Editorial: Watching briefby The Listener
Why did no one do anything about Solid Energy’s catastrophic business strategies?
Who monitors the monitors? That’s the question at the heart of the extraordinary failure of one of the state’s most valuable assets, Solid Energy.
Despite at least four years of supposedly close official scrutiny since concerns about the corporation’s past and future strategies were first raised, more than $1 billion of value has simply evaporated, only a couple of years after Prime Minister John Key began telling “Kiwi mums and dads” what great businesses the asset-sale SOEs would be for small investors.
Only now that it’s too late are more searching questions being asked about the corporation’s risk-prone behaviour. Perhaps the most pertinent is: whatever happened to the Crown Companies Monitoring Unit, once a robust and feared meddler in state assets, now subsumed into the Treasury and seemingly ineffective?
Excuses have been made for Solid Energy’s board and management, to the effect that nobody could have anticipated either the strength of the New Zealand dollar or, most catastrophically for the business, the slump in the price of coal. Actually, yes, they could. This is precisely the sort of risk-management policing New Zealanders were entitled to assume was being imposed by the Treasury, and surely by the corporation upon itself.
Business commentators have used the word “grandiose” to describe Solid Energy’s failed strategies, and – admittedly with the benefit of hindsight – it’s hard to think of a better description. Directed by the previous Government to diversify into other energy spheres than coal, and urged on by commentators concerned about climate change, Solid Energy once seemed well-placed to grow and thrive. With at least a medium-term ballast from coal income, all it had to do was play to its strengths and expertise where it could employ them in other energy sectors. Instead, it became an aggressive market player, running off smaller private-sector competitors in areas it wanted to reserve for itself, yet never managing to create sufficient new earnings streams to prepare itself for a coal-less future.
It conceived such a massive, capital-hungry expansion that the Government in 2009 was finally stunned into trying to thwart its ambitions to become the “Petrobras of New Zealand”.
However, the Government claims to have been powerless to prevent the company drawing down debt and making investments up to a certain level. And despite Treasury monitoring, it was not structured prudently enough to withstand the coal-price slump. Now we learn the Government subsequently encouraged it to embark on yet another ambitious expansion – the lignite project – without ever having to submit a business case.
National has made no bones about its impatience for New Zealand energy companies to monetise their expertise by diversifying and investing, particularly in projects overseas. Companies such as Mighty River Power have had considerable success in areas like geothermal power, and despite some failures as well, this remains a strategy with big growth potential.
The tragedy of Solid Energy’s failure is that it gives that whole strategy a bad name it doesn’t deserve. Because this one company was, unaccountably, allowed to run amok, the political appetite for more soundly based bold initiatives in the energy market will have weakened considerably.
But the other lurking question is, how many other state assets are ticking time bombs of debt because of slack or timid monitoring? It’s true politicians cannot, and should not, interfere directly in the running of a state corporation but they should have a detailed working knowledge of how each company is being run, and a willingness to replace its board wherever they find poor performance. However, they can only do this if they pay attention.
Telling details, such as Solid Energy’s penchant for conspicuously large staff salaries – nearly 400 people earning between $100,000 and $200,000 in 2012 – and executive bonuses, even after the coal-price shock, should have alerted ministers and officials to a gung-ho culture at board and management level. The retention of the chief executive, even after it became clear the strategies over which he had presided were no longer viable or appropriate, also beggars belief.
The Government has two other big assets grappling with the fact that their historical raison d’être is fast vanishing. NZ Post and TVNZ are having to reinvent their business models because the internet is rapidly replacing their core functions.
The Government needs urgently to be able to reassure taxpayers that, having let Solid Energy’s follies romp along unexamined, it has its eye beadily on the rest of the state’s big businesses.
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