There's a lot of upside down politics in the Solid Energy saga, but at the end of the tunnel it's all about the next election

"Show me the money", John Key hooted at Phil Goff in the 2011 election campaign, painting Labour as a party of loose financial discipline. Can you trust a party that doesn't know how to get out of deficit, wants to tinker with vege taxes and create tax-free zones, he asked voters. And they said no.

While some in and around Labour don't think the leaders of that woeful campaign have taken sufficient accountability or looked hard enough at its failings, as Charles Chauvel said in his valedictory speech, Labour at least understands that a lack of economic credibility has hurt its electoral hopes. The tax-free zone was quickly jettisoned and restoring payments to the Super Fund became a lot less urgent, for example.

And economic credibility is what the battle over Sold Energy is now all about. Labour is running this hard because it sees a chance to place a seed of doubt in voters' minds about National's economic cred.

After the appearance before the select committee by Don Elder and John Palmer, it's clear that the company was ambitious and focused on growth. However to achieve that growth it took on more debt than it felt comfortable with, due to government urging. The record is clear that National was happy with SOEs borrowing more and that they were especially big fans of its plans for lignite development in Southland.

Now that debt which National was so keen on has left Solid Energy horribly exposed as the price of coal has dived in the past year. Labour's message to voters: National's so called economic cred isn't worth the paper it's written on. The hope is that if it can't reach surplus in the next 18 months it has a couple of very big sticks to whack National with come the 2014 election campaign.

Of course this story is rich in political hypocrisy. Through the prism of Solid Energy, you can see National encouraging SOEs to take on more debt, while being incredibly conservative towards and protective of its own balance sheet. Debt? Bill English and others in government have warned repeatedly of its dangers and spoken in almost religious tones of the importance of returning to surplus, all the while nudging SOEs in the opposite direction.

Debt? Why not? It was classic 'do as I say, not as I do'. Now, with not a rain cloud in sight, National is left with the challenge of making those losses up somehow in the next year or so if it wants to achieve its holy grail of surplus.

But it goes both ways. Labour's criticism of National in this case is essentially that it was too 'hands on' and too relaxed about debt. This from the party that is usually saying National isn't hands on enough and is happy to carry a bit more debt on its own books.

None of that really matters much to voters, however. Despite protestations to the contrary by Palmer and Elder, the public sees a company that hadn't covered its backside or prepared itself for a stormy day. They see millions of taxpayers' dollars gone and the need to blame someone. And they see a government that's preached the evils of debt caught out by that very evil.

It will take more than this to dent the personal credibility of John Key in the eyes of middle New Zealand. Many will accpet that there's only so much a government can do when commodity prices fall. But it's certainly a chink and a risk to the public view of Bill English and the party as a whole as sound economic managers.

That's why this isn't the last we've heard of Solid Energy. And that's why Labour will keep asking John Key and Bill English about the hole Solid Energy has dug itself, hundreds of millions of dollars deep. They might even ask National to show them where the money went.


Comments (7)

by Ross on March 15, 2013

Labour's criticism of National in this case is essentially that it was too 'hands on' and too relaxed about debt. This from the party that is usually saying National isn't hands on enough and is happy to carry a bit more debt on its own books.

I'm not sure it's correct to say National was too hands on. If National had really been hands on, they might have realised before it was too late that all was not going well at Solid Energy. Why would an SOE Minister ask for higher dividends and more debt when the writing was on the wall?

by Ross on March 15, 2013

I should add that I don't think Labour's criticism is that National were too hands on. Indeed, Clayton Cosgrove has repeatedly said that the government was asleep at the wheel. They should have known what was happening, or was likely to happen, at Solid Energy but they seemed oblivious.

by Tim Watkin on March 15, 2013
Tim Watkin

Yeah that's all true Ross, but Cosgrove is trying to have it both ways. He's also saying that it was National's intervention to encourage Solid Energy to borrow that was at the heart of the current problems. To be generous I guess he's sayng they should have been less hands on operationally and more hands on in terms of oversight.

by Ross on March 15, 2013

Tim, yes I think that's what he means. 

In 2009, then SOE Minister Simon Power told SOEs that they had to act like commercial enterprises. He said that he would, among other things, “set clear expectations, including financial performance targets for SOEs, and hold boards accountable for achieving these”. The impression was that Power was in control and wouldn't settle for second best. What happened?


by Tim Watkin on March 15, 2013
Tim Watkin

Well, Power left for a start. And the coal price plummeted. And National canned biofuel support... But it still feels like a tangle when National is in trouble for being too hands on in the running of SOEs. I mean, ministers really shouldn't be pushing state companies to up their gearings, should they? Especially Tory ministers. It does seem that their actions and ideology are out of sync.

But it's a fine line. Any government as shareholder will have a view on how much growth, profit etc it wants out of a business it owns and so can open the door to more borrowing (as a Labour govt probably would have done as well). Or close it.

by stuart munro on March 16, 2013
stuart munro

The high dollar was also certainly a factor, and a point upon which Bill English has continued to display the narrow ideological inflexibility so abhorrent to non-believers in the neo-liberal cult of economic self-harm.

Solid could've weathered the coal price without the record currency. I wonder if Bill English or his treasury puppet masters can point to 500 million in benefits from their failure to preserve parity with major trading partners.

by Frank Macskasy on March 19, 2013
Frank Macskasy

"Well, Power left for a start. And the coal price plummeted. And National canned biofuel support..."

Indeed, Tim.

But Power's directive that SOEs take on more debt is only half the story. National Ministers also wanted higher dividends. (Remember that National's tax revenues have taken a dive since the '09 and '10 tax cuts.)

They directed SOEs to borrow more. Then they demanded higher dividends. In effect, the SOEs were borrowing for the government. But here's the neat little accounting trick; the borrowings would be a liability for the SOES - but would should up as a positive income for the government.

End result; the guvmint looks good and balance their books. At the same time the SOEs look "bad" and "irresponsible", and National ministers "tut tut", shake their heads, and say this proves SOEs are incompetant at running their businesses.

Neat eh?

Palmer and Elder tried to cut back on gearing from the 40% demanded by Power, to 35%. I think they knew full well what National was up to, and that they would bear the responsibility if things went pear-shaped.

Which, for Solid Energy, it did on 21 February this year.

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