In today's email, we covered the surprise announcement that Theo Spierings will resign as Fonterra CEO after almost half a billion of losses, the fight brewing between Shane Jones and Air New Zealand and the moral hazards inherent in EQC's new plans that leave its disaster fund unfilled.
- Spierings to go
Fonterra Chairman John Wilson has just announced CEO Theo Spierings will leave later this year. He made the announcement just minutes after detailing almost half a billion dollars worth of losses on Fonterra's Beingmate investment and from the fallout from the 2013 botulism scare.
I was at the news conference in Auckland this morning with Newsroom's Business Editor Nikki Mandow and Newsroom columnist Rod Oram, who has written extensively for Newsroom Pro on the disastrous 18.8 percent stake in Beingmate.
It was a surreal scene. Having announced the big losses on the investment in China and to compensate Danone for the botulism scare, Wilson used a statement in the news conference to announce Spierings would leave later this year and the board started an international search in November last year. Spierings sat next to him and later described the situation as "awkward."
Wilson said the announcement was brought forward from April to remove speculation about succession and he denied it had anything to do with the big losses in China. He said Spierings would continue to drive Fonterra's strategy and business "with special emphasis on China" in the interim. Spierings would also retain an advisory role after the announcement of the new CEO, Wilson said, adding the search was already at the short-listing stage.
Analysts and shareholders had expected a significant writedown on the Beingmate investment, which has been mired in poor performance since Fonterra bought the stake in 2014. Beingmate was supposed to provide a distribution channel for Fonterra's Anmum infant formula into China through its 'bricks and mortar' stores. But almost as soon as the acquisition happened, China's market shifted quickly to being dominated by online stores selling direct to mothers and Beingmate's sales slumped.
Wilson and Spierings said they were frustrated and disappointed by Beingmate's performance, but expressed confidence they could turn it around. However, Fonterra remains hamstrung by its minority stake and Beingmate has yet to appoint a fresh CEO. Fonterra wrote down the value of Beingmate by $405 million to $244 million, but it still included a takeover premium in its 'fair value' estimate and stuck with its decision to change to fair value measures from a discounted cash flow basis.
See Nikki's full report on Fonterra's result here.
I'll have more detail and analysis tomorrow after an interview with Spierings and Wilson. Rod Oram will also produce a column that Newsroom Pro subscribers will see first.
2. Carter vs Jones
Air New Zealand Chairman Tony Carter took the unusual step yesterday of publicly rebuking Economic Development Minister Shane Jones over his criticism of Air New Zealand's decision to stop flying out of Kapiti Airport.
In the normally staid and behind-closed-doors world of relations between the boards of state owned or controlled enterprises and the Government, Carter issued a statement just after 4 pm saying that he had written to his shareholding minister Grant Robertson to "reinforce that the airline will always act independently of the Crown."
Carter referred directly in the statement issued through the NZX to Jones' comments about regional services in connection with the Government's 51 percent shareholding when noting the stake gave it equal rights with other shareholders.
"Any appearance of a lack of commercial independence is viewed seriously by the Air New Zealand Board and is ultimately potentially damaging to the interests of all shareholders, including the Crown," Carter said.
Jones was earlier reported as telling Air NZ's regional affairs manager Ian Collier to stop "closing down regional air links ... and take that message to your supervisors.
"They've just ditched Kapiti. Kaitaia is gone with the wind," he said later. "It might ruffle a few governance feathers, but I'm not here to stroke the peacock. I'm here to get the mahi done," he was reported as saying.
Jones told Derek Cheng that Air New Zealand had deliberately downgraded the provinces to boost company profits.
"They've taken a strategy to increase profit by downgrading provinces. Then they decided within three weeks to bail out of Kapiti. Hell, you get better rights for buying a second hand car than three weeks," he said.
"I'm not going to stop talking about it. My whole phone system has been clogged by our fellow Kiwis ringing with tales of woe about Air NZ in the provinces," he said.
"Apparently they left behind as a type of support for the smaller carriers, potentially (Air) Chathams, something like some old baggage handling gear. That's a joke.
"I'd actively encourage mayoral leaders in the provinces to bring forward solutions. We need, in my view, a policy for regional airlines."
Jones doubled down this morning after Carter's rebuke by calling for heads to roll on the Air New Zealand board.
Prime Minister Jacinda Ardern defended Jones' comments yesterday, saying he was not the shareholding minister and had a right to his own opinion as regional development minister.
However, she told reporters this afternoon that she had since reprimanded Jones for his comments, saying that he had "gone too far" with his later comments. Noting that some people may have sympathy for Jones' view, Ardern said "calling for the resignation of any board member is a step too far and I have told Shane Jones that".
For his part, Robertson was not directly critical of Air New Zealand, but his comment carried a sting in its tail: "We will continue to look at the composition of the board through the normal processes."
Carter was appointed as Chairman in 2013 under the previous Government and knows Jones' approach to corporates well. Carter was the former Managing Director of Foodstuffs and watched as Jones used Parliamentary privilege to attack Countdown over its prodcurement practices in 2014. Carter is also the brother of current National list MP and former speaker David Carter.
Former National Prime Minister John Key is also now on the Air New Zealand board.
3. Bryce Edwards: 'A case of review-itis'
Victoria University political academic Bryce Edwards is now writing a weekly opinion column for Newsroom Pro. It will be published on a Wednesday with this email.
He writes this week the government is in danger of being struck down by a case of “review-itis”, whereby it generates a swathe of reviews, inquiries, and independent panels to give the appearance of action.
One of the most alarming similarities between the start of Jacinda Ardern’s Labour-led Government and John Key’s National administration nine years ago, is an over-reliance on technocratic working groups and reviews to advance a policy agenda, Bryce writes.
Both governments moved fast once they got into office, keen to show how active they were in the early days – which provided a sense of momentum and confidence. Yet, those administrations achieved much less in their first bursts of activity than might initially appear. Much of the check-list of activities involved simply launching talk-shops rather than implementing policies, he writes.
See Bryce's full column here on Newsroom Pro, where it was first published this morning.
4. A morally hazardous EQC plan
EQC Minister Megan Woods announced a raft of changes to EQC legislation yesterday that will increase coverage by 50 percent to $150,000 per property and extend the time for claims from three months to two years.
But the announcements did not include plans to re-fill the National Disaster Fund, which has been emptied by the Christchurch and Kaikoura earthquakes. If the big one hits tomorrow, taxpayers in general will essentially have to borrow to pay out the excess for the claims on EQC. It will take a another decade before the levy of 20 cents per $100 of cover builds up the $1.75 billion needed to fill the fund and cover the 'excess' on the EQC's current programme of reinsurance.
But Labour is not alone in choosing to ignore -- for now -- the need to refill the fund. Treasury has actually questioned in advice to both Governments whether the fund is needed at all, Thomas reports.
“Finance theory suggests the most efficient approach to financing would be to close the NDF and instead finance natural disaster risk centrally through the Treasury,” it said.
That does raise a question around moral hazard though. Is it fair for renters who are taxpayers to effectively take on some of the risk of landlords who are effectively paying less in insurance than they should? Yet again, land and property owners are benefiting from an effective subsidy from non land-owning taxpayers and non-saving taxpayers. The same type of subsidy exists in the implied Government Guarantee currently sitting under bank term deposits. Savers are effectively receiving a guarantee from non-saving taxpayers, who are also most likely to be renters.
The question of whether people should be taking the risk of building and owning houses in earthquake zones without incurring the full insurance costs of that risk is also fair. This 'spreading' of risk effectively creates a moral hazard similar to the situation that enabled bankers of Europe and America to rack up big profits (and bonuses for themselves) during the good times, and then even bigger losses for taxpayers during the bad times. A classic case of moral hazard where the profits are privatised and risk socialised.
See Thomas' full story here on Newsroom Pro for more on EQC.
5. The rebirth of a labour hire bill
A Labour bill that has been languishing for more than a decade will finally be resuscitated, Newsroom's National Affairs Editor Shane Cowlishaw reports.
After more than ten years a private member's bill to stop the exploitation of temporary workers will be introduced to Parliament.
The Employment Relations (Triangular Employment) Amendment Bill would allow people employed by a labour-hire company to take a personal grievance against the secondary employer they are subcontracted out to.
It would also grant those workers the ability to join a collective agreement if one was available.
The bill has its genesis in 2007 when former Labour MP Darien Fenton travelled to the UK on a parliamentary trip for first-termers.
While there, she caught up with her counterpart in the British government who mentioned he was grappling with a growing problem of exploited workers employed by labour-hire firms.
After returning to New Zealand, Fenton began talking to unions and employees and realised some were heading to the workplace with no rights at all.
She drafted the bill and Trevor Mallard, the Labour Minister at the time, was planning to push it through but the 2008 election loss halted plans.
National Labour Minister Kate Wilkinson quickly killed-off the legislative change and since then it has sat, undrawn, in the biscuit tin. Now, another new Labour MP Kieran McAnulty, who adopted the bill, will finally introduce it to the house after it was drawn in February.
See Shane's full story here on Newsroom Pro, where it was first published yesterday.
6. Briefly in politics and the economy...
Migration drop - Statistics New Zealand reported this morning that net migration fell on a seasonally adjusted basis to 4,970 in the month of February from 6,270 in January. That took annual net migration in the year to the end of February to 68,900, which is its first time since May 2016 the total has been below 69,000. "The lower annual net migration was mainly caused by an increase in non-New Zealand citizen migrant departures," Statistics NZ said, pointing to a 22 percent rise to 29,100 in departures of non-New Zealanders in the February 2018 year. This would account for some students and temporary workers leaving after two or three years here without receiving permanent residence.
Strong balance sheet - Treasury published its Government-wide Investment Statement yesterday showing the Crown had a net worth of $117 billion or $27,000 per person at the end of June, 2017. Treasury has to publish the report once every four years. The Crown had $314 billion of assets and $197 billion of liabilities. That begs the question: why is the Government so worried about not increasing its net debt beyond its pure measure of 20 percent of GDP?
A wider net - Associate Finance Minister David Parker announced yesterday that investments in sensitive land involving forestry rights would be brought into the scope of the Overseas Investment Act. The changes would introduce a light-handed “checklist” screening regime, which Parker said would make it easier for overseas investors to gain approval to buy forestry rights than if they were subject to the current screening regime.
Cheap debt - New Zealand government bonds yields traded yesterday at lower yields than comparable US Treasury yields for the first time in 24 years. The yield on New Zealand's 10-year government bond was 2.85 percent yesterday, up from 2.75 percent at the end of 2017, while US 10-year Treasuries were at 2.86 percent, having climbed from 2.41 percent at year-end. That's seen the spread or yield premium move 1 basis point in favour of the benchmark US bond, a turnaround from the start of the year when the spread was 37 basis points in New Zealand's favour. A year ago, the New Zealand 10-year bond was yielding 82 basis points more than its US counterpart.
'We did it' - Executives from Cambridge Analytica boasted in an undercover sting of playing a key role in bringing Donald Trump to power and said they used “unattributable and untrackable” advertising to support their clients in elections. (The Guardian)
'Great job!' - US President Donald Trump broke ranks with other world leaders by calling to congratulate Russian President Vladimir Putin for his landslide re-election victory over the weekend. He did not raise Russian interference in America's elections or Moscow's role in a nerve agent attack in Britain. (New York Times). The Washington Post reports Trump did this despite being given briefing materials from advisers that said, in capital letters, DO NOT CONGRATULATE.
7. Coming up...
The Reserve Bank is scheduled to announce its latest monetary policy decision in a brief statement at 9 am tomorrow. Economists expect retiring Governor Grant Spencer to leave the Official Cash Rate on hold at 1.75 percent and stick with the bank's essentially neutral stance from its last full Monetary Policy Statement on February 10.
Spencer retires at the end of this week and will be replaced next Tuesday by Adrian Orr. Grant Robertson has yet to release a new Policy Targets Agreement with Orr.
8. One fun thing...
WhatsApp founder Brian Acton tweeted this this morning:
"It is time. #deletefacebook"
Acton was the co-founder of WhatsApp, which Facebook bought for US$16 billion.
This Vanity Fair article captures the mood around Facebook perfectly.