Adam Bennett

Adam is a political reporter for the New Zealand Herald.

Report queries Treasury response

Review raises questions about whether reaction to Solid Energy's near collapse was either forceful or fast enough.

The report says Treasury early on identified 'a fundamental divergence of views' between itself and Solid Energy over future energy prices. Photo / Greg Bowker
The report says Treasury early on identified 'a fundamental divergence of views' between itself and Solid Energy over future energy prices. Photo / Greg Bowker

An independent review of events leading to Solid Energy's near collapse has raised questions over whether Treasury's response to early warning signs of trouble was forceful or fast enough.

Treasury yesterday released a review by accounting firm Deloitte of its monitoring of the company which appears likely to be broken up and sold after almost failing under the weight of $390 million of debt and low coal prices.

Deloitte said it did not believe "that the failure of Solid Energy has highlighted a material failure in Treasury's monitoring processes".

However, the report goes on to say: "We do believe that the failure does raise questions about how these processes are applied and whether Treasury's response was forceful enough or occurred soon enough given that the company provided cause for concern over an extended period."

Deloitte said there were "influential countervailing factors" that Treasury needed to consider when determining its response to issues.

The report notes Treasury early on identified "a fundamental divergence of views" between itself and Solid Energy with respect to future energy prices and a link between that view, its investment strategies and its own internal views on valuation.

"These concerns were advised to ministers and played back to the company. With hindsight it is clear that the company's view on [the] price path led to strategies for the business that materially increased risk," it said.

"The strategies resulted in material value at risk in relation to core mining and development activities, high debt and an overhead structure - all of which meant the company was poorly placed to cope with the massive price shock that it faced in 2012."

For Treasury to have fully identified the extent of this risk, Deloitte said it would have to have undertaken much more analysis of the company and its plans, for which it would almost certainly have had to commission outside industry expertise to address the more complex technical matters such as mine plans and forward views on energy prices.

Had Treasury more fully appreciated the implications of the company's view on prices it could have initiated a more substantive investigation into the company's affairs earlier, "probably as an outcome of the 2008 statement of corporate intent [business plan] process".

If that investigation had been conducted at that point, it likely would have resulted in rejection of the company's business plan. "A consequence of this would most likely have been a change to the leadership of the company and possibly a change to the composition of the board.

"We note, however, that at that point many of the investment activities were in progress and any new management team or board would have needed to develop and implement new strategies for the business which would have had their own risks given the nature of Solid Energy's business."

Deloitte said the removal of the company's board by a minister would have been a "crude lever".

"Notwithstanding this, with the benefit of hindsight, it is evident such a move may have been warranted."

It noted that for Treasury to initiate such action "would have required it to effectively form the view that it lacked confidence in a board and executive with a sound track record in a technically complex industry".

- NZ Herald

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