Espiner on Solid Energy

February 27th, 2013 at 11:00 am by David Farrar

writes:

I admit I’m no expert, but it looks to me as if taxpayers lose either way under our current SOE model. We either pay through the nose for our power with little or no government regulation on price or we watch poorly performing bailed out with our money.

I know the sale of SOEs has always been a political hot potato, but let’s look at it rationally rather than emotionally. Why does the public need to own a coal mine? Or a power company? Or an airline? 

Here’s my suggestion: Sell the lot, but only after decent regulation to protect the consumer has been put in place. Here in New Zealand we pay high prices for monopoly services that are effectively government-owned. 

Former energy minister Gerry Brownlee talked tough a few years back about taking on the power companies, but of course nothing came of it. According to a study by Victoria University researcher Geoff Bertram we have some of the highest power prices in the OCED. Is it any wonder, when the government is both poacher and gamekeeper?

There’s no reason I can see why taxpayers should be exposed to risks taken by wannabe venture capitalists or price-gouged by our own companies. Selling them off is the only way to create a level playing field and provide any real competition for the poor old consumer. 

I basically agree. The correct role of Government is regulation, not ownership. When they are both and owner and a regulator, you get a conflict of interest and neither are done as well as they can be.

If people think ownership doesn’t matter, look at . The “collapse” has happened because they had a very ambitious expansion programme led by the then CEO.

Now I’d argue that the basic strategy of expanding away from just coal mining was not a bad one for Solid Energy. With the difficulty of getting a coal mine consented, the new safety focus post Pike, and a target of more renewable energy – the company didn’t have much of a future just as a coal miner.

However where it appears the company went wrong was the scale of the expansion plans were too ambitious, they required too much debt and risk, and not enough focus remained on the core business of coal. Hence projections were done on coal prices that were too high. Now globally all companies have been caught out by the 40% slump in coal prices including giants like BHP.

However Solid Energy has been more exposed, because they had taken on higher risk with more ambitious expansion plans. And this is where ownership does matter.

If the Directors themselves have shares in the company, and they represent shareholders whose actual money is at risk, then they will be more cautious about expansion plans. That is not to say they would not agree to them, but they would probably have been saying let’s do it slower, let’s keep our core focus on our current income stream and not borrow too much on this vision of huge expansion into lignite and other areas.

When it is your money at risk, not someone else’s money, you act differently. The price of failure is catastrophic when it is your own money.

I have absolutely no doubt that if Solid Energy was not state owned, it would not be in as dire a situation as it is now.

That is not to be an absolutist and say that all private sector companies succeed and all state companies fail. That would be ridiculous and obviously not true. But overall there is a reason the private sector does better – it is because you make better decisions when it is your own money at risk.

Going back to Colin’s column, I agree we should sell pretty much all our commercial companies, and not just 49% of them. Taxpayers should not be having to bail out mining companies or risking the expansion plans of the power companies. The best thing the Government can do is be an impartial pro-consumer regulator that ensures we have excellent competition. That is not compatible with ownership

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24 Responses to “Espiner on Solid Energy”

  1. Cato (1,094 comments) says:

    Stopped clocks and all that, I guess.

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  2. campit (438 comments) says:

    But overall there is a reason the private sector does better – it is because you make better decisions when it is your own money at risk.

    I’m thinking Telecom’s acquisition of AAPT and Air New Zealand’s acquisition of Ansett Australia (“the jewel in the crown” said Selwyn Cushing) as examples that contradict this statement.

    I think poor corporate governance is the main reason why both public and private companies fail. A director’s job is to do what is best for the company, regardless of whether they have shares in the company or not. That is why they are paid director’s fees.

    [DPF: I said not every private company makes good decisions. But overall the private sector makes better commercial decisions because it is their money at risk.]

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  3. Neil (528 comments) says:

    Totally agree that the SOE’s should be privatised. However lets realize that a lot of them have a lot of rubbish to be chopped off. They don’t satisfy the needs of careful investors. There has been plenty of featherbedding in these companies.
    It’s great to see and hear the reaction of the anti-asset sales people running for cover. Stick to your knitting. Risk ventures are for private capital and entrepeneurial decision making not cabinet decisions.
    As a shareholder I never like investing in a company where a politician, of any political stripe, is a director. They are used to playing with other peoples money- Roger Douglas,Doug Graham,Bill Jeffries,Sir Brian Talboys,Jenny Shipley…
    Why should the NZ taxpayer own TV stations,coal mines or dams.
    You only have to look at places like Cuba where now those communist governments are moving away from state control.

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  4. JeffW (303 comments) says:

    Well said DPF. It is time a much more radical look at the extent of government was reviewed, including but not limited to its commercial roles.

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  5. barry (1,317 comments) says:

    Solid Energy collapsed because of one simple reason – totally incompetant directors and management.

    Same goes for mainzeal and Rakon – and quite a few others.

    Incompetant leaders cant be blamed on the owners – although I guess in many cases it is the owners who put those idiots in charge.

    Ive been following NZ Post for some time.
    For the years up to 2010 they continued to lose postal business yet they continued to budget an increase. Only someone from mars would have not seen the effect of the internet. Incompetant management.

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  6. krazykiwi (9,188 comments) says:

    campit – I’d like to see directors remunerated with options that vest in ‘x’ years, or ‘y’ years after they stood down from the board. It might encourage longer-term strategic thinking if short-term personal gains were taken off the table. Same strategy for executive superannuation entitlements.

    As for the privatisation story, I believe governments shouldn’t own/run businesses. I believe more strongly that governments shouldn’t waste my money on electoral pork designed to keep them in power. Given our government’s willingness to indulge the latter, I’m not really keen for them to sell assets so that swing voters can be more readily bought.

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  7. cha (3,547 comments) says:

    I have absolutely no doubt that if Solid Energy was not state owned, it would not be in as dire a situation as it is now.

    But…but…we elected the party of business to lead us not into financial ruin…

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  8. Viking2 (10,748 comments) says:

    Yey You can both pay your ACT subs now.

    Has Espiner had a brain transplant. That’s not lefty talk.

    All good though and lets get it done. Education and schools as well.

    Best news I’ve seen for years.

    The best bit saved for last.
    Without all the empires we sure would not need 120 political overheads.

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  9. berend (1,602 comments) says:

    All wishful thinking, another thing National won’t be changing.

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  10. Jack5 (4,231 comments) says:

    Solid Energy wasn’t only Government owned, but it was following successive state strategy goals.

    Solid Energy was pushing into biofuels such as rape seed oil and wood pellets at the same time it was trying to explore the vast mineral resource of Southland lignite for fuel (and latterly fertiliser).

    Both are industries that have produced only with subsidies and Government support. Money spent investigating liquid fuel from Southland’s huge lignite resource was always spending on a remote possibility. Fuel from lignite was feasible in Germany in World War 2 because they were desperate for diesel and petrol, and by SASOL in South Africa only because the world was shutting off South Africa’s supply of petrol during the apartheid era. It’s time may come in NZ, but not soon.

    However, above all Solid Energy was far too optimistic in expecting the world coal price boom to continue steadily, just as the rest of the country is overly optimistic in expecting commodity dairy prices to stay high permanently. NZ was always going to be one of the first squeezed by the dive in world coal prices, thanks to its well overpriced currency, and thanks even more to the high cost of transporting coal, first by rail over the Southern Alps to an export port, and then to market.

    Solid Energy management was highly paid, too, compared with most private firms. The outgoing CEO was on a pay a number of times the multiple of John Key’s salary as Prime Minister, and in a company with a staff of not a helluva lot over 1000, there were tens of staff on $200,000 a year plus.

    Should it have been Government owned? IMHO, no. However, there should still be good regulation of an industry like coal, as the West Coast disaster showed.

    The tragedy of the Pike River disaster understandably overshadowed the whacking of investors in that mine by incompetent management at very top and board level, and I don’t mean the hapless mine manager left to face the music. The developers failed to meet time goals, underestimated difficulties and costs, and generally failed all round. Fuck them.

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  11. Danyl Mclauchlan (1,049 comments) says:

    I know the sale of SOEs has always been a political hot potato, but let’s look at it rationally rather than emotionally. Why does the public need to own a coal mine? Or a power company? Or an airline?

    ‘Or an airline’? Are you and Colin seriously ‘rationally’ questioning why the taxpayer owns 3/4 of Air New Zealand?

    [DPF: Yes. The Govt should have allowed Singapore Airlines to buy a greater stake of Air NZ when it was in financial difficulty. Their refusal made the crisis even worse and made the taxpayer investment inevitable as they wouldn't allow Singapore Air to invest more.

    Ironically they then tried to get Qantas to do aa deal with Air NZ which would have been awful for the consumer and destroyed TT competition. Why you should not own and regulate. Singapore Air was already part of Star Alliance so a sale to them would not have have competition issues]

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  12. Jack5 (4,231 comments) says:

    Barry’s post at 11.17 could be taken as saying that Rakon as well as Mainzeal has collapsed.

    Rakon hasn’t collapsed, though it’s taking a hammering.

    It’s lowered its forecast for preliminary earnings for the year, but its shares are still at 23c on the NZX this morning.

    IMHO Rakon would have been better off staying privately owned. Hyped to hell by the broker community and its hangers on when it went on the stock exchange. Such technology companies will always be liable to wild swings of tech progress and market demand.

    Like family farms, family-owned enterprises can ride out the down turns better, without the equity vultures pecking into them while they are recuperating.

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  13. ross69 (3,645 comments) says:

    The fact is that when Solid Energy began to have “grandiose” plans in 2009, the government could have stepped in. Our illustrious and all-knowing PM didn’t take any action.

    http://www.nbr.co.nz/article/govt-blocked-grandiose-solid-energy-plans-2009-bd-136424

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  14. tvb (3,950 comments) says:

    The ownership by the Crown brings into play the implicit Government guarantee. This means this business was able to take bigger risks. That is supposed the be moderated by the statement of corporate intent. It is often not well understood why that exists. Needless to say there is much tension between the Treasury and SOEs over these SCIs and what risks the Crown is prepared to wear.

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  15. wreck1080 (3,533 comments) says:

    Govt should not own any businesses except those of national ‘importance’, such as power companies where a degree of national planning and coordination is required.

    I’d think it is generally agreed that the privatisation of power has been a disaster.

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  16. ross69 (3,645 comments) says:

    Don Elder was paid about $1.4 million per year before he called it quits. That’s one thing SOEs have in common with the private sector – the penchant for paying excessive salaries to non-performers.

    http://www.nbr.co.nz/article/don-elders-future-not-discussed-ch-129455

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  17. krazykiwi (9,188 comments) says:

    ‘Or an airline’? Are you and Colin seriously ‘rationally’ questioning why the taxpayer owns 3/4 of Air New Zealand?

    In the words of an exec-level consultant to AirNZ: Air New Zealand operates more like the travel department of Tourism New Zealand than it does a commercial enterprise.

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  18. Jack5 (4,231 comments) says:

    Danyl, Danyl, Danyl … (11.41 post)

    Warren Buffett, The Sage of Omaha said this about airline shares:

    There’s no worse business of size that I can think of than the airline business. You’re selling a commodity product with no variable costs. Huge fixed costs. It’s a terrible business.

    I have an 800 number now which I call if I ever get an urge to buy an airline stock. I say, ‘My name is Warren, I’m an air-aholic,’ and then they talk me down.

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  19. scanner (340 comments) says:

    Delinquent directors, incompetent middle and senior management, lack of control on spending, duplication of management, ridiculous bonus payment to senior staff, failure to plan for cyclical coal prices, and the straying away from core business have all helped to contribute to the demise of Solid Energy.

    The rat directors who oversaw the decline of a once very profitable business have all run away when the bucket got lifted to the fan, to seek cover behind their well connected friends who helped to install them in the first place.

    If our media actually got off their arses and exposed these directors and management for the frauds they are it may stop it happening again, the absolute minimum of scratching is required to gather this information

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  20. Pete George (21,831 comments) says:

    I agree we should sell pretty much all our commercial companies, and not just 49% of them.

    I think National got their package of SOEs to sell wrong. Rather than committing to a policy of selling half of a set number of SOEs they should have looked at indivuidual SOEs incrementally, as market and other conditions allowed.

    They should have started with one energy company and seen how that went before committing to more.

    They made their policy decision two years ago, there have been a lot of chnages in the economic situation and in individual SOEs since then, especially SOlid Energy obviously.

    Political cycles and election campaign priorities do not fit well with making sensible business decisions.

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  21. gazzmaniac (2,270 comments) says:

    wreck1080 said

    I’d think it is generally agreed that the privatisation of power has been a disaster.

    I don’t think so. I think that the three or four years from deregulation, the breakup of Electrocorp, and the sale of contact until the reregulation by the Clark governmnet were pretty good – the price of electricity actually dropped. The sad thing is that the government didn’t sell two more energy companies to ensure that they were only a small player in the market instead of the major player. That would have led to proper competition instead of a state owned cartel.

    I also agree with Pete George – they should have chosen one SOE to sell in its entireity rather than parts of four and retaining the controlling interest in the industry.

    As for Solid Energy, it should have been sold years ago, after recovering from its first bailout.

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  22. barry (1,317 comments) says:

    Jack5 (2,822) Says:
    February 27th, 2013 at 11:46 am

    You got a few Rakon shares then……?

    should have had a property instead – then it wouldnt be subject to the gambling tendencies that many company managers have. If you are going to suffer a value loss – best organize it yourself than let someone else do it……..

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  23. simonway (356 comments) says:

    Why does the public need to own a coal mine? Or a power company? Or an airline?… Here in New Zealand we pay high prices for monopoly services that are effectively government-owned.

    I’m not too familiar with the coal mining sector, but neither the electricity market nor the airline market are controlled by government monopolies.

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  24. wiseowl (579 comments) says:

    “the correct role of Government is regulation not ownership”

    correct

    So why is the government and regional council investing millions in a dam in Central Hawkes Bay ??

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