Labour on Solid Energy

March 14th, 2013 at 7:00 am by David Farrar

It seems to me that there were two major factors that led to the problems at . One was the fall in global coal prices, and the other was the borrowing to fund alternative energy projects which haven’t led to a return.

In terms of the first, I’d be very keen for an MP to ask and some questions along the lines of:

  • What global price for coal was used each year in your 2008 to 2012 business plans as the projected price?
  • For each of the following years, what was the worst case scenario that was used for global coal prices, and how did that compare to the actual price?
  • How often did you update your business plans and revise the assumed coal price?
  • Did Solid Energy undertake any hedging – why or why not, and at what level?
  • Were the decisions on alternative energy projects contingent on a certain level for the coal price? If no, why not?
  • What was the company’s risk management strategy around a coal price slump?

These are not gotcha question, which I suspect some MPs will try and do. They’re questions that would actually help us understand why the company has got into so much trouble.

It will be interesting if Labour attack John Palmer, considering what said when he appointed him Chairman:

“John Palmer is widely regarded and respected as one of New Zealand’s leading governance practitioners,” Trevor Mallard, SOE Minister, December 2006, announcing Mr Palmer’s appointment as chairman of Solid Energy

We also have Helen Clark on Don Elder:

The PM did however point out that Solid Energy’s CEO Don Elder had assisted in turning around a struggling enterprise into one that was now greatly benefiting the NZ taxpayer. – Scoop in 2007

Also of interest is what Trevor Mallard said about the influence of the Government on Solid Energy’s operations:

“If we’re doing planning going forward we’re making sure that we do have both security [of supply] and a good mix of renewables then it’s easier to influence that with ownership as well as with general regulation,” Trevor Mallard on AGENDA, TV1, June 2007, speaking about Solid Energy

And if you want a great reasons for why the Government should not be the owner:

“Well I think in some areas for example Solid Energy would do some investment in research in renewables for coal and in gasification and carbon sequestration in a way that a private sector company wouldn’t.” Trevor Mallard on AGENDA, TV1, June 2007

For example the money wasted on biofuels. Even Damien O’Connor complained about it in August 2012:

Hon Damien O’Connor: Why should miners in Huntly and on the West Coast lose jobs to save money for Solid Energy, when the company has wasted millions of dollars on a biofuels project that has failed, and now threatens to destroy the high-value vegetable oil industry in New Zealand?

It was pointed out:

Hon STEVEN JOYCE: I think the point that was being made was that the biofuels obligation was created by the previous Government

And in case you don’t believe Mr Joyce:

Hon Trevor Mallard: That’s right.

Maybe it should be Trevor Mallard answering questions, not just John Palmer and Don Elder. Especially considering this statement:

Trevor Mallard: I was the Minister in charge of Solid Energy when they bought land with lignite resources. This was done on purpose so that it would come under control of the SOE – so you can work that land in a way which is socially responsible. I understand that that area could be very valuable in the future; that it could provide 400 years’ worth of vehicle fuel power.

It is absolutely correct that John Palmer and Don Elder front up to the select committee. I imagine some will try and turn it into a public crucifixion. Once that pantomime antics are out of the way, I hope we get some insightful questions into what they regard as the factors that led to the company’s failure, what critical mistakes that Solid Energy made and what would they have done differently in hindsight.

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22 Responses to “Labour on Solid Energy”

  1. vibenna (305 comments) says:

    The fact is the present government loaded up the debt, yet still had the temerity to blame Labour. They now have egg all over their face.

    The other interesting part of this is the strategy of loading up the SOE debt to generate higher dividends. Does anyone know whether that will appear in the Crown balance sheet?

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  2. itstricky (1,851 comments) says:

    Can we get some stats. on the amounts of investment, the losses, all the numbers please – so we can make up our own minds rather than “he-said-she-said” quotes from ex-hack-politico’s of yesterday

    When you’ve been in power for this long, how much longer can you keep blaming Governments of yester-year? Where’s the line? When you’ve crossed that line does that mean you don’t have any other answers and you’re desperate?

    You’re telling me you haven’t considered this :

    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10871040

    Or this:

    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10871113

    As being reasons for the collapse?

    Oh, no, wait sorry. Forgot the unwritten rule that the Herald is a commie conspiracy, the Truth is “the truth” and that no-one is supposed to criticise the Nats. Government.

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  3. wreck1080 (3,924 comments) says:

    In an environment where the exchange rate has been on an upward climb for nearly a decade hedging cannot protect you and nor would you make such a risky bet over such a long term.

    The real question is why the govt owns airports and coal mining companies etc. .. .

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  4. Danyl Mclauchlan (1,070 comments) says:

    I imagine some will try and turn it into a public crucifixion.

    I imagine the opposition will be more interested in the National Government’s directive to borrow money via the company, gearing it for debt and increasing the dividend.

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  5. Richard29 (377 comments) says:

    I’m also interested to hear Bill English’s justification for demanding the company take on more debt and pay high dividends even when it is not performing:

    http://www.stuff.co.nz/business/8420942/Ministers-pressured-Solid-Energy-Parliament-

    Solid Energy’s gearing ratio was 13.8 per cent in 2009, but that rose to 34.4 per cent in 2010 and 41.7 per cent last year. Since 2009 Solid Energy has handed the Govt a dividend of $164 million, while borrowing $313 million.

    Bill English recently announced a razor thin budget Surplus in 2014/2015 – this looks very much like he’s not actually reduced the debt he’s just moved it onto the balance sheet of the SOEs.

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  6. David Farrar (1,899 comments) says:

    Danyl obviously does not know company law. The shareholder does not set the dividend. It is exclusively for the board of directors and there are stringent tests that a director must apply including signing a certificate that the company is able to pay the dividend without damage to the company. Anyone who has been a Director knows this. Those suggesting the level of dividends caused the problems has no knowledge of how companies operate and the requirements around approving dividends.

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  7. Auberon (873 comments) says:

    Indeed DPF, and as John Palmer is one of the country’s “leading governance practitioners” I imagine he will be giving Labour MPs a bloody good lesson in this fact at the select committee today.

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  8. Tom Barker (143 comments) says:

    You must be feeling dizzy after all that spinning, David. Better have a lie down.

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  9. Auberon (873 comments) says:

    You should try it sometime Tom Barker – the truth is good for the soul ;-)

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  10. Tom Barker (143 comments) says:

    I should try spinning, you mean? What’s that got to do with truth?

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  11. Redbaiter (9,122 comments) says:

    What do we learn from this totally avoidable fiasco?

    Running a successful company these days is hard enough without having to contend with directives from idiot politicians. SOE’s might be the flavour of the month with socialist governments right now, but the long term reality is that they are a bad idea.

    Politicians should not have anything to do with companies and there should be a large zone of isolation surrounding them where politicians should not be permitted to venture.

    Lawful corruption of enterprise by government and politicians (in combination with their “private sector” lackies) is killing this country.

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  12. ross69 (3,652 comments) says:

    I get it – Trevor Mallard and Helen Clark are to blame for Solid Energy’s woes. That must mean that our illustrious leader is impotent.

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  13. ross69 (3,652 comments) says:

    Danyl obviously does not know company law. The shareholder does not set the dividend. It is exclusively for the board of directors

    And who oversees the performance of the Board?

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  14. Jimbob (641 comments) says:

    The biggest con in the energy industry is biofuels. Wind energy is close behind, unless they can make cheap wind turbines. Biofuels are not the answer to alternatives to fossil fuels when in the future we need to eat, not burn food. Something like Radium has huge potential.

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  15. Akld Commercial Lawyer (165 comments) says:

    A prediction – no-one comes out of this with their reputation enhanced. It will be interesting to (i) those who enjoy watching a playground stoush; and (ii) those who have already made up their minds about the culpability. For analysts, it will probably show that Solid Energy’s management is no better or worse than the average small coalminer across the ditch – unless the news about the lignite foray is that the company cannot unload the land in Southland to some consortium for more than it paid for the properties. Some interested spectators will add today’s circus to the list of reasons why a business with any degree of risk should not be in the taxpayer’s hands. (There are a couple of interesting studies on this issue that have been published lately – one of which is by a well known NZ economist.) Unlike DPF, I doubt very much that the questions will be insightful – but I have some expectation that the answers will be. Unless David Cunliffe has written the questions or, better still, subbed in I don’t hold out much hope for anyone on either side getting to the crux of the issues – instead the clown will fumble his 15 mins of fame and resort to trying to heckle a chairman and a CEO who have played the Saturday matches. As a result, it will quickly descend into a mud wrestle about how much people are earning and other such pointless sideissues. When the dust settles, how many experienced directors or senior managers will be putting their hands up to be a CEO or on the board of an SOE….
    And it is the board, not the shareholder that determines the dividend policy – but if the shareholder doesn’t like the board policy, they begin by hinting (less and less subtly) about what they think of the policy. Generally, the shareholder gets a better return on their equity if the gearing is higher and the assets made to sweat. Which is all good until a commodity market undergoes a massive correction almost over night and your customers stop returning your calls. Ultimately, if the shareholder doesn’t like what the board is doing – they replace the board. Also, the board engages the CEO, not the shareholder, and when the shareholder starts telling the board who they should and shouldn’t engage – as usually about the time that a board chair asserts their authority (or leaves).
    I did think I could add something acerbic or clever about which is the dirtier business ….but I will leave that to some of DPF’s more learned correspondents.

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  16. flipper (4,084 comments) says:

    Auck Comm Law….
    Excellent analysis and comment.

    Add a question…,Would Palmer/Elder have gone where they went if there had been 49% private sector shareholder representation on the Board?

    I doubt it.

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  17. Black with a Vengeance (1,865 comments) says:

    Could Elder have gone where he went if Key and English had been doing their jobs properly?

    I doubt it.

    The same question could be asked of the South Canterbury Finance Collapse.

    Looks like another game and fix was in with Solid Energy. Give em just enough rope to hang emselves, then scapegoat and hang em out to dry as the fall guy. Meanwhile sell off the profits and socialise the loss to the taxpayer.

    The rub is to be pretty relaxed about it if caught and always ensure there’s a previous govt to blame !

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  18. Black with a Vengeance (1,865 comments) says:

    Ruthless intent and impeccable timing is the Key to success in the English speaking world.

    Hey look over there…its a bright shiny clean green power generating highly profitable state asset you already own and run by a competent state administered board that uses NZ’s 100% PURE waterways we’re selling to all you lovely hardworking kiwi mums and dads so we got money to build schools and hospitals…AWWW THAT’S NEAT!!!

    Don’t look over here… where we’ve run a dirty coal mine into the ground and showed up the bad state administered CEO as being inept by misusing your money on ill advised ventures we supported but can now sell off the assets dirt cheap to Chinese out the backdoor and get a nice wee kickback for those in the know…AWWW NOW THAT’S REALLY NEAT!!!

    There’s no such thing as coincidence and there is no plan B.
    You execute plan A allowing for all contingencies.

    If all else fails, send in General Rumblefuck to generally make a big rumble about it but do fuck all.

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  19. lastmanstanding (1,297 comments) says:

    SE is all about governance failure and culture failure. IMHO Elder had been there too long and I bet had captured the Board with some help from his senior management. I also bet that if you interviewed those who had resigned over the past year or 2 you would find there was a culture of bullying and intimidation.
    If you look at the finance company failures all had the hallmarks of bad culture. Bad corporate culture leads to failure.
    If you want to know more about this read Bob Garratts excellent book The Fish Rots from the Head. As one who meets with Bob when he visits NZ he has very insightful views on corporate culture.
    Also look at the Competence/Incompetence vs Low Arrogance/High Arrogance matrix. Whilst Elder may have a PhD I bet he is High Arrogance.
    The SE HQ wasnt known as The Palace for nothing. Also look at the numbers of staff on $100K plus 10 years ago compared to recently. Again a sign that the CEO/senior management have captured the Board and conned them into alllowing corporate excess.
    If the Minister had interfered and suggested or demanded dividends borrowings or other strategies that werent in the best long term interests of the organisation then the Chair and Board have an absolute obligation to resign if they cant presuade better sense to prevail.
    Like wise a CEO must resign if the Board demands they implement strategies that they do not agree with and or believe will harm the long term success of the organisation.

    SE is yet another example of the extreme poor corporate governance that exists in NZ. Problem is few can see it until its too late.

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  20. Black with a Vengeance (1,865 comments) says:

    ^^^What a fucking lame ass copout for Elder and soft sell apologist spin for Key and English passing the buck and lacking the balls to do anything about it.

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  21. itstricky (1,851 comments) says:

    David, what a cop. You’re treating people like idiots and trying to divert again. Of course the Government don’t determine the dividend. But, there’s only one reason a company exists – to serve it’s shareholders. As 99% shareholders, they put pressure on the company. If it was this that put it under, it’s awfully convienient for them that they’ve got a fall guy for the unrealistic demands that were pushed from their position of power – “Hi there, it’s Bill English. I need you to do something for me”

    So, was it this that put them under? Or was it just Labour’s fault, six, seven, eight years ago? Again?

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  22. itstricky (1,851 comments) says:

    lastmanstanding

    Sounds like a good book, given world events.

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