SOEs put govt blanace sheet at risk

Opponents to the partial sale of state assets complain about the loss of dividends, they forget about the costs.

Trans Tasman points out the risks of state ownership:

. . .there is a harsh reality to be faced, not only with Solid Energy (what’s a Govt trying to do in owning coal mines?) but with other state-owned entities whose profitability has shrunk: think of TVNZ, NZ Post, Kordia. Not surprisingly, Solid Energy’s troubles have thrown into relief how the Govt’s balance sheet, already structurally weak, can be pushed into dangerous territory by businesses where all the risks have to be shouldered by the taxpayer.

Opponents to the sales complain that the government will lose dividend income when up to 49% of shares in an SOE are sold.

They forget the risks and costs of ownership which ultimately fall on the taxpayer.

I’d rather have my taxes pay for core government responsibilities like defence, police, infrastructure, health and welfare than investment in areas best left to the private sector.

Why should taxpayers face the risk?

Solid Energy’s shareholding ministers, Finance Minister Bill English and Minister for State Owned Enterprises Tony Ryall confirm the Government has been advised that Solid Energy is in discussions with its banks.

“The Solid Energy board is working with Treasury, advisors and the banks with respect to further restructuring options, with the aim of returning the company to a sustainable financial position,” Mr English says.

“World coal prices have dropped significantly which has contributed to the deteriorating financial position that Solid Energy is in now.

“These discussions are required because the position of the state-owned enterprise has continued to deteriorate despite the restructuring that has already taken place,” Mr English says.

State-owned Enterprises Minister Tony Ryall says a number of factors have weighed against the company, in particular world coal prices dropping by 40%.

 “It is facing very serious financial challenges,” Mr Ryall says. Solid Energy’s debt stands at $389 million and its interim result, which is due shortly, will show additional losses.

“The new chair and board are focusing on a return to a core coal business which is viable at current world prices. The public is aware that there had already been restructuring at the company, but more may be required,” says Mr Ryall.  

“The Government appreciates this is a very unsettling time for employees and suppliers and the company’s wider stakeholders but it is a process which must be worked through carefully and properly,” the ministers say.

Opponents of government plans to sell  a minority shareholding in a few state assets talk about what will be lost.

They don’t talk about what will be gained nor do they talk about the risk that comes with running a business which includes loss of capital.

Why should taxpayers face this risk for something that isn’t core government business?

Rural round-up

Fish war on canals :

”Greedy” salmon anglers threatening to turn a salmon bonanza in the Waitaki hydro canals into a free-for-all are being accused of ignoring catch limits and using illegal methods to catch easy prey.

Following the release of 36,000 salmon smolt from the Mt Cook Alpine Salmon hatchery at Ohau 18 months ago, anglers have reported being able to hook a fish on every cast at some spots on the Tekapo and Ohau canals.

However, Central South Island Fish and Game field officer Graeme Hughes said the easy fishing had resulted in more people fishing illegally and ignoring the two-salmon quota. .  .

Tarras scheme reprieve - Rebecca Fox:

Potential irrigator Tarras Water Ltd has had a reprieve, but it has come with a stern warning from the Otago Regional Council.

The council voted 7-3 to overturn its own hearing panel’s recommendation not to amend the long-term plan to allow for investment in the irrigation scheme at a meeting in Dunedin yesterday. Instead, the ORC is proposing the amendment go ahead.

As the decision gives the council the option to invest in the scheme, a meeting will be held, possibly as early as next month, when councillors will make the decision whether to invest – with conditions attached – or not. . .

Cautious steps in goat milk expansion:

An Australasian goat milk company, CapriLac, is looking to expand “in a cautious way” in the Waikato.

Co-owner Rupert Soar said the family-owned company was advertising for goat farmers who were interested in selling their goat milk or leasing their operations to the company.

The company had received “quite a bit of interest”, and was following up leads, Soar said.

Farmers did not need to buy shares to get involved, as the company was not a co-operative. . .

Mining rights unlikely to affect farm sales – Terri Russell:

Solid Energy’s decision to sell farmland and keep mineral rights for mining would not turn away potential buyers, a Southland rural agent says.

About 1000 hectares of farmland near Mataura have been put on the market, and the mining giant plans to retain rights to lignite resources under the surface for about 30 years.

Last year, the company reviewed its land holdings after a drop in coal prices and a $40m loss for the year ending June 2012.

Southern Wide Real Estate director Philip Ryan said potential buyers would not be put-off if it were reserved for mining because about half of Southland had mineral rights. . .

A finalist but best still home – Gerald Piddock:

Doug and Jeannie Brown have made the final of the 2013 Glammies.

The North Otago farmers made the cut in the best of breed – traditional for one of his romney lambs grown on his farm at Maheno.

It was the third time they had entered the Golden Lamb Awards and the first time they have made the finals. This year four sheep were entered into the competition.

Their entry was one of 20 finalists which made the cut out of 180 entries from around the country. . . .

 

 

 

 

 

Rural round-up

We must look after our good staff on dairy farms – Pasture to Profit:

How do we prevent the increasing “churn” of employed staff?  Turnover (or tenure) of staff employed on NZ dairy farms is expensive. There is a general feeling that the “churn” of dairy farm staff is getting faster. 

The NZ dairy industry doesn’t compare well with other employment sectors. The greatest “Churn” appears to be amongst the young or in the first year that people are in the job.

“Annual churn out of the industry is estimated at 15% for 2010/11 with a cost of $64 million to the industry in lost investment. . .

How green are you? – Bruce Wills:

How green are you?

I mean, do you genuinely care about your carbon footprint and the integrity of what you put into your house let alone place against your skin?

Would you be prepared to wear genetically modified fibres against your skin?

I imagine some would answer an indignant, no.

I could further ask if you would be prepared to wear oil, let alone fill your walls with the stuff or even lay it on your floors.

In Australia, recently, I learned the amount of non-genetically modified cotton could probably be held in one hand. Alright, a slight exaggeration there, but truth be told, almost all of the world’s cotton is genetically modified. . .

Robertson pins Pegaus hopes on Fovaran sale – with water consents for dam -

A pending water consent application in Hakataramea Valley may help Wanaka developer Bob Robertson recoup his position at Pegasus Town – in receivership – near Christchurch.

Mr Robertson is hoping to sell his Foveran deer park property in Hakataramea Valley, North Otago.

He placed it on the market two years ago without success.. .

Fewer farmer directors could be a good thing - Milking on the Moove:

Fish Stock Status Update:

The Ministry for Primary Industries is reporting that by far the majority of New Zealand’s fisheries are performing well – 83.2 percent of fish stocks of known status are healthy.

The Status of New Zealand Fisheries 2012 report has just been released.

James Stevenson-Wallace, the Director of Fisheries Management, says New Zealand continues to be world-leading in the sustainable management of fishing, and the Quota Management System gives fisheries managers the ability to address problems where they occur. . .

Pure Oil NZ – purchase of Biodiesel’s Ag Division:

Pure Oil New Zealand Limited is pleased to announce its purchase of the Agricultural Division of Biodiesel New Zealand Limited. This includes: oil seed rape crop production, the oil extraction facility at Rolleston and the marketing of the resultant products (rape seed oil and rape seed meal).

Pure Oil NZ is owned by Midlands Seed, Southern Packers, Roger Lasham (Agronomist) and Nick Murney (Manager). This group of shareholders bring a wide range of skills and expertise to strengthen the current business model and will ensure the new business is able to reach its full potential. . .

Agri-business sale completed

Solid Energy has completed the sale of the agribusiness division of Biodiesel New Zealand Ltd. The purchaser, Pure Oil New Zealand Ltd, is owned by Southern Packers, Midlands Seed, and a manager and agronomist who previously worked for Biodiesel New Zealand.

Solid Energy said in August that as part of its response to the impact on its business of the extremely challenging global coal market, the company would sell its biodiesel business which operates in two parts – one manufacturing and marketing biofuel and the agri-business division which contracts with farmers to grow oilseed rape, processes the seed at an oil extraction plant at Rolleston and sells the oil into the food industry and meal as animal feed. In early October Solid Energy announced the consortium led by Southern Packers was the preferred bidder. . .

Manuka prices inflated

The National Beekeepers’ Association (NBA) wishes to correct misleading information, circulating in some media, that beekeepers are earning up to $400 a kg for bulk manuka honey.

NBA chief executive, Daniel Paul, says this is incorrect. . . 

Quartz Reef Completes the Treble with Pure Gold Win at Air NZ Wine Awards

The Pure Gold medal awarded to Quartz Reef Méthode Traditionnelle Brut at Air NZ Wine Awards announced overnight has completed a winning treble for this premium Central Otago single estate grown producer and caps a great month of awards.

Quartz Reef only produces three Méthode Traditionnelle wines and to have a 100 percent Gold Medal success rate shows a commitment to superior quality from winemaker, Rudi Bauer, and his dedicated team who create these bottle fermented hand crafted wines. . .

Forest and Bird welcomes new green growth report:

Forest & Bird welcomes the release of a study making a case for New Zealand’s business and political leaders to embrace green growth that makes economic sense.

The study is by Vivid Economics, in association with the University of Auckland’s Business School, for green growth business lobby group Pure Advantage.

“Forest & Bird fully supports a transition to a green economy, as one of our top five priorities,” says Forest & Bird Conservation Advocate Claire Browning. . . .

Why risk public money?

This comment from Solid Energy chair John Palmer could be used by both sides of the debate on the Mixed Ownership model for state assets:

“Palmer also indicated Spring Creek has been in trouble for some time, and if Solid Energy had been a listed company, it could not have been so patient for as long as it had in trying to reach viability.”

Opponents of the partial sale of a few companies will argue that this shows government ownership provides greater protection for a company in tough times.

Supporters of the policy will say it proves that partial ownership will add extra discipline to the governance and that it is better for decisions to be based on market conditions than politics.

I am in the latter camp.

Why should public money be put at greater risk than private funds?

 

 

 

Case for MOM

Joanne Black has a good case for the Mixed ownership Model for state assets (on-line here next week):

. . .  I need think only of Solid Energy’s plans to build a lignite-to-briquette plant to remind myself why ownership of these companies is better left to people who can afford to risk (that is, possibly lose) their money, than to have such investments funded by taxpayers.

I imagine most of us could think of several hundred things on which the government could more urgently and usefully spend our taxes than on finding out whether converting lignite to briquettes actually works. It might not.

that is not a reason for Solid energy to not pursue the project, but it is quite a good reason why someone other than taxpayers alone should pay for it.

Opponents of the MOM have focussed on the income that will be lost when a minority of shares are sold.

They conveniently overlook the costs, and the risks, that will be reduced when they’re shared by other investors.

Assets can be liabilities

Among the dead rats National was forced to ingest before the last election was a pledge to hold on to all crown assets.

The promise was no assets would be sold this term and if there was any intention to sell any in a future term that would be announced and be part of a future campaign.

Now we’re about half way through the current term it’s a good time to look at state owned assets and question if it’s in the companiess’ and the country’s best interest to retain them in public ownership.

One of the questions to be asked is, whether investment needed for continued growth of these assets is the best use of scarce public funds.

This may well have been in the mind of Solid Energy’s chair John Palmer when he suggested that a partial sale of the SOE might be good for the company and relieve the state of the need to find the money needed for expansion.

It would be good if we could get past the emotional and ill-founded belief that state ownership is always good and private ownership is bad and looked at suggestions on a case by case basis.

Some sales, partial or full, could provide domestic  investment opportunities for those with money to spare; realise funds which the government could spend on other priorities; expose the companies to the discipline of the market and enable them to raise funds they need without going cap in hand to a cash-strapped government.

While discussing this another point to bear in mind is that assets which don’t get the continuing investment they need can turn into liabilities.

Coal to fertiliser plant for Southland?

Eastern Southland’s lignite coal could be turned in to fertiliser if joint investigations by farmer-owned co-operative Ravensdown and Solid Energy are successful.

Solid Energy, and agricultural fertiliser supplier, Ravensdown, are jointly investigating the viability of building a US$1 billion plus coal-to-fertiliser plant in Eastern Southland, harnessing the region’s world-scale lignite resource and making New Zealand self sufficient in, and potentially an exporter of, urea fertiliser.

The study will consider the economics and possible location of a plant producing up to 1.2 million tonnes a year of urea – a nitrogen fertiliser used to enhance grass growth – from up to 2 million tonnes a year of lignite mined from Solid Energy’s extensive lignite resources. At last year’s urea prices – up to US$800/tonne – this plant would have generated the equivalent of about NZ$1.5 billion per annum in export equivalent revenue – through a combination of import replacement and direct exports.

The venture could created up to 500 new jobs. The study should be completed early next year when the companies will decide if they proceed to the next stage. If they decide to go ahead construction could start by 2012 and the plant might be operating by late 2014.

Solid Energy’s Chief Executive Officer, Dr Don Elder, says: “. . . Agriculture is our most important economic sector . . .. Urea is a key input to increased farm productivity, but is mostly imported at present, which exposes our farmers to world supply volatility, and prices that can fluctuate widely. Producing urea from our vast lignite resources is a prime example of how New Zealand can capitalise on our position as one of the richest countries in the world in natural resources per capita.”

The lignite to uerea study is running in parallel with work to investigate producing diesel.

“Developing a urea plant in advance of constructing a lignite-to-diesel plant would allow New Zealand to have advanced gasification industry competency and capabilities in place at an earlier stage, to substantially facilitate further and larger developments. Alternatively the two developments could take place in parallel and form the basis of a “syngas park”, supplying clean syngas to multiple downstream applications including diesel and urea.”

Federated Farmers  president Don Nicolson said the responsible exploitation of our mineral wealth would play an important part in increasing productivity.

“The numbers involved in this feasibility study are mind-boggling.  Even if annually it converts two-million tonnes of lignite into fertiliser, there are enough proven lignite reserves to keep the plant ticking over for some 650 years.

“The study opens up the prospect of 500 new jobs and the construction of a state of the art facility in an investment worth some $1.4 billion.

“Given New Zealand imports some half million tonnes of gas or coal based urea each year, the new plant will likely be built to the latest environmental standards.  This has obvious benefits from a global climate change perspective.

“The really exciting thing is the potential of turning New Zealand from an importer into an exporter, generating the equivalent of $1.5 billion in export equivalent income each year. 

“That amount represents one and a half times the size of the wine industry or three times the current value of the wool clip.

“It’s also an example where companies can leverage off agriculture, New Zealand’s most important industry, into completely new areas.  In this case taking a low value mineral which occurs in vast quantities and turning that mineral into a high value export.

Turning a low value resource into fertiliser, replacing imports, creating jobs in rural Southland, doing it all to meet the highest environmental requirements . . .  If investigations show the project is feasable it will be very good news indeed.

Grain Price Rises Pushes Food Prices Up

Good news for producers is bad news for consumers because rising international prices for grain will push domestic food prices up again.

Bread prices are predicted to rise 10c a loaf and pork and bacon prices $2 to $3 a kg.

Food producers face new grain contracts – $100 a tonne, or 30%, higher than last year.

Farmers say contracts for next season’s harvest, which are about to be signed, reflected those higher prices.

Pig and poultry producers say price rises are inevitable to cover higher feed costs.

Foodstuffs (South Island) chief executive Steve Anderson agrees, and warns costs will continue to increase across the board.

He could not quantify the size of any increase, saying that was up to suppliers, but he doubted there would be any price correction in the immediate future.

“We’re not planning on seeing a reduction in commodity prices in general.”

The price for meat and wool is also driven by the price of grain and that in turn is driven by the price of energy. The combined shortage of food and high fuel prices will push the price of all food up.

Grain prices were so volatile, milling wheat growers were not signing contracts at $500 a tonne, claiming the price was still $100 a tonne below the international price and higher-yielding feed wheat.

“It is a rising market. On a falling market, everyone would be signing,” Federated Farmers grains council chairman Ian Morten said.

Demand from dairy farmers had also driven up cereal prices. Growers have been encouraged to plant higher-yielding feed varieties instead of milling wheat, which gave them leverage against the mills.

Grain growers had this year resumed exporting to take advantage of higher international spot prices, something they had not done for many years, which reduced the availability of domestically-grown cereals.

On top of this is the competition for land from the misguided policy which changes land use from producing food for people to the production of fuel for vehicles.

Farmers and food producers also blamed Solid Energy for higher prices, as it has contracted 5000ha of predominantly cropping land to grow oilseed rape for biodiesel production this year.

Solid Energy plans to increase that production to between 20,000ha and 25,000ha within three years.

Mainland Poultry chief executive Michael Guthrie said international issues had driven grain prices up 80% for his egg business in the past 18 months.

Drought in Australia had decimated world grain production; there had been floods and biofuel production in the United States; growing demand for grain from China and India; low world grain stocks; and dairying had taken over cropping land in New Zealand.

Mr Guthrie said egg prices had been stable for the past two years. He expected prices to rise, but could not say by how much.

Pork Industry Board chairman Chris Trengrove said New Zealand was six months behind the rest of the world on feeling the impact of higher grain prices.

Pork and bacon prices would need to increase about $1 a kg to the farmer to cover rising costs, which translated to between $2 to $3 a kg to the consumer.

Production and transport costs are also rising for fruit and vegetables and that too will impact on retail prices.

Repeated competition from rabbits persuaded me to abandon my vegetable garden but now it has been securely fenced this seems like a good time to get it ready for spring planting.