The Solid Energy sequel at Parliament’s commerce select committee lacked only SBW in a pair of satin shorts.
Don Elder arrived flanked by Chapman Tripp lawyers who, never mind legal services, looked as though they’d ninja-chop anyone who got too close. Clayton Cosgrove lowered and twitched on the other side of the ring, planning utu for slights inflicted by Solid Energy’s current bosses in the first bout the previous week. “This is unfinished business,” he seethed.
The ref, Jonathan Young, tactfully let the match go for extra rounds, and deservedly so, as it was easily the most fascinating select committee punch-up in recent memory, and the assembled accountants, lawyers, analysts, lobbyists, party flaks and journalists would have relished the chance to savour it dressed in tuxedoes and sipping brandies.
By the time Elder was borne away in the eye of his ferocious storm of lawyers, it was clear that every single attendee was going to call the bout differently.
With the heroic versatility of that mirror in the Harry Potter books, the Solid Energy saga has become one of those things into which everyone who gazes can see what they want to see.
The Opposition sees only that the Government caused the company’s near-collapse by hoovering extra cash out of it. A sexy angle, but not true.
The company sees only that if the international price for coal hadn’t collapsed and the dollar stayed high, it would have been fine. Also not true.
The Government tries to see only one isolated thing at a time in the mirror. The company was over-geared. The coal price collapsed. The company wanted to become even more highly geared to get into more risky investments. The company had already made a number of dud investments.
Each is true in and of itself, but unfortunately for National, when you take them as the combined set of circumstances they were, each resulted from a rather unfortunate lack of coherence in the way the Government manages its relationships with state-owned enterprises.
Thursday’s interrogation by MPs of former chairman John Palmer and departing chief executive Elder was reasonably thorough, but the pick-and-mix accusations and self-justifications to have come out of it are – perhaps usefully for political purposes – hopelessly bewildering for the voter.
One of the most prominent pieces of disingenuousness is Labour senior Cosgrove’s claim that the company ended up in a heap because the Government demanded it borrow more and pay it more dividend. The company itself says this was not the major factor in its difficulties.
It would be in a better position now with lower gearing. But in earlier years, the company itself had asked the Government for permission to gear way up for a massive expansion and been turned down. It even postulated having a capital appetite of $2-3 billion each year.
There was no suggestion at the hearing that Solid Energy either vigorously opposed the Government’s higher-gearing requirement, or was even particularly anxious about it. As for the dividend payments, Elder was clear that their impact was neither here nor there in the great scheme of things.
The Government’s practice of gearing up its SOEs to harvest more cash is an issue in general terms, however. AS Palmer said – albeit more tactfully – former SOE Minister Simon Power’s instruction across all the corporations to ramp up to 40 per cent was arbitrary and foolhardy. Each SOE should have been assessed according to the wider issues facing it.
There is no one-size-fits all for balance sheets. But the Treasury has long held a hard-line position about “lazy” SOE balance sheets. It served up the same advice to the previous Government to ramp up borrowing, but Labour generally resisted it. After the exigencies of the GFC, the current Government gave in, deciding it needed all the cash it could get its hands on. But even if Solid Energy had been excused from this cash-grab, it would still be in schtuck.
Another stick eagerly grasped at the wrong end is the question of whether, as Prime Minister John Key has said, the company a few years ago asked the Government for $1 billion.
The Opposition says Palmer and Elder’s testimony shows it did no such thing. Actually, it’s very clear – and Palmer specifically confirmed this – that the company’s 2009 expansion proposal would have required capital in the order of $1 billion. While he said the company did not expect the Government to supply the whole amount, and was contemplating joint ventures and the like, it certainly went to the Government for permission massively to increase its capital and scope.
Had the Government offered to write the cheque, let’s not imagine Solid Energy would have said no. Bottom line: Solid Energy borrows $1 billion, the Government borrows $1 billion. Key’s characterisation of the approach was shorthanded, but not at all misleading.
Key was ill-advised to cite, as part of the company’s downfall, its over-gearing, given that it had upped its gearing at the Government’s behest. In highlighting this, he simply played into the Labour Party’s politicking.
However, neither borrowing, nor being turned down for massive capital expansion, were what did for this company. The fact not in dispute is that Solid Energy made some very poor investments – albeit mostly for the right reasons. It obviously couldn’t go on being a coal miner in perpetuity, yet it was the owner of this country’s biggest energy resource.
It and successive governments have been in agreement that Solid Energy needed to A. refine ways of getting access to our reserves of premium coal from the geographically challenging places it lurks, B. find profitable things to do with the lower-grade coal, and C. get into other green and sustainable energy projects.
It would be too depressing to chronicle all the dead-end decisions made here, but suffice it to say, bio-fuels turned out to bury bones and chase cars; wood pellets seemed like a good idea at the time, but now people who have pellet burners can no longer get pellets because it wasn’t; and even old-fashioned coal mines, which you’d have thought the state coal miner would be proficient at, threw up all manner of insurmountable challenges.
It ended up with mines which, while viable when the coal price was high, became uneconomic virtually overnight. While in one sense laudable, its decisions to buy the troubled Spring Creek and Pike River mines to keep them open and try to make them viable, ended up compounding Solid Energy’s woes.
This is one of the many aspects of this company’s situation which call the whole SOE model into question. It’s hard to imagine that any private company would have gone within a bull’s roar of either coal mine. But as a state corporation, Solid Energy felt an obligation – or, if you’re cynical, an opportunity to ingratiate itself with politicians on all sides – to do the decent thing and preserve jobs.
While these mines do not alone account for its failure, they’ve left a hell of a hole.
SOEs have become a sort of push-me-pull-you creature, tugged in various directions by proxy negotiations between the Treasury and the boards, the Treasury and the Government, and the boards and the managers. It’s all a bit peek-a-boo.
If, as with the 40 per cent gearing, the Government says it would like something to happen, the board is really obliged to make that happen, unless it can, via the Treasury, talk the minister out of it. Yet the board is supposed to be independent, a body handpicked and trusted to have the expertise to know how to run the company.
The argy-bargy over Solid Energy’s value points up how dysfunctional this at-one-remove situation can become. The company’s own valuation of itself was considerably greater than that calculated by Forsyth Barr and investment bank Macquarie. Not unnaturally, this discrepancy came to the Government’s attention and Please Explains were issued.
Palmer and Elder told the select committee the company’s expectation for coal prices was positive, albeit subject to inevitable fluctuation. At the same time, the Treasury was advising the Government the price of coal was declining and likely to continue doing so.
What’s a minister to make of this? As Elder said, the various valuations depended on a range of assumptions and variables. Pressed on the company’s $3.5 billion self-valuation, Elder told MPs: “It served the purpose of saying, here’s what the company could well be worth.”
“Could well be worth” is not a statement likely to reassure a nervous minister. Small wonder the Cabinet had some quite fierce discussions about what was going on in Solid Energy.
One potentially disquieting thing that was going on was a conspicuously close relationship between Palmer and Elder. Palmer, who asked for the Solid Energy chairmanship, told journalists after Thursday’s meeting that he had been excited at the chance to work “for” Elder.
A slip of the tongue, but a telling one. He explained that Elder’s contract was updated on his (Palmer’s) last day as chairman because the two had such a close relationship that he had not gotten around to updating Elder’s contract each year. He thought he had better regularise the position before he left. And yet, without formal review, Elder’s pay and bonuses went up and up and up each year.
Governance in any company depends on a clear-eyed distinction between management and board. While the passion with which Palmer defended Elder against the often vituperative criticism he has come in for is laudable, it’s fair to ask whether there was a prudently impartial relationship between the chairman and CEO in this case.
By all accounts, Elder is a visionary, inspirational leader, but he has also been characterised as grandiose and aggressive in his approach. At times it has seemed as though Solid Energy was intent on world domination. The company tried to see off potential competitors in the private sector, and, to track bonus payments to staff and head office comfort, has not stinted itself even in declining fortune. It gained an enduring reputation in its sector as a flash spender.
Palmer was indignant at MPs’ questions about a culture of extravagance, craftily changing the focus to Solid Energy’s unabashed big spending on safety culture. He also made the point that, to think up new ways of doing what the company does, it needs to import brain-power, skills and experience of world-leading quality.
But even as more emerges about the various strands that fed this disaster, the Government cannot escape culpability. However poorly managed Solid Energy’s corporate and reputational duties may have become, the buck stops with the ministers. The Government is the sole shareholder, and should call the shots – however byzantine and unwieldy the SOE accountability chain may have become.
A striking feature of Thursday’s disclosures was that neither Palmer nor Elder could recall having met for direct talks with ministers about any of the vital issues or decisions. Such things are tossed around with officials. Maybe that nicety, a sort of ornamental separation of church and state, has become a foolish conceit.
It’s impossible not to conclude that key ministers weren’t paying attention, or didn’t understand or analyse properly what they were being told both by and about Solid Energy.
It’s probably safe to say they are all ears now.