Government helped dig SOE’s big hole

SOLID ENERGY had its ‘‘sad and difficult day’’ this week, as Prime Minister John Key put it. But this was just the last in a long line of sad and difficult days and there is still no end to them.

The state-owned enterprise now goes into voluntary administration, ‘‘a much better position than liquidation’’, Key says. But not so very much better. Nobody thinks the company will trade its way out of the deep hole into which it has fallen.

The Government is keen to avoid blaming anyone, least of all itself. Key said this week that ‘‘people will be aware that it’s a victim largely of falling coal prices’’. This is only about half of the truth.

The coal industry worldwide is in crisis because of crashing coal prices. But Solid Energy piled plenty of fuel on the fire that destroyed it. And Government ministers and officials failed to stop it.

This is an old story, of managerial over-reach dressed up as planning and bold thinking. In June 2010, the then chairman, John Palmer, said the company was worth $2.5 billion and could be, ‘‘with the right management and access to capital, one of New Zealand’s most important companies’’. However, he added that ‘‘in its current form I don’t think it can be’’.

The company seemed to think coal prices would stay at healthy levels forever, though there were those in the market who didn’t agree. Exactly what went on within the Government remains unclear, but the outcome is not. Solid Energy fell into debt and loss and never came out again.

The company admitted to a select committee in March 2013 that it had made mistakes but also blamed the Government for pressuring it to take on debt and increase dividends. This, too, was at least a plausible charge. After all, the Government was running a huge deficit and it wanted to bring it down. In a sense, both sides carried on with their eyes wide shut, and the bureaucrats didn’t manage to bring them to their senses either.

Ideologues of the Right will claim that the whole sad fiasco shows the dangers of the state getting into business. This is simple-minded. Not all SOEs have ended up hundreds of million of dollars in debt. Some SOEs have been well run; some have not.

Psychologists might be better at explaining the mess than economists or business theorists. Businesspeople like to think of themselves as rational and cold-eyed, carefully measuring costs, risks and benefits and making wellfounded decisions.

Sometimes they do this. And sometimes entrepreneurs turn out to be dreamers and fantasists; risk-takers sometimes turn out to be mere gamblers.

A whole branch of economics has grown up to debunk the theory of the rational entrepreneur. The psychologist and Nobel Prize-winning economist Daniel Kahneman has shown the persistent and detailed ways in which economic decision-makers do nutty things.

Nobody ever accused politicians of being rational decision-makers, and in this case the politicians owned the company. So the shambles went on and the taxpayer ended up with an enormous bill. A sad story, indeed.