Need to sort out public-private muddle

We have an extractive economy which depends on commodity exports. That makes the drought a big deal. It makes Solid Energy a big deal - made bigger by a public-private muddle.

The drought is big for farmers. It is big for the rest of us because most exports are of what is extracted from grass grown with rain, from forests, from the sea, from underground and from the landscape, exported as pleasure for tourists.

More advanced economies mainly export what they do with what countries like ours extract. The value they add each hour of work is higher than ours so their people are better off.

John Key and Co want us to extract more, particularly milk and petroleum. One of Amy Adams' departures from the Land and Water Forum consensus is an enthusiasm to dam nice rivers (with public funds) for water for farms.

But in an extractive economy a commodity price fall cuts our material standard of living.

When the coal price plunged last year Australia's media numerously reported coal mines closing and firms in trouble in Queensland. Solid Energy had lots of company.

But because Solid Energy is a public entity, its trouble is political. Government politicians blame Don Elder for runaway ambition. Opposition politicians blame ministers for being poor overseers.

Dr Elder thinks big and wide. He is solid energy, megajoules of it. His ambition to build a mineral resources conglomerate, which ministers batted away, made waves behind the scenes at the time and attested to his restless lateral thinking and entrepreneurial instincts. He is an effervescent, stimulating fellow.

Dr Elder was the man to deliver what state-owned enterprises (SOEs) were told to do when they were corporatised: act commercially, that is, as private-sector firms do. But, unlike a private firm, Solid Energy can raise capital only from the government (that is, taxpayers). When it wanted capital to spread its risk from reliance on a single commodity ministers said no. Bill English wanted to strip taxpayer capital out of Solid Energy, not put more in - just as he will strip 49% of taxpayer capital out of Mighty River Power next month (a referendum will likely later tell him he didn't have a mandate to do that).

Without more capital, Solid Energy could expand only out of retained earnings (great while the price was high but only while it was high) or joint ventures or with more debt. Even without expansion, ministers drove the board to raise the debt ratio beyond its comfort level so Simon Power could extract higher dividends. That, ministers thought, would drive commercial efficiency and add to revenue to help Mr English's fiscal consolidation.

So, when prudent private-sector firms around the world were deleveraging during and after the global financial crisis and now have cash in the bank, Solid Energy had to lift its leverage and so its, and our, risk.

In short, a public entity, an SOE, was expected to act as if it was a private entity, a firm, but had to do so under the thumb of public-sector ministers who made a careful public-sector (fiscal) decision but a dubious private-sector one.

The Cabinet is more comfortable when there is a sharp line between the private and public sectors and it favours the private. So it cuts core public sector jobs and constrains SOEs and its half-step to ''mixed-ownership'' will inject some private-sector oversight. Mr English often says that a real job is created only when a (private) business hires someone (at the extreme, that logic says a nurse in a private hospital is a wealth-creating job and one in a public hospital is not).

But actually, no private firm is an island - it sells to the public, the public regulates it through the government, to which it pays taxes (or should), and it uses public infrastructure, including roads and schools.

And actually, the public sector does create wealth - education, for example, adds to wealth, intrinsically for the educated, and, by building human capital, to all of us. And as the global financial crisis kings showed, the private sector can destroy wealth and, as a result, jobs.

In fact, the Cabinet is not as ideological as its rhetoric. There are no plans for more private prisons: their value is as a monitor and comparator for the public operator and as an innovator, not as an automatically better operator. Don't expect large numbers of ''partnership'' (charter) schools. Mr Key lavished taxpayer money on private rugby and private Sir Peter Jackson. And ''mixed-ownership'' is, well, mixed.

The private and public spheres are not distinct. They mesh, overlap and often blend. Drought-stricken farmers needing public-sector handouts know that. Private-sector-loving United States lavished public money on big ''private'' firms during the global financial crisis.

Solid Energy's past and Mighty River's future suggest a need to rethink the public-private relationship - not just on the Cabinet side of politics but on the public-sector-loving Labour-Greens side. So far, neither side has really done that deep rethinking.

Colin James is a leading social and political commentator.