Tuesday, March 26, 2013

The Solid Energy files

Treasury dumped a pile of documents relating to Solid Energy on Friday. While there have been a couple of revelations from them so far (notably about the government's dishonesty in presenting it for sale while knowing it was in trouble), journalists seem to still be going through them. Meanwhile here's a few things I've noticed:

  • In 2006 Treasury highlighted concerns about Solid Energy's violation of consultation requirements for major projects [PDF, 22 - 28]. The company had spent $50 million and was planning to spend $67 million more on land and mineral rights purchases in Southland for its lignite projects. Officials were "concerned that considerable capital expenditure has occurred without any substantive prior consultation with officials or Ministers. Solid Energy's SCI requires formal consultation if any capital expenditure item exceeds 25% of shareholder funds. The land and minerals purchases to keep the options open for the project in total will significantly exceed this threshold." They called the lack of consultation "unacceptable". Later in 2008 [PDF, 26 - 29] Solid Energy objected to lowering the consultation threshold to a number more in line with those of other SOEs.
  • Solid Energy's joint venture deal with Cargill over the Spring Creek mine was structured to enable Cargill to dodge US taxes [PDF, "unlimited company structure"]. Treasury did not object to this, but its hardly appropriate for a state-owned enterprise with a statutory duty to exhibit a sense of social responsibility to be enabling tax evasion.
  • Solid Energy justified its joint venture on the basis that it would allow it to pay higher dividends. It then didn't pay out those dividends, instead re-investing profits in capital development. This is part of a repeated pattern, in which Solid Energy repeatedly promised dividends but then never delivered them.
  • In 2008 Treasury raised strong concerns about Solid Energy's valuation [PDF, 32 - 39], after it increased from $450 - $500 million to $7.8 billion in a single year. The new figure included the company's coal-to-liquids projects, which Treasury generously called "speculative" (they had purchased land and mineral rights, but nothing more; judging from information they provided in 2007 [PDF, 48], this assumed a high energy price / low carbon cost scenario. In other words, they were valuing as if the ETS didn't exist and would never affect them). Treasury "[did] not think it is credible for the company's estimate of its commercial value to increase by a factor of 15 in one year; nor do we think an estimate subject to variability of -70% to +200% is robust enough to be presented in the way that it has in the draft SCI". Solid Energy subsequently revised its value to $3 billion [PDF, 6], but this figure still included other speculative projects, and Treasury labelled it "unrealistic". However they noted that "the valuation is however the company's estimate, so it is the Board's responsibility to justify it".
  • In 2010 Solid Energy pulled the same scam again [PDF, 12 - 14] increasing its valuation from $2.5 to $3.9 billion. $800 million of that was the discounted value of proposed lignite investments which had not been made yet. Treasury again raised questions of credibility.
  • These revaluations had an effect on the consultation requirements mentioned above. By revaluing the company to $500 million in 2007, Solid Energy effectively doubled its consultation threshhold from $60 to $120 million. If the threshold had remained at 25%, then the later revaluations would have effectively removed any government oversight of large investment decisions.
  • And the smoking gun: in 2009, Treasury explicitly advocated SOE's taking on more debt in order to pay higher dividends [PDF]. They expected that this pillage could raise as much as $2 billion in special dividends for the government. Unstated: that it would effectively shift debt from the government's books to those of SOEs. It is unclear how vigorously SOEs followed this instruction; journalists may want to follow up on that.

There's no doubt more in there to be found, but what I've noticed so far is troubling enough. The overall picture I get is of an SOE running rogue, resisting oversight by its shareholder and focusing on empire-building rather than returning dividends to the people of New Zealand. In addition to that, we have pillage by the government in an effort to hide its true levels of borrowing. Its a dismal picture which raises serious questions about the governance of our SOE's and what they are allowed to get away with, and it really makes me wonder whether Solid Energy was uniquely bad, or whether we'll find similar problems with Meridian, Genesis, and Mighty River.