Rutherford exposes Greens financial illiteracy

October 6th, 2013 at 7:00 am by David Farrar

Hamish Rutherford (a former business journalist) writes at Stuff:

With co-leader and economic spokesman Russel Norman overseas this week, it fell on the shoulders of Green Party energy spokesman Gareth Hughes to reveal what he sees as the Government’s latest skulduggery.

With “the stroke of a pen” Solid Energy has been privatised, Hughes said, and not to mums and dads, but to foreign banks.

But what has really happened:

Hughes based his claim on a Beehive announcement that banks which lent hundreds of millions to Solid Energy were converting $75m of loans into “non-voting redeemable preference shares” as part of a rescue deal.

Suddenly at least 14 per cent of the company was owned by four Australian banks, Hughes reasoned, putting “privileged, powerful banking interests ahead of New Zealanders”.

For a start this overlooked that a New Zealand building society, TSB, also loaned Solid Energy tens of millions of dollars and was facing the prospect of losses, a detail made public months ago.

That aside, even though the banks are technically acquiring equity in Solid Energy, the lack of insight as to who was on the receiving end of the deal was striking.

Since revealing the scale of Solid Energy’s problems in February, with debt spiralling to near $400m, Finance Minister Bill English has promised those who funded its ill-fated expansion would not get off scot-free.

The negotiations dragged on for months, and now we know why.

The Government is about to mete out the kind of treatment the Greens seem to wish they could hand out to big business, and the banks are signing up only because the alternative is writing off the debt entirely.

Yes, the Crown is injecting $25m cash into Solid Energy, but for every dollar it is putting up, the lenders face losing three.

The banks are not getting any sort of reward or return. They are in fact taking a big hit.

What do the banks get in return? Shares which will never be worth more than the original amount – Solid Energy can buy the stock back at any time at face value.

It is unclear whether Solid Energy has any motivation to buy the stock back, ever, but certainly it won’t do so before it pays off all or most of the rest of the hundreds of millions of dollars of debt it still carries.

Even if coal prices recover, that will take years. During that period the value of the equity will evaporate through inflation and the lost opportunity to earn interest.

Worst of all (for the banks) is that although English has signed off on fresh loans worth at least $100m, in return he takes security over all of Solid Energy’s assets.

Looks like a very good commercial negotiation from the Government, doing its best to protect taxpayers. As I said, the real shame is that Solid Energy wasn’tt sold off years ago. The next time someone claims the Government must own these commercial companies, think of Solid Energy.

In terms of repayment, the banks’ “equity” stands somewhere near the contractor who cleans the windows at company headquarters.

If the Green Party really believes that kind of ownership is a kind worth buying, then heaven help the taxpayer when it gets near the purse strings of the Treasury.

Indeed.

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The pitfalls of public ownership

October 4th, 2013 at 12:00 pm by David Farrar

The Herald editorial:

The Green Party has called the Government’s bail-out of Solid Energy “privatisation by stealth”. Would that it were so. The state coal company will cost the taxpayer $155 million under the terms of the bail-out. It would have been more if the banks holding most of the company’s $380 million debt had not agreed to exchange just $75 million of it for shares in the company.

The banks could have insisted on repayment of all the debt, liquidating Solid Energy and costing 1,000 jobs.

But State-owned Enterprise Minister Tony Ryall is saying little to suggest there is any prospect of Solid Energy going back on to the partial privatisation programme with the power generators and Air New Zealand. More is the pity. The rise and fall of Solid Energy is a textbook example of the pitfalls of public ownership.

There is a case for the Government to own some monopolies like Transpower. There is no case (in my mind) for the Government to own a coal company.

Labour’s state-owned enterprise spokesman, Clayton Cosgrove, never tires of the phrase “asleep at the wheel” when blaming ministers for the company’s ambitious investments. But Treasury records show that in 2010, when coal was still booming on China’s continuing steel production and the board of Solid Energy was making big plans to diversify, the Government was cautious.

Indeed. The Government turned down the funding for the big plans. I suspect Labour would have handed over a billion dollars and renamed Solid Energy KiwiCoal.

If world prices pick up and the company can entertain wider ambitions again, it should be sold to the biggest bid. There is no reason for coal to be a state concern and every good reason to relieve the taxpayer of further risk.

Absolutely.

We should sell TVNZ also, while someone will still pay money for it.

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The Solid Energy package

October 2nd, 2013 at 10:00 am by David Farrar

Adam Bennett at NZ Herald reports:

The Government has loaned stricken state owned coal miner Solid Energy $100 million and extended a further $30 million standby facility as part of a restructuring package announced this morning.

Finance Minister Bill English and Minister for State Owned Enterprises Tony Ryall said the package had been agreed between the company, the Government and key lenders.

“As we have said previously, ministers were not prepared to expose taxpayers to on-going losses if Solid Energy’s core business was not considered viable,” English said.

“However, we also said that we were prepared to provide support for the company if there was a reasonable chance it could be made viable, and we expected the lenders to also contribute to that recovery,” he says.

This is a good outcome for the 1,000 or so staff of Solid Energy. However it is risking a further $100 million of taxpayer money. Hopefully the loan will be repaid in time, as Solid Energy adjusts to the new environment.

This for me reinforces why absolutely the Government should not own competitive commercial companies like Solid Energy. Taxpayers should not have to be exposed to the risks involved with such investments.

Chairman Mark Ford said the proposal “would allow the refocused coal mining business to trade its way back to profitability over the next few years, but that this would have to be supported by ongoing efficiencies and cash generation and improvements in the international coal market”.

“We believe that the company has a good operating future and we hope that with the continued support of our shareholder and our funders, we can re-establish the company as a major employer and economic contributor in our key coal mining regions.

The moment it is stable again, we should sell it – and not just 49% of it. If we had sold it three years ago, the taxpayer would be hundreds of millions of dollars better off.

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The Solid energy failure

June 12th, 2013 at 11:00 am by David Farrar

Adam Bennett at NZ Herald reports:

Solid Energy withheld financial information from Treasury when challenged on its business plans in what an independent report says was a pattern of disrespect the company showed to officials monitoring its performance.

Treasury yesterday released a review by accounting firm Deloitte of its monitoring of Solid Energy which appears likely to be broken up and sold off after overextending itself and almost failing under the weight of $390 million in debt and low coal prices.

Deloitte said it did not believe “that the failure of Solid Energy has highlighted a material failure in Treasury’s monitoring processes”.

However, the report goes on to raise questions “whether Treasury’s response was forceful enough or occurred soon enough given that the company provided cause for concern over an extended period”.

Deloitte said several Treasury staff it interviewed “identified a sense of tension from the chair and chief executive particularly when challenged on more fundamental aspects of their business and strategy”.

The problem is that the sack the Board option is a very heavy step to take.

Deloitte was also given examples of the company’s “lack of respect for commercial expertise that set the scene for difficult interactions, particularly surrounding core issues with Solid Energy’s governance”.

The first written evidence of this was in April 2011 when a Treasury analyst requested financial information underpinning Solid Energy’s evaluation of one of its projects.

Deloitte understood Mr Palmer told Treasury the request was unprofessional and Solid Energy would not provide the information.

“Following robust disagreement from Treasury, the chair instructed the Solid Energy management team to provide the analysis. It is our understanding it was never provided.”

The Deloitte report comes just a few weeks after Treasury released documents showing Mr Palmer fought against Treasury’s wish to have an independent advisor appointed to the company’s board last year as the state owned coal miner’s problems mounted.

Deloitte’s report concludes that the removal of Mr Palmer and Dr Elder “may have been warranted.”

However it noted that for Treasury to initiate such action “would have required it to effectively form the view that it lacked confidence in a board and executive with a sound track record in a technically complex industry”.

Perhaps something needed for the future is an agreement between Board and share-holder, where they agree on what sort of information will be provided to Treasury on request. While the Board can be the only governing body, it is important Treasury has enough information so it can independently advise Ministers on the company’s performance and plans.

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Solid Energy and $1 billion

May 22nd, 2013 at 6:21 pm by David Farrar

The Herald reports:

Newly released papers raise fresh questions over Prime Minister John Key’s claim that Solid Energy asked for $1 billion of taxpayers’ money to fund its transformation into a massive resources company.

Mr Key made the claim earlier this year when it was revealed the state-owned coal miner was on the verge of collapse under the weight of almost $400 million in debt.

Former chairman John Palmer, who approached the Government with the plan in 2010, denied asking for the money but later said he understood why Mr Key might have said the proposal involved “those sorts of costs”.

But Solid Energy documents released by Treasury yesterday detailing the proposal contain noreference to a request for the money.

Solid Energy’s business proposal said the Government’s willingness to forgo dividends from Solid Energy and Kupe were essential for the project to proceed, and it would require extra equity of up to $1 billion on top of that to fund the expansion.

However, it did not seek that from the Government in the proposals, saying: “All this can be achieved … without requiring a direct Government equity contribution (other than forgoing dividends from Solid Energy and Kupe for up to 5-10 years).”

This is being pedantic, and the PM’s interpretation of Solid Energy seeking $1 billion (in fact up to $3 billion) of equity is entirely consistent with being interpreted as a potential call on taxpayers. The difference between not taking dividends and a capital contribution is semantics. Both increase the Crown’s equity in the company.

Thank God, the Government said no.

Also interesting to note in the released papers that what forced out into the open the lack of substance to Solid’s forecasts was in fact the mixed ownership model preparation. It was only the preparation for potential partial float that got the detailed coal price forecasts out of Solid Energy. Without that policy, the extent of their optimism may have gone unnoticed for much longer.

Solid Energy is a superb example of why the Crown should not be the sole shareholder of a risky commercial business. The transparency and discipline you get from being listed on the NZX is significant.

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Solid Energy documents

May 21st, 2013 at 2:18 pm by David Farrar

Treasury has just released a mound of documents on Solid Energy. There’s over 100 documents so I’m not going to try and read them all.

I am looking at some around the proposed Natural Resources Ltd. if any readers are bored, feel free to read a few docs, and comment below any interesting aspects of them.

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Solid Energy

March 20th, 2013 at 4:00 pm by David Farrar

Some useful analysis by Chalkie at Business Day:

Meanwhile, in April 2009, Finance Minister Bill English and then SOE minister Simon Power summoned SOE bosses to a meeting and told them to sharpen up.

“We’ve got a recession and we’ve got a government that wants value for the taxpayers’ dollar,” English told reporters after the meeting. “They need to get better returns than they’ve got.”

Solid Energy was not singled out for dividend extraction and a dose of debt, but you can see why it might have felt the rebuke more keenly than others.

Chalkie has run the numbers on debt and dividend levels for a bunch of SOEs going back to 2005 and it’s clear that Solid Energy was slacking a bit. From 2005 to 2008 its annual dividends were zero, $20 million, zero and zero.

Such paltry returns are not what you want from a business deploying shareholders’ funds of $400m or so. No wonder English and Power wanted more.

If the state has to own commercial trading companies, it is not unreasonable to expect them to pay a dividend. Otherwise we’d be far better off selling them, and investing the money elsewhere.

We’ll come back to what Solid Energy did with its money in a mo, but it’s worth noting that the Government’s rev-up didn’t make a difference to all SOEs.

Comparing the four years from 2009 to 2012 with the previous four years, average dividends actually declined at Meridian and TVNZ, stayed roughly the same at Genesis Energy, while big dividend lifts were apparent at Mighty River Power and Landcorp.

Debt levels were also not universally increased after English and Power’s crackdown. Landcorp’s borrowing stayed in the same ballpark while TVNZ’s fell considerably.

The point here is not that debt and dividends at those companies should have been different, only that the outcomes support the view that decisions on these matters were ultimately made by individual SOE boards.

Of course. In fact it is a decision not just for the boards collectively, but individual directors. A Director has to sign a certificate or resolution they they are personally satisfied that the company can pay the dividend – and there are serious legal implications for a Director who gets it wrong.

Chalkie reckons the Government’s position in 2009 was only what you’d expect from a shareholder and how boards responded to that pressure, rightly or wrongly, was down to their judgment of what was best for the business.

Solid Energy’s judgment was that debt could be substantially increased, from $33m in 2008, to $62m in 2009, to $212m in 2010.

By June 2012 debt was $295m, which sounds like a lot but on a crude measure of gearing – debt/total assets – at 25 per cent it was well within the bounds of normal, around 50 per cent.

A better measure may be interest payments, which were also no obvious grounds for alarm. In the year to June 2012, Solid Energy had operating cashflow of $142m – a measure of basic business profitability – representing considerable headroom for its interest bill that year of $14.8m.

So the interest was around 10% of the operating cashflow surplus – reasonably conservative. The problem is that the surplus disappeared as the coal price dropped.

With 90 per cent of the world just starting up the prosperity ladder, the company said, there was only one way oil prices – and therefore coal prices, which are strongly correlated – would go.

In its best-case scenario Solid Energy saw coking coal prices at US$400 a tonne by 2020 and US$600 by 2030.

So what should an energy business do if it sees soaring demand and high prices into the future?

If you believed prices were going sky high, you might invest in more coal production, you might invest in coal seam gas and underground coal gasification.

If you believed in world energy hunger, you might invest in alternative energy sources such as wood pellets, biodiesel and lignite briquettes.

If you believed in ever-tighter oil markets and you were an ambitious, patriotic Kiwi energy company, you might want to secure big chunks of oil exploration real estate.

So in a sense, Solid Energy’s strategy in pouring so many millions into these projects had a sort of logic to it.

But only if you believed the price projection.

The current coal price is US$101 a tonne.

The Treasury’s assessment of the NRC scheme advised: “It is not clear why the Crown would wish to take such an exposure in commodity price movements based on price path analysis not shared by other experts.” The NRC idea got the brush-off from the Government, quite rightly.

But Solid Energy isn’t struggling today because it thought about getting into oil exploration. It is in trouble because a lot of the money it did invest turned out to be wasted when energy prices didn’t behave as it thought they would.

The Government was smart enough to see the implausibility of Solid Energy’s forecasts when it came to the NRC, but not when it came to wood pellets, underground coal gasification, lignite, Spring Creek, biodiesel and all the other things soaking up the company’s resources.

While all that was going on, the Government shareholder was busy getting Solid Energy to fill in its boiler-plate questionnaires seeking answers about how many credit cards it gives employees, how many staff have mobile devices and what it spent on office refurbishments.

If we wondered why state-owned businesses tend to under-deliver, just think about committees of MPs and bureaucrats poring earnestly over executive mobile phone bills. For all the good it does they might as well flag it and and go to the pub.

Chalkie reckons the Government is well aware its lack of oversight helped Solid Energy get out of hand and is doing its best to make Elder the fall guy.

There is a degree of truth to this, but this is part of the problems of the SOE model. The select committee is focused on how many credit cards a company has and shareholding Ministers are responsible for scores of companies – as well as all their portfolio responsibilities.

Of course you also have Treasury staff, and they did warn against some of the plans, but with no disrespect to Treasury, a 25 year old analyst can’t compare to the role played by professional company analysts.

If Solid Energy was listed on the stock exchange, then there would be a number of commercial funds that would have invested in it. And those funds would have an analyst whose job it would be to know everything possible about that company. They would live, breathe and eat that company. They would read every report, every statement, attend every AGM, and be constantly analysing the company’s strategy, worth and risks. The reason for this is because their job depends on it. If they get it wrong, their employer (and them) stands to lose millions or tens of millions of dollars. When it is your money at risk, you take much more of an interest in a company’s performance.

And you would have a share price that would deliver real-time daily feedback on how investors thought the company was doing.

That’s not to say Elder shouldn’t have gone – he should. But to Chalkie the main responsibility lies with Solid Energy’s board, which reviewed and endorsed the company’s strategy year after year.

I agree – the board sets and agrees to the strategy.

The Government, meanwhile, was well aware of Solid Energy’s approach but didn’t pay it much attention – complaining about it now is just hypocritical.

I think it is unrealistic to expect the Government to be second guessing the board.

Overall, Chalkie see this as another example of why SOEs are a bad business model. It’s just a shame the debacle means Solid Energy will remain 100 per cent state-owned for even longer.

I agree – the model is flawed, to say the least.

The Herald editorial agrees:

In 2010, when the Government was still forming the mixed ownership model it took to the 2011 election, this was too much to contemplate. It rejected the notion of the national resources company, encouraged Solid Energy to develop its existing resources, including lignite and “unconventional” gas extraction, but offered no additional investment.

Within two years, China’s steel production had slowed, coal prices slumped, Solid Energy’s investments were not paying off and a share float is no longer in prospect. The board’s plans might have been “off the bullish end of the charts” but private investors ought to be invited to make that judgment.

When global energy demand recovers, the Government should sell whatever stake it takes to make the most of the country’s untapped wealth.

It is indeed a pity that private shareholders were unable to invest in Solid Energy earlier.  They should be the ones making the judgement on whether the bullish plans to become a global resources company were worth investing in.

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Key was wrong – they wanted $27b not $1b

March 15th, 2013 at 12:52 pm by David Farrar

The Herald reports:

Prime Minister John Key this morning released documents detailing Solid Energy’s ambitious expansion plans which would have required capital investment of $2-3 billion a year until 2021 or a total of up to $27 billion.

Key released the papers in response to Labour’s claims he misled the public about Solid Energy approaching his Government about a $1 billion investment to become the “Petrobras” of New Zealand, a request he says his Government turned down.

However, in his appearance before a parliamentary committee yesterday, John Palmer who was Solid Energy’s chair at the time, said while the company made the approach, there was never any expectation the Crown would bear the cost of the required investment and a figure of $1 billion was never mentioned.

I admire the ambition of the Solid Energy directors and staff, but this just shows again how unsuited it is to be owned by the Government.

When you are 100% Government owned, there are only two sources of funds for capital – the Government’s or borrowing. The Government’s contributions can be either direct capital investment or reduced (or no) dividends.

It is simply not possible that the desired expansion could be done purely through borrowing. A Government contribution was absolutely necessary and implicit.

Of course if private shareholdings were allowed, then Solid Energy may have been able to access capital without it coming from the Government. This entire episodes reinforces dramatically for me the undesirability of having these commercial companies state owned.

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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 Solid Energy. 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 John Palmer and Don Elder 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 Trevor Mallard 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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“Alternative Developments”

March 13th, 2013 at 9:00 am by David Farrar

Stuff reports:

A pre-asset-sale study in 2011 for the Government had highlighted over-optimistic coal price assumptions and questionable alternative fuels investments, which led ultimately to changes to the board and management, he said.

O’Connor said the previous government had supported Solid Energy as a sustainable business that was looking into alternative developments, while National saw it solely as a cash cow which could help it fund tax cuts.

Very nice of Damien to claim credit for the alternative developments which of course failed, and led to the increased debt. Solid Energy did not borrow money to pay dividends. Dividends come out of profits. Debt is used to fund “developments”.

This reinforces for me why the Government should not own commercially risky trading enterprises. If people want to fund “alternative developments” they should do so voluntarily as direct shareholders.

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Espiner on Solid Energy

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

Colin Espiner 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 SOEs 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 Solid Energy. 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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So why do we own a mining company?

February 21st, 2013 at 4:52 pm by David Farrar

Stuff reports:

The depth of Solid Energy’s financial woes have been laid bare with the Government confirming the company is in talks with bankers over its debt levels.

The Solid Energy board was working with Treasury, advisors and the banks about further restructuring options, with the aim of returning the company to a sustainable financial position, Finance Minister Bill English said.

“Despite restructuring, Solid Energy’s financial position has continued to deteriorate. It is in constructive discussion with banks,” English told a media briefing this afternoon.

He confirmed there had been differences of opinion for some time over the direction of the company.

“There will be the opportunity for us to go back and look pretty hard at the governance and the monitoring.”

The Government would not let the company go into receivership, English said. He would not directly answer questions about a taxpayer-funded bailout, but would not rule it out. …

State-owned Enterprises Minister Tony Ryall said a number of factors had weighed against the company, in particular world coal prices dropping by 40 per cent.

We should have sold Solid Energy years ago. Taxpayers should not be forced to be investors in risky commercial enterprises such as mining. There is no strategic need for the Government to own a mining and power company – just as we also don’t need to own companies that run hydro-dams.

Labour and Greens go on about all the dividends from these companies, and overlook the risk – as we have seen with Solid Energy.

We shouldn’t own a loss making rail company either.

Governments should focus on what they are good at – passing laws, developing policy, regulation etc. The private sector should run companies, receiving both the benefits of them when successful - but also having to foot the losses when not sucessful.

Sadly this means Solid Energy will probably never be sold, and potentially remain a taxpayer liability for some time.

I just hope the Supreme Court upholds the High Court decision, so the Government can get on with at least reducing its shareholding in these competitive commercial companies.

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Why we should not own commercial competitive companies

February 16th, 2013 at 11:00 am by David Farrar

Jason Krupp at Stuff reports:

Mighty River Power says years investing in overseas geothermal projects have given it the confidence to go it alone internationally at a time when Kiwi development opportunities are drying up.

The state-owned energy company yesterday announced it had reached a deal with GeoGlobal Energy (GGE) to withdraw from the GGE Fund after five years.

Mighty River is taking two Chilean development projects and a minority stake in US firm EnergySource with it, currently held by the GGE fund. In exchange, GeoGlobal will take control of the fund’s interest in Germany, and other non-EnergySource related assets in the US.

Mighty River has been a big investor in the GGE Fund for more than five years, with the bulk of the US$250m committed to the venture already invested. It will also pay GGE US$24.8 million (NZ$29.1m) to exit the fund.

“The fund was a way to learn about the international market, and we learned about what works and doesn’t work, and it is timely for us to move on,” said MRP chief executive Doug Heffernan.

NZ taxpayers should not be having their money at risk in a company that is investing in risky projects overseas. I don’t think there is anything wrong with MRP investing as they have. Business always has a degree or risk. Only those with no business experience fail to understand this. They think business is a licence to print money.

The only companies the Government should own are those that provide some sort public service (Radio NZ but not TVNZ) or maybe monopoly infrastructure providers (Transpower – but once could actually have that as a club-type membershp).

Take Solid Energy. That used to be a profitable company. But it has been hit by two major external factors. A drop in the price of coal due to China over-supply and a global move away from coal as fracking has opened up shale gas as an alternative energy source.

If Solid Energy had been sold some years ago, then private owners would bear the risk of the business downturn. There is no strategic reason for the Government to own a mining and energy company.

But now the taxpayer is going to be left having to finance a likely bailout of Solid Energy. Rather than spend money on hospitals or schools, the taxpayer is going to have to bail out a mining and energy company that it shouldn’t even own. I doubt it will ever be sold now – the global market has changed fundamentally. So we will be left with a dog that will cost taxpayers money.

I want a Government that invests in schools and hospitals – not coal mines and hydro-dams. It’s a great pity they were not all sold many years ago.

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Headline v story

November 24th, 2012 at 7:02 am by David Farrar

The headline in Stuff:

High pay rates stay despite firm’s loss

Note the journalists doesn’t write the headline. Then the first para:

State-owned coal miner Solid Energy has more than a quarter of its staff earning double the average wage and a chief on $1.1m when the company made a loss of $40 million this year.

Solid Energy’s 2012 annual report shows it chief executive Don Elder was paid $1.1m in the year to June and weeks later announced he was axing the jobs of a quarter of the staff to save millions of dollars in costs.

So at first the impression is that despite Solid Energy losing money, the CE is unaffected or even getting a pay increase. But you then read:

Elder’s 2012 pay is $250,000 less than what he was paid the year before because he received less in performance payments.

Hmmn, so in fact the CE has taken a 20% cut in remuneration – not such a sexy headline though is it.

The board was prepared to pay him a short term performance payment of $164,350. That was only 40 per cent of what he could have earned in that category.

However Elder declined to take anything in that short term category.

And the CE voluntarily declined any short-term performance payment even though he met some of his objectives. A laudable decision, in light of the company’s struggles.

Elder told the board he wants to take a 10 per cent cut to his base pay in this 2013 financial year.

And he has voluntarily offered a cut in his base pay rate.

It’s good all this detail is in the story. It is just a pity that the headline didn’t reflect it with a more accurate headline such as “Solid Energy boss takes pay cut as company struggles”

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Damien says Solid Energy to blame for Pike River!

November 8th, 2012 at 2:00 pm by David Farrar

NZ Herald reports:

Solid Energy is largely to blame for the “dumbing down” of mining industry standards that allowed the Pike River disaster to happen, West Coast-Tasman MP Damien O’Connor says.

So does that mean Qantas was responsible for Erebus?

Solid Energy’s general manager of communications Vicki Blyth said she was shocked by Mr O’Connor’s comments.

“It’s appalling to suggest that Solid Energy is in any way to blame for what happened at Pike River.”

Ms Blyth said Solid Energy had benchmarked itself against international best practice for some time. It had made submissions to the previous review of mining regulations.

“That’s what we submitted to the Royal Commission. We fully support the recommendations and the commission’s proposals.”

A somewhat bizarre attack on Solid Energy.

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Poor West Coast

August 30th, 2012 at 11:00 am by David Farrar

Stuff reports:

The West Coast has been dealt another “devastating blow” and hundreds of jobs throughout the country are set to be slashed after state coal miner Solid Energy announced plans to move away from underground mining.

Three hundred and seventy miners and contractors at the Spring Creek Mine are in limbo after the state-owned energy company announced the suspension of operations at the mine yesterday.

The Huntly East underground mine in the Waikato will cut 63 staff and 60 contractors because the company is stopping further development. Another 65 staff at the Christchurch head office and 17 staff from other parts of the business are also in the firing line.

What an awful blow. Hopefully it may reopen, but far from certain.

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Pike River sold

March 9th, 2012 at 4:00 pm by David Farrar

Stuff reports:

 Pike River Coal has been sold to state-owned enterprise Solid Energy under a conditional agreement, receivers for the mine said today.

The receivers said they have reached agreement with Solid Energy New Zealand for the sale of the assets of Pike River Coal. …

”We, as the receivers, are pleased with this agreement as we consider it the best way forward for all parties. As part of the agreement, negotiations will continue with the Crown to establish a trust that will help oversee efforts to enter the main area of the mine and facilitate body recovery – if it is safe and technically feasible.

”In the meantime, work on the tunnel reclamation is continuing. We will provide further updates as appropriate,” Fisk added.

I suspect the families of the dead miners will be pleased with this sale, as Solid Energy has publicly committed to doing what it can to recover the bodies. The Government had said it would make recovery of the bodies a condition of transferring the mining licence, so this may be why other parties did not bid for the mine in the end.

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Solid Energy bidding for Pike River

March 14th, 2011 at 2:24 pm by David Farrar

Hayden Donnell in the NZ Herald reports:

State owned mining company Solid Energy has revealed it wants to buy the Pike River Coal mine, pay off its unsecured creditors and recover the bodies of 29 men still trapped inside. …

Solid Energy, which operates several West Coast mines including the nearby Spring Creek Coal Mine, today announced it was one of those looking to buy the rights to extract the $6 billion of coal still at Pike River through a mixture of opencast and underground mining.

Chief executive Don Elder said recovering the 29 bodies still inside the mine would be a priority in that proposal.

It was committed to addressing the “many challenges” of making the mine economically viable while respecting the wishes of the families of the dead, he said. …

“As a non-negotiable part of that, the wishes of the families have to be a priority in considering all options including potential recovery, if feasible, of the 29 miners’ bodies. The same applies to the unsecured creditors on the West Coast; any solution to invest in and work the mine needs to address that issue as a top priority.”

That’s possibly the best news the Coast has had, since the explosion.

Elder said the company’s plan would include opencasting parts of the mine.

Somehow I suspect the usual suspects won’t oppose this mine being opencasted.

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The SOE challenge

June 18th, 2010 at 7:47 am by David Farrar

The Herald reports:

The chairman of Solid Energy says at least part of the state-owned coal miner should be sold off to raise billions of dollars needed for new projects, including more mines.

John Palmer – who is also chairman of partially privatised Air NZ – said Solid Energy needed up to $10 billion in additional capital over the next five years, and should be partially privatised if National wins a second term in office.

That was the best way to provide the money, given the state of the Crown accounts, he told the Herald yesterday.

“I don’t think it makes a lot sense for the Crown to put several billion dollars into a company like Solid Energy where it can retain all of its existing ownership and leverage and external capital can provide the opportunities for growth. It’s very much a win-win situation.”

Solid Energy is not a monopoly like Transpower or NZ Post. It is not a utility- it is a competitive business undergoing commercial activities that are not guaranteed to be profitable.

If Solid Energy can not access extra capital, it will not be able to reach its potential, which may mean less tax revenue and less jobs in NZ.

But do we want the NZ taxpayer borrowing money to invest in Solid Energy, and assuming all the risk? I think Palmer makes a good case for that risk to be shared around.

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Reaction to PMs Statement

February 10th, 2010 at 10:38 am by David Farrar

The EU had a reception at the Backbencher last night, so lots of MPs and journalists there to chat to.  The typical opening line from a National MP was “So about that B grade” while from Labour MPs it was “Unlike Annette we won’t use Farrar and respect in the same sentence unless there are some other words in between” :-)

Phil Goff was there also, so I said I looked forward to him quoting me more often in future :-). Actually had an interesting chat generally on economic stuff, such as land tax. If Labour are bold they could consider proposing a land tax (tied to income tax reductions) for 2011. That could attract some support from economic reformers.

General consensus I got from pundits there was that there was definitely some good stuff in the Government’s work plan – in fact more detailed plans that most Governments announce in the PMs statement.

But what may trip the Government up is they misplayed the expectations game. Building the statement up as the “most important” one ever was a mistake, as was talking about it being a “step change”. Again, there is some good stuff there that certainly will help lift economic growth. But will the announcements alone close the gap with Australia? Of course not. But the rhetoric leading up to it, got expectations artificially high.

With the benefit of hindsight, it would have been better to have positioned the statement as a typical PMs statement – a general overview of the Government’s achievements and workplan, and then surprise the media and opposition when it turns out to have close to 30 specific initiatives in it.

As I said yesterday, I welcome the focus on growing the economic cake, not just how to split it up, and look forward to more details in the budget.

Reaction from others:

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The biggest tax of them all – the ETS

May 8th, 2008 at 5:13 pm by David Farrar

NZPA reports on testimony today from Solid Energy:

The Government could take up to $80 billion in windfall gains due to the climate change emissions trading scheme (ETS), Solid Energy chief executive Don Elder told MPs today. …

Mr Elder said the bill was not only about climate change, but was also the most far-reaching taxation legislation since the 1980s.

He said no one had seemed to consider the possibility that even if pollution targets were met, billions of dollars would end up in the Government’s coffers.

The ETS, as designed, would punish polluters for all their emissions, not just those above the 1990 level set by the Kyoto Protocol.

Even if emissions were reduced to 1990 levels by 2025/2030, which he felt was unlikely, it would mean the Government would still collect $20b over that period.

He said the $20b figure assumed a low price for carbon — $22 a tonne — and if it was replaced with a “realistic figure” of up to $200 a tonne the windfall gain over the period would be in the region of $80b.

“Now that may well be a justified policy and it may well be able to be redistributed, but that is a tax restructure…buried inside an emissions trading system.”

Climate Change Minister David Parker said he fundamentally disagreed with the analysis and said the Government would never allow such a scenario to occur.

Mr Elder told MPs the complexities of the scheme were creating unintended consequences that saw the details change on a weekly basis.

This was complicated by the number of processes going on simultaneously to write the policy even as the committee considered the legislation.

He said that the European Union took five years to design a much more modest trading system and still got it badly wrong first time around.

The climate change bill was laying down conditions that would exist 22 years away.

“People aren’t even born yet who will probably be playing for the All Blacks by the time this legislation is still showing its teeth…yet we are rushing this through in six months and it doesn’t make sense.”

Mr Elder said instead of having a prescriptive bill, it should be rewritten into more general enabling legislation.

Then over the next year the details could be thrashed out and slotted into place.

He said the rush to put the ETS in place was not necessary as most sectors were now not being hit by the scheme until 2011 and onwards.

So who thinks the Government will refund all those billions that they will accidentially accumulate?

It is worth noting Elder is not saying do not have an ETS. He said this is a scheme for the next 22+ years, and trying to finalise it is six months is going to be a disaster. The EU took five years. And with the Government delaying the first sectors by a year, there is no real reason not to delay it.

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Press on West Coast Spying

April 22nd, 2008 at 7:06 am by David Farrar

The Press Editorial:

Senior Government figures made it clear that Solid Energy, which is a State-owned Enterprise, must not itself stoop to such tactics nor countenance its so-called security consultant, Thompson and Clark Investigations, doing so. But TCIL director Gavin Clark has again attempted to hire a paid informer. Even if Solid Energy had no knowledge of this, its continued commercial relationship with the security firm places its own credibility on the line. It is time that Solid Energy cut TCIL adrift.

They really have no choice. It just does not survive the credibility test that TCIL’s activities were not motivated by having Solid Energy as a client, even if not explicitly mandated in this episode.

Can I suggest that if TCIL are gong to continue as amateur spymasters, they get better at it. You don;t try and turn an existing greenie – no wonder they keep getting exposed.

If I was TCIL, and wanting to infiltrate the Save Happy Valley Coalition I would go along to Act on Campus, and hire their scruffiest new member and give him or her a two to three year mission. Now your typical AoC member will do anything for enough money, so you probably need to be thinking $1,000+ a month to supplement their student allowance.

You need to pick someone who has not been publicly identified as an AoC member, and have them join up. But the key is not to have them start spying too soon.  You need to be prepared to invest in just having them spy for a year or so, and then start having them produce the bacon.

Now after a while they may develop a conscience. More money will help with this problem, but a good spymaster will also start giving them some perks they’ll miss. You see they are probably investing all their spy money on the stockmarket. So every six months or so you send them and their boy/girlfriend to Queensland for a holiday – that will keep them motivated to keep spying.

Anyway back to The Press:

On the face of it, the Government’s unambiguous directive to Solid Power last year had been breached. This might explain the speed with which the SOE chief executive Don Elder specifically ruled out his organisation having any involvement in or knowledge of the second effort to hire a paid informer.

For Solid Energy this latest spying row is hugely counterproductive. A coal company in this age of heightened environmental awareness is always going to struggle to get good publicity. But the SOE does have some positive stories to tell, such as its entry into the biodiesel market and its involvement in the first Southern Hemisphere carbon storage project.

Instead, it has become mired in accusations about a private espionage operation, an activity which was last year shown to be distasteful to most New Zealanders. Compounding the perception problem, the accusations could also create sympathy and publicity for the targeted protest groups which they do not necessarily deserve.

All true.

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