Solid Lessons

Finance minister Bill English is arguing that we shouldn't second guess business decisions made by Solid Energy. His argument happens to be a convenient way to get him off the hook for government failings

We need to understand what happened and learn from it so that it doesn't happen again. Bill English is implying that in the same circumstances he would do the same thing again. 

The business failed because it forecast record high coal prices would continue indefinitely and made business decisions on that basis. 

Bill English is right that governments should not second guess SOEs when they make business forecasts such as those around future demand. There may have been good reasons for Solid's price forecasts. It's only with hindsight we can see the forecasts were clearly wrong. But Solid's failing was to have no Plan B; It might have been good to hope for the best, but they failed to prepare for the possibility that record prices would not last. They bet the company. Allowing them to do so was a failure of governance and oversight.

Even while the company was forecasting record high prices for coal it lost confidence in the ongoing viability of the coal business. They spent over $300 million on alternative new energy businesses, none of which succeeded. So much for their business forecasts of continuing high prices for coal - if coal was going to continue to be such a sure thing, why did they need to bet the company on diversification into unproven technology. Not only did they waste a lot of money, management shifted its focus away from its main business. It spent far too much effort and time, as well as resource, on non-core activity. Only a Board and shareholder asleep at the wheel would have allowed these mistakes to go as far as they did.

You might think these were unfortunate but understandable business mistakes except for one telling further feature: Solid used the record high coal prices to repeatedly revalue the business, and on the basis of the huge revaluations management paid themselves exorbitantly. Not just generously. Not even market leading. But richly - they gave themselves much faster pay rises and paid themselves much more than comparable businesses. 

There may have been an argument to pay so many so well if their insightful strategy and superb execution had created the revaluation; but their management initiatives were all failing. Every one of them. The only factor in the revaluation was a high global commodity price for coal, yet the management had themselves lost confidence in the future of the commodity to the tune of that $300 million invested in diversification.

So there is a lesson to be learned not from second guessing, but from asking how such dreadful governance was allowed to happen. What was really happening was that the government was not all that interested in running a successful coal business - they were focused on privatising it. Right through the nineties the National government was demanding the sale of the business. They were never demanding better management of it. The failings in government were not an accident. They were ideology. They were the indirect but predictable result of focusing on the wrong objective. For all National's claims to be pro business, all they have demonstrated is that they don't know how to run one.

National's asset sales have already cost New Zealand over a hundred million in fees and expenses. Add to that now the hundreds of millions squandered at Solid.

The job of SOE oversight is to focus on making the business successful. When the focus switches to other objectives, Solid happens.