NZSF: from bad to worse

I’ve written various posts here about the conduct of the New Zealand Superannuation Fund when Adrian Orr was CEO.    Their investment returns have been no better than one might have hoped for given the amount of risk they (force taxpayers collectively to) take.  Formally, they will argue that their strategies are risky enough that one can really only judge based on 20 year runs of performance (the Fund is only 15 years old).   But they talk themselves up endlessly, making dubious claims about their contribution, and playing politics more often than sound economics.  We had the big call last year to reduce their carbon exposures, allegedly on the grounds that risk-return considerations didn’t support such investments any longer, but then they implemented the decision in a way that makes it impossible to see whether this big active management call was well-judged on financial grounds, or not.  As I say, they play politics more than good policy, good economics, or good finance.

Since Adrian Orr moved on, the Fund has been led by Matt Whineray, now confirmed as CEO.    From him we’ve seen the unsolicited bid to be owner or part-owner of the government’s planned new light rail projects.     As I noted when that news came out

I’m sure the government is delighted.  As their predecessors were when the NZSF and ACC teamed up –  off-market of course – to take part-ownership of Kiwibank, without actually providing any fresh expertise, and in the process reducing the transparency and accountability around (what is still 100% state-owned) Kiwibank.  But in the end these are votes of confidence from public servants, who know which side their bread is buttered on.

As I’ve written about here previously, NZSF aren’t great investment gurus.  They’ve made quite a lot of money taking big risks in a strongly rising global market, but the returns relative to risk, or to taxpayer’s cost of capital haven’t been particularly attractive and –  as even NZSF will acknowledge –  markets go down as well as up.   As for light-rail projects, the NZSF statement noted that around 2 per cent of the Fund is in infrastructure assets worldwide.  That doesn’t suggest any particular expertise in light-rail –  and they don’t point to any in the statement.   And almost any government project can be made viable for an investor if the associated contracts are skewed sufficiently favourably in the investor’s direction.

Perhaps a good deal can be constructed for NZSF (with appropriate pricing and risk shifting, silk purses for some parties can be created almost anywhere), but it doesn’t have the feel of NZSF doing its core job.  It has the feel of NZSF continuing to degrade the  New Zealand policy process, using its (our) moneypots to serve political ends.

This last week I see NZSF has had a press release out.

The NZ Super Fund has congratulated Bloom Energy on its initial public offering on the New York Stock Exchange.

“The public listing is a significant milestone for Bloom Energy as it works to deliver sustainable on-site electricity to organisations around the world,” said Acting Chief Investment Officer Mark Fennell. “We look forward to supporting Bloom Energy as a listed entity for mutual benefit.”

Bloom Energy appears to be fairly new company NZSF had invested in.   Unfortunately, it is one that NZSF has already lost money on.

Mr Fennell acknowledged that Bloom Energy, while performing strongly on listing (up 67%), was currently priced below the level at which the NZ Super Fund initially invested in the company.

But no matter.  Just stick the investment in the bottom drawer for long enough and hope it comes right…..

“As a long-term investor the NZ Super Fund’s primary focus is on what we buy an asset for and the value we ultimately realise. Our investment returns will only crystallise when we sell our stake. What our investment is worth at various interim time periods is not as important to the NZ Super Fund as it is to investors with a shorter investment horizon.”

Typically, the best estimate of what someone will see an asset for is closely related to the current market price for that asset.  I’m not sure why NZSF felt it necessary or appropriate to put out a press release on this occasion, but I’m quite uneasy about an organisation –  managing our money, not their own –  that thinks that in rising global markets, a mark to market loss is just irrelevant, and made so because somehow NZSF can take a longer view than some other investors.   Even NZSF should recognise that it would have been rather better for them to have paid the IPO price (had they done so, they’d already have been up 67 per cent), not whatever loss-making price they actually did pay.

And then, in this morning’s newspaper, comes news that NZSF is lobbying (via the Tax Working Group) for tax concessions –  subsidies and corporate welfare programmes –  for infrastructure businesses it wants to get involved it.  The full (quite short) submission is here, but the gist is that they want cut-price company tax rates (no more than half the company tax rate) for “nationally significant infrastructure projects” (one of the criteria for such projects would be “Alignment with the Treasury’s living standards framework”), protection against any changes in tax rates over the (multi-decade) life of the project, and exemptions from standard RMA, immigration etc procedures.

I’m all in favour of lower company (and capital income) taxes more generally.  Standard economic analysis supports that sort of policy, and all of us would be expected to benefit from adopting such a policy approach.  But that isn’t what is proposed by NZSF; it is just a lobbying effort to skew capital towards particular sectors they happen to favour.  It is a pretty reprehensible bid to degrade the quality of our tax system.  There is no economic analysis advanced in support of their proposal –  so little it almost defies belief –  no sense of considerations of economic efficiency, just the success of lobbying efforts in a few other countries (including two struggling middle income countries not known for the efficiency of capital allocation or quality of governance, and the United States –  which not only has plenty of poor infrastructure, but a corporate tax code  riddled with exemptions and distortions).

NZSF is clearly in favour with the new government.  But the cause of good policymaking and the cause of efficient allocation of capital would, almost certainly, be advanced if it were simply wound up and the proceeds used to repay debt.  We should also stop the pretence –  advanced repeatedly by Fund spokespeople –  that we have a “sovereign wealth fund”.  What we have is a speculative investment fund, financed with borrowed money, producing no better than respectable, high risk returns, making no real difference to important questions around state-funded age pensions, and increasingly at risk of being used to skew capital allocation towards favoured political ends, backed by threadbare (or non-existent) economic analysis.


Treasury advice on rushing the Reserve Bank bill

From a Treasury paper to the Minister of Finance, written in March and pro-actively released yesterday (emphasis added)

Legislative Timeline
14. Officials’ recommended timeline, set out in Annex 2, would see drafting instructions issued in tranches from the end of April, and Cabinet approval of draft legislation by the end of August. Consistent with previous decisions, the recommended process does not allow for public consultation on an exposure draft of the legislation prior to the Bill being referred to select committee. You should note that this timeline is indicative only, and will depend on how quickly decisions are made, securing time in the House and the length of the select committee process.

15. Officials’ proposed timeline will allow the first reading of the Bill when Parliament resumes in the first week of September. Assuming the normal six month select committee process, this would enable Royal Assent by the end of April 2019.

16. The bid for space on the legislative agenda suggested the legislation would be passed this year. However, we do not recommend passing the legislation in 2018. Doing so would require shortening either the policy and drafting process, the select committee process or both. Reducing the time for either of these processes risks compromising the quality of the final legislation, and will make it harder to build public support for the reforms. A substantive select committee process that builds public support is particularly important given that the changes are to one of New Zealand’s major economic frameworks and that only limited public consultation was conducted during the policy development process.

17. If you want to pass legislation in 2018 and run a full select committee process, the policy and drafting process would need to be completed by early June. While this is not impossible, it would greatly increase the risks around introducing legislation. Risks could include introducing legislation with provisions with unintended consequences or new processes that are unworkable. This would make significant amendments likely during the select committee and the committee of the whole House stages.

Since the bill introduced this week has to be reported back from select committee by 3 December, it seems likely the government wishes to pass the bill this year, contrary to Treasury’s fairly-trenchantly worded advice.

I’m a little torn.  I’m keen to see a statutory committee in place, and I don’t usually put much store in Treasury’s economic analysis (and see Eric Crampton on the limited number of economists they are recruiting), but they should know something about policy development and legislative processes.  And they clearly think this legislation is being rushed, in an unnecessary, inappropriate, and risky way.