Two major factors - falling international coal prices and a $320 million mountain of debt - proved the undoing of state-owned coal company Solid Energy. Nothing much could have been done about the first, but there are certainly lessons to be learned from the accumulation of so much debt. If a closer and more critical eye had been applied to the state-owned enterprise, it may have been able to cope with its commodity cycle woes and avoid last week's slide into voluntary administration. And New Zealanders would not have to face the reality that there will be no return on a $125 million taxpayer-funded support package.
At its most fundamental level, Solid Energy's downfall reflects the perils of public ownership of commercial undertakings. Taxpayers were exposed to considerable risk the moment five or so years ago the company's board decided "super-profits" could be extracted from New Zealand's abundant oil, gas and coal reserves in the period before renewable energy took over from fossil fuels. It assessed, correctly, coal's future was limited. But its planned diversification was extremely ambitious, even grandiose. Banks went along with the decision, in large part because the demand for coal in China meant the international price continued to be buoyant for a considerable time.
The Treasury, however, had deep reservations, assessing Solid Energy's forecasts as excessively bullish. Nor was the Government convinced. It provided no capital, but did too little to rein in the company. Instead, it encouraged it to develop its existing resources, including lignite and "unconventional" gas extraction. The most sensible option in such a scenario would have been to urge Solid Energy to raise private capital rather than take on the debt that was its downfall when coal prices slumped. The upshot was in 2013 public capital had to be injected solely to maintain the operations of its coal mines and attempt to nurse it through a cyclical downturn.
That failed. A more astute administration would, of course, have seized the opportunity to sell Solid Energy when the international coal price was running hot. As a commodity, this state of affairs was never going to last. The opportunity was lost. Now, there must be considerable doubt about finding buyers for the company's mines through an orderly sale process over the next two and a half years. Solid Energy itself says there is "little prospect" of prices recovering in the short to medium term. It believes it will be three to five years before the imbalance between supply and demand causes them to come back.
That, allied to coal's status as a sunset industry, suggests the course adopted last week will, in many instances, simply buy time. For Solid Energy's employees, continued trading is, of course, a better option than immediate liquidation. But if assets are not sold, the company will be shut down. The impact on the West Coast is likely to be severe. Opposition parties are calling for a regional development strategy to help the region cope. Given the Government's culpability in the collapse of Solid Energy, it is a more than reasonable request.
