Editorial: Solid Energy shows pitfalls of public ownership

Solid Energy's underground mine in Huntly, Waikato. Photo / Chris Loufte

The Green Party has called the Government's bail-out of Solid Energy "privatisation by stealth". Would that it were so. The state coal company will cost the taxpayer $155 million under the terms of the bail-out. It would have been more if the banks holding most of the company's $380 million debt had not agreed to exchange just $75 million of it for shares in the company.

Those non-voting redeemable preference shares can be traded under certain conditions, most of which the Treasury has veiled as commercially sensitive. But one of them is that the Government would have to be consulted. The question is probably academic in any case. The shares are unlikely to have much exchange value until the company gets back on its feet, and then the company has the option to buy them back if it wishes.

In the meantime, the shares give the four big banks priority over the Government's ordinary shareholding for a claim on assets if Solid Energy is liquidated. Until this announcement, its position was precarious. It had made some daring investments designed to broaden its business and was unable to sustain them when international coal prices went into decline two years ago.

After the Government stepped in to save it from collapse last year, ministers said taxpayers would not be exposed to ongoing losses if the company's core business was not considered viable. The injection this week of $25 million cash, $100 million in loan facilities and $30 million on standby may be taken to mean the Government believes the coal operation can return to profit.

But State-owned Enterprise Minister Tony Ryall is saying little to suggest there is any prospect of Solid Energy going back on to the partial privatisation programme with the power generators and Air New Zealand. More is the pity. The rise and fall of Solid Energy is a textbook example of the pitfalls of public ownership.

Labour's state-owned enterprise spokesman, Clayton Cosgrove, never tires of the phrase "asleep at the wheel" when blaming ministers for the company's ambitious investments. But Treasury records show that in 2010, when coal was still booming on China's continuing steel production and the board of Solid Energy was making big plans to diversify, the Government was cautious.

The company was convinced the world was about to enter a transition from fossil fuels to renewable technologies and "super profits" would accrue to those who first tapped New Zealand's other resources. Solid Energy was seeking cumulative investment of $27 billion to go into oil and gas exploration, methane hydrates, lignite conversion, iron sands mining and steel mills.

As a state company, Solid Energy felt it should have preferential access to those minerals. The Treasury disagreed. It believed the company's profit projections were "off the bullish end of the chart" but felt the risk was acceptable if private investors took it on and the company faced competition for access to the resources.

That would have meant privatisation on a larger scale than the Government was contemplating with its mixed ownership model favouring "mum and pop" shareholders. It encouraged Solid Energy to expand no further than lignite conversion and "unconventional" gas extraction (fracking), offering no additional capital.

How we might now wish the company had been allowed to raise private capital instead of the debt that weighed on it when coal prices slumped. Now, public capital is being added for no extra purpose except to maintain the coal mines. If world prices pick up and the company can entertain wider ambitions again, it should be sold to the biggest bid. There is no reason for coal to be a state concern and every good reason to relieve the taxpayer of further risk.