NZ Post and Kiwibank

Chained Naked to a Horse-and-Buggy

Sometimes you can see things coming down the pike. You just know what is going to turn out. Most folk knew way ahead of time that the horse-and-buggy transport system was going to become extinct. This, despite the horse-and-buggy preservation society's sterling work, despite the emotional speeches in Parliament evoking the nobility of the horse and the debt Western civilization owed to it, and despite the Government investing in a horse-and-buggy transport company called Cobb and Co, appealing to nostalgia and national pride.

At the time there were bitter mutterings at the economic sabotage being wrought by automobile companies. People were purchasing motor vehicles that were manufactured in faraway places like the UK and the US and the money was going overseas. Strict import licensing rationed how many cars were allowed to come into the country, so as to restrain the sabotage to respectable levels. All that overseas exchange being lost. If only we weren't so stupid as to give up on the horse-and-buggy.

Yet most people could see the outcome a mile off. The horse-and-buggy was going to go the way of the dodo--and in the end it was only Greenpeace that was left protesting the environmental devastation that was coming from the internal combustion engine. The Auckland Star reported how they stripped naked and chained themselves to the last buggies in the country, shutting down Broadway for a time. At least until the police--far less tolerant of socio-political antics in those days--unchained the naked miscreants, harnessed them to the buggies, and whipped them away down the Great South Road. They were never seen again.

Well, it is all so clear now. The horse-and-buggy was a goner. Sometimes economic innovation and market forces do that. Well, actually they do it all the time. But that does not stop modern day Canutes striving mightily against the tides of economics and history. Just today, for example, we have been treated to another gasp of another long, lingering death. Yet everyone knows the death is inevitable, being just a matter of time.  But everyone is too polite to say so. 

The New Zealand Post is close to commencing the palliative care stage. Like the horse-and-buggy companies, its revenues face a long, slow, lingering decline. It is inevitable. It is irreversible. As the decline hastens, it is also inevitable that our politicians, cheered on by postal workers and society's nostalgics, will in a few short years vote taxpayer's money to subsidize the business. We will be told in sonorous tones about how NZ Post is not just an icon--no, it is a vital national and strategic resource to be kept alive at all costs, even though life support is horrendously expensive.

But we will all know the real story. It is only a matter of time, and how much taxpayer's money will be flushed down the sewer as our nation goes through the futile motions of preserving obsolescence.

E-mail, electronic communication, and efficient market-driven courier companies have coalesced into an unstoppable economic force to make mail services obsolete. Ergo, NZ Post's revenues are steadily declining. This in the front page of The Herald:

A number of New Zealand Post workers are set to lose their jobs as the company looks to cut costs by closing outlets. NZ Post chief executive Brian Roche would not say how many shops would close down, but said it was likely to be fewer than 20.

The move was sparked by falling mail volumes as more people used the internet. "Our mail volumes have been declining for 4 to 5 per cent a year," Roche told Radio New Zealand. "We have to address that problem, if we have got less volume and the same level of fixed costs the two don't go well together."

For a while there, NZ Post thought it had a winner. Exploiting the largesse of economic nationalists-cum-politicians it was made the owner of a nationalised bank, Kiwibank. Since banking was a growth industry, and since NZ Post already had a nation-wide branch network, hey presto politician-cum-business gurus decided that could disworsify NZ Post into banking, thereby securing NZ Post's future. It seemed to work for a while--but now, once again, economic reality is emerging from beneath the fizz and pop. Kiwibank took all the cardigan-brigade's accounts--loss making accounts--from their competitors; then they discovered that they had grown so fast, and their margins were so bad, they needed more capital. The government, by this time, restrained by its own huge, ballooning deficits, declined the generous invitation to stump up with more borrowed money. Poor Kiwibank was forced to borrow offshore--thereby once again disguising for a time its high cost base and poor margins. But no longer.

In what amounts to a delicious irony, Dr Michael Cullen--former Labour Party deputy Prime Minister and Treasurer, now Chairman of NZ Post--long a champion of Kiwibank, is having to clean up the mess he largely created. Now "we spent it all" Cullen is having to cut, cut, cut.

NZ Post chairman Michael Cullen last month told a parliamentary commerce committee difficult trading conditions and a flat economy continued to negatively affect business. "One of the issues is that Kiwibank has been staffed and organised on the assumption of very strong growth," Cullen told the committee.

"At any particular point in time it's staffing is reflecting the anticipated needs for the growth of the next phase rather than it's current service delivery profile. As a consequence its actual cost ratio is actually quite high by banking standards. "This period of slow growth, which is going to be inevitable for Kiwibank over the next year or two, is probably an opportunity to address more firmly that issue of cost reduction within Kiwibank itself."

"Organised on the assumption of very strong growth"?  Just like you ran our national accounts, Michael. You thought you could spend, spend, spend to infinity, on just such an assumption of permanent economic growth. "A cost ratio quite high by banking standards"? You mean your competitors are leaner, meaner, and more efficient than the government bank--despite repatriating all those profits back to Australia, Michael?

Our prediction remains. NZ Post will continue to decline, eventually to the point of inevitable shuttering the shop. It is a horse-and-buggy service. Its subsidiary, Kiwibank will end up being sold off as a lemon to the private sector.

And that, as they say, will be that.

The moral of the story: never let the state get anywhere near a commercial business. For politicians capital is always cheap and virtually inexhaustible (being extorted via the taxation system from the citizens). State owned and operated businesses are inevitably overcapitalised, inefficient, and pathologically bent towards a high cost base. That's what happens when capital is free and inexhaustible. Until it is not--and of course it never really is. It only appears that way for a decade or so.

Some will object that New Zealand's "state owned enterprise" model refutes this sweeping judgment. It does not. It merely provides yet another example of its truth. The SOE model appears to work for a time because the government relinquishes the responsibilities and privileges of ownership, requiring that the companies run as stand-alone commercial businesses with independent boards and management.

But in the end this, too, breaks down. Governments cannot resist appointing their commercially inept mates to SOE boards as a sinecure for favours rendered. Moreover, when taxpayer's money dries up no government wants to pony up capital for reinvestment in the businesses. Rather, government tries to strip out the maximum in dividends and payments from their tame corporations. When it finally dawns on politicians that, were they to continue in this vein, the businesses will be run into the ground they then decide that selling them off is the better route. And that's where we are right now.

The moral remains valid: never let the state get anywhere near a commercial business. If any politician were even to moot the idea, harness him naked to a horse and buggy and whip him down the Great South Road.