51% government share (or to point to overseas examples where a 51% share has been effective, such as that of the Brazilian aircraft manufacturer EMBRAER), and the arguments for the move have been grounded in the value of market discipline and share ownership by “mum and dad” investors – arguments which could justify total privatization. However, even with the character and motivations behind the National Government’s proposal becoming clear, media commentary has lacked a certain nuance. What I will attempt to do in what follows is provide a slightly more fine-grained analysis of the proposed reform of state-owned enterprises, leading to the conclusion that the suggested sale of shares in the five state-owned enterprises is a misguided move.

First, some facts. What the Government is proposing (and has been proposing, to be fair, for some time since prior to the last election) is the reduction of its share in five state-owned enterprises – Genesis Energy, Meridian Energy, Mighty River Power, Solid Energy, and Air New Zealand – to 51%. This means that the Government will retain a majority stake in these state-owned enterprises, but will allow the sale of the remaining shares on the market. The Government estimates that it will make between $3 and $7 billion on this sale, which the Government has said will be deposited in the “Future Investments Fund” for infrastructure investment. The state-owned enterprises were established under the State-Owned Enterprises Act 1986, an Act which notes that state-owned enterprises are to “operate as a successful business” (including through serving as a good employer and exhibiting social responsibility), allows for Ministers to hold shares in these enterprises, requires that these enterprises do not act inconsistently with the Treaty of Waitangi, and establishes transparency measures (such as annual reports and statements of corporate intent). New legislation will have to be passed to authorize the sale of shares in state-owned enterprises.

What this change is really about is the level of government control and oversight over Genesis Energy, Meridian Energy, Mighty River Power, Solid Energy, and Air New Zealand. Whether the move is right turns on one’s view of the appropriate level of government ownership and control of these enterprises – and on whether one believes that the sale of a significant government stake in these enterprises will achieve the asserted benefits of improved economic performance and a deepened capital market. Let me address these issues one by one.

Significant government ownership and control allows the use of these state-owned enterprises as “market rudders” within the small New Zealand market. That is, in the same way that the government has used Kiwibank as a tool to steer the banking market in certain positive directions (for instance, in interest rates), the presence of state-owned enterprises creates an opportunity for the government to nudge markets – for instance, the electricity and coal market – in socially desirable directions. In the electricity and coal markets, the state-owned enterprise model (with high levels of government ownership) means that environmental innovation can be encouraged, and power prices kept acceptably low. Recent governments have not always used these “market rudders” as they might. But what is clear is that this capability will be lost, or at the very least dented, with the advent of the Government’s proposed mixed ownership model.

What will also be lost are legal accountability mechanisms for the activities of the five state-owned enterprises affected by the Government’s proposals. State-owned enterprises with high levels of government ownership have been found in law to be amenable to judicial review (which ensures fair process in decision-making) and are also thought to be subject to the New Zealand Bill of Rights Act 1990, since they serve important public functions. But the further that these enterprises move away from government ownership and control, the more they slip out of the robust ring of public law controls: it could no longer be said definitively that the state-owned enterprises with their proposed new structure would be able to be taken to court in judicial review or Bill of Rights Act proceedings. Some might shrug their shoulders at that thought: perhaps there is no reason for Mighty River Power or Solid Energy to have to honour public law obligations and to face stringent legal accountability. But others would say, with some justification, that what we are talking about are quite essential services, such as electricity. Where these services are refused to individuals, it may be that higher standards of fairness in decision-making should be required. The public would seem to agree, as evidenced by the outcry when Mercury Energy – a division of Mighty River Power – switched off Folole Muliaga’s electricity supply abruptly in 2007 because of non-payment of a bill of $168.40, resulting in Mrs Muliaga’s death since she was unable to access an oxygen machine. And Singapore has opted for a similar commitment, using a state-owned enterprise to ensure that its ports and power industry are 100% government-owned. The accountability that is achieved by government control is diluted by the sale of shares in these state-owned enterprises.

Maybe what is lost, however, is offset by what is gained in the way of improved economic performance and capital market benefits. The Government argues that incentives will allow for better returns once shares are floated in Genesis Energy, Meridian Energy, Mighty River Power, Solid Energy, and Air New Zealand. It also states that the partial sale of these assets will deepen New Zealand’s shallow capital markets and provide another investment option for “mum and dad” investors.

Unfortunately neither of these claims really passes muster. The enterprises are performing well: New Zealand’s state-owned enterprises returned 16.4% on funds in the 2010-2011 financial year according to Treasury figures, and Air New Zealand (to take just one of the state-owned enterprises) is widely regarded as a top-performing New Zealand company, with the most effective CEO in Rob Fyfe in the country. And it is hard to see that distant share-owners will provide such increased discipline for the performance of these enterprises. Further, in terms of capital market benefits, selling shares in these five enterprises is surely no long-term solution to New Zealand’s capital market problems. The sale may provide a burst of share activity, but New Zealand’s capital market challenges are structural, and the sale does nothing to address these underlying structural challenges.

When the dangers outlined above are weighed against largely illusory benefits (and when one throws into the calculation the danger of arriving at an accurate price for the partial sale of these assets, especially at a time of economic uncertainty and when the Government aims to limit the purchasers of shares to “mum and dad” investors), it becomes clear that the Government’s mixed ownership model is a wrong turn for New Zealand. Too much is lost from this sale, and not enough gained, to say that it is a move that we need as a country.

*Max recently graduated with a Law/Arts conjoint degree from the University of Auckland

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Too much is lost from the partial privatization of state-owned enterprises, and not enough gained, to say that it is a move that we need as a country