Were senior Cabinet ministers asleep at the wheel? Did they fail to step in soon enough when problems at Solid Energy were apparent long before the troubled state-owned coal company went public and finally told the markets of its rapidly deteriorating balance sheet?
Those charges have been levelled by Labour and the Greens at Tony Ryall and Bill English - the company's two shareholding ministers who are responsible to Parliament for Solid Energy's performance.
But does the accusation stack up? Is a select committee inquiry warranted?
A bundle of official documents released by the Treasury last Friday suggests those ministers were not so much asleep at the wheel as having trouble getting their hands on the wheel. The papers highlight the trade-offs involved in the state-owned enterprise model - that ministers can lay out their expectations for the business but do not interfere in operational matters to ensure that state companies can meet their prime objective of functioning in a truly commercial fashion.
Solid Energy is not the first SOE to run into financial strife. Terralink, the Government's former land-mapping business, was placed in receivership in 2001. But Solid Energy is the biggest.
The irony is that National had been tightening up monitoring procedures and disclosure rules as part of the "no surprises" policy to avoid ministers finding themselves in the dark. But they were introduced at the very moment the collapse in international coal prices was leading inexorably to forced mine closures and job layoffs and ultimately the calling in of the company's bankers.
What the papers most reveal is ongoing friction and tension between Solid Energy's board and the Treasury, whose job was to monitor the company's performance.
The documents show the Treasury expressing "concern" across a number of fronts. The department had major reservations about the company's diversification into biofuels, lignite and other ultimately unprofitable, energy-related developments.
The Treasury was concerned these were being funded through cash flows while Solid Energy racked up debt to meet the Government's dividend requirements. The Treasury was perturbed by the low level of return in terms of dividends - around 1 per cent for the previous five years. Meanwhile, an independent scoping study had raised serious questions about Solid Energy's own valuations of the SOE and its readiness for a partial float.
There were strong differences of opinion over the contents of the company's annual statement of corporate intent, the key document in allowing ministers some influence on how the company should perform in the year ahead.
To top it off, ministers and officials were clearly annoyed that Solid Energy's board and senior management did not think the company was a suitable candidate for a partial share float.
Should these arguments alone have prompted ministers to use one of the few sanctions available to them - a clean-out of the board, as obliquely suggested by the Treasury? And would that have saved the company from the subsequent slump in coal prices? Deckchairs and the Titanic come to mind.
To complicate matters, Solid Energy was delivering where it mattered - the bottom line. In February last year, the company announced a six-month profit of more than $70 million, but warned of a "toughening" export market for coal and that the slowdown could be "significantly prolonged".
This was backed up in a letter to Ryall a week later from the board's chairman John Palmer, who told the State Owned Enterprises Minister that while coal prices were "softening"as a result of the European financial crisis and contraction in the Chinese steel market, Solid Energy considered the impact would be short term and emerging markets would continue to stoke demand.
The Treasury cites Solid Energy's price forecasts as another "source of tension" in being far more optimistic than the consensus of other coal producers and analysts.
So officials could not have been completely surprised when less than three weeks after they received Palmer's letter, Solid Energy contacted the Treasury and warned there had been significant changes in the company's forecasts; because of the price slump and the high New Zealand dollar the company's results could be "significantly down" for the next two financial years.
The papers do not make it clear if and when ministers were told of Solid Energy's revised forecasts. But the pessimism was not enough to persuade them to abandon the scheduled share float. An aide-memoire written for ministers ahead of a meeting with Palmer in early May questioned whether the board was "committed" to making the necessary changes to prepare the company for the float and whether it had the right mix of skills and the "desire" to make the necessary changes.
The serious nature of Solid Energy's plight became apparent over following weeks with the Treasury recommending in early June - and ministers subsequently agreeing the company be moved to "intensive monitoring" status.
Solid Energy's management had by then put forward a programme of cost-cutting, reduced capital spending, the sale of some assets and the writedown of others to extract the company from the mire.
The Treasury was not convinced. The company had a poor record of cost control and that some suggestions - such as abolishing free lunches at company meetings - appeared "trivial".
Officials were perturbed that neither the board nor management had acknowledged that the underlying diversification strategy that the company was pursuing "may not be appropriate".
Again, there was worry that the recovery plan was predicated on overly rosy coal price forecasts.
The Treasury hinted once more of the need for changes to the company's board. But it is not clear whether that had any connection with Palmer's announcement three weeks later that he was stepping down as chairman, saying Solid Energy had an "exciting" future. It was not the word that those literally at the coalface would have chosen as, over following weeks, the company finally revealed publicly how dire things had got and instituted a restructuring plan which will see Solid Energy's workforce slashed by 25 per cent.
The question remains: did ministers react too slowly? Were they too consumed with selling a portion of Solid Energy and too distracted by the bumpy relations with the SOE? Were they handicapped by the long-established norms and protocols of the State Owned Enterprises Act that ministers keep their distance and do not interfere? Was the Treasury too far behind the eight-ball in its monitoring of Solid Energy? Or did the price slump happen so fast that recovery plans were rendered too little too late?
The answer may be a combination of all those things to varying extents. What the documents do prove is that none of those involved had access to that most valuable commodity enjoyed by Opposition parties - hindsight.
- by John Armstrong of the NZ Herald
