$10m Bank of Shane loan carries major risks

Shane Jones’ justification for why the Government decided to lend almost $10 million to debt-laden Westland Milk Products was both surprising and consistent. ‘‘The reality is the banking sector has turned its back on large parts of provincial New Zealand,’’ Jones, the self-styled ‘‘provincial champion’’, said on TVNZ’s Q+A.

The comment was telling in several ways, but fits with Jones’ attacks on the banking sector.

In recent months, the NZ First MP has criticised the Australian-owned banks for reducing the number of branches in provincial areas, even investigating whether banks could be forced to maintain a network as a condition of a banking licence (even as Kiwibank, for which he has some ministerial responsibility, was planning branch closures). He has also accused the banks of holding ‘‘oligopolistic positions’’.

Now he appears to be using the Provincial Growth Fund (PGF), a $1 billion-a-year pot NZ First won during coalition negotiations, to fill a void which he believes exists.

Although the public is not allowed to know the terms of the loan, it appears the PGF has become a type of bank, willing to lend where commercial banks are reluctant.

While it might be unfair to say the fund is a lender of last resort, Westland is clearly struggling as a result of high debt ($254 million in its latest report) and the fact that, as a co-operative, it will struggle to raise money from shareholders to strengthen its balance sheet.

The situation was serious enough that the company hired bankers at Macquarie Capital to help it evaluate its options, including continuing with the constraints it has, taking on outside investment, or being sold to a rival.

Chairman Pete Morrison is due to provide an update on that plan today at Westland’s annual meeting – from which media and public are excluded – although the company has confirmed the process has not reached a conclusion.

The terms of the PGF loan have not been released, but chief executive Toni Brendish described them as ‘‘favourable’’, adding that the company’s other banks were pleased with it.

The money will be used to pay for new segregation facilities at the co-operative’s Hokitika site, so different types of milk can be processed separately. It is part of a move to higher-value projects, creating up to 10 new jobs.

Brendish says the loan allows the company to accelerate its investment plans, part of a five-year capital-spending programme. But she also maintained Westland could have obtained a loan for the spending and that it was likely to have happened only a year later anyway.

‘‘In discussions with the banks, it would have met all the criteria for funding. So we didn’t go to the Government because we couldn’t get it from the banks, we went to the PGF because we met all the criteria.’’

Critics of Jones’ fund have warned that the money could turn out to be wasteful, including by backing projects that could have happened anyway. There is also a risk of setting a precedent. Westland, which employs hundreds of people on the West Coast, is clearly highly important to the region’s economy. But many other companies around the country are too. Is the Government going to step in and provide money each time a company has stretched finances?

Assessing which companies are worthy and which are not is difficult for any government and it is taxpayer funding on the line.

Jones has variously said he was happy for the terms of the Westland loan to be made public, but also described as unhelpful comments from the company that the loan was on favourable terms.

Even forgetting the risks involved in the $10m loan, there could be other risks here.

Trade officials had already warned about the risk that money from the fund will be construed as agricultural subsidies, which could challenge World Trade Organisation rules.

Westland’s loan potentially breaks new ground, with favourable terms granted to a company that has been open about its need for capital.

While Jones insists he has been given no specific warnings about it, it seems a risky loan given New Zealand is attempting to negotiate a free trade deal with the European Union. Risky not only because it could be exploited by interest groups in other countries, but because it is funding a project that would have happened anyway.

It is easy for Jones and others in the Government to sit back and criticise banks for not being willing to lend, without presenting evidence.

But this loan appears to be a risky one to make when even Jones is claiming it will create only 10 jobs at the most.

We didn’t go to the Government because we couldn’t get it from the banks, we went to the PGF because we met all the criteria.’’