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Treasury's Landcorp advice shows challenge for growth-minded firms with state owner

Monday 3rd July 2017

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State-owned enterprise Landcorp Farming has repeatedly clashed with the government’s financial adviser, the Treasury because it wants to reinvest cash to grow its business rather than return it to the government as dividends, papers released under the Official Information Act show.

The papers canvas Treasury advice to the government since 2013, when Harvard Business School graduate Steven Carden took over as chief executive at the country’s largest corporate farmer, and began to put forward new ideas about how to grow the business by developing higher value products such as sheep milk, diverging from the previous model of adding more livestock to produce larger volumes of base agricultural commodities like cow milk.

While state-owned enterprises are expected to operate as a successful business, “as profitable and efficient as comparable businesses that are not owned by the Crown,” Treasury said the government has other uses for its money than investing in SOEs.

“The government has numerous demands on where to invest its capital, most of which are a higher priority than reinvestment in its commercially focussed businesses,” Treasury said in a letter it drafted for the government to send to Landcorp. “We, therefore, expect SOE boards to be conscious of the wider environment they are operating in, and make decisions regarding the use of capital on that basis.”

The papers show that after several years of tensions over dividends, Treasury advised the government to reject Landcorp’s Statement of Corporate Intent for the 2016/17 year, so the board could “reconsider” its dividend policy, due to the government’s preference for dividends over investment in growth or diversification projects.

Treasury advised the government to threaten the use of its powers under the SOE Act which allows Ministers to direct a board on dividend levels. Treasury noted that while it wasn’t aware of the power ever having been used, it frequently made SOEs aware of its existence, and let them know it was available if required.

Treasury had earlier noted that “it would be a fairly extreme step to take” and the issue would be better resolved through discussions.

However, on this occasion, Treasury officials said they had already had a number of discussions with Landcorp’s management and chair Traci Houpapa about the dividend policy but the company had been “unwilling” to amend it.  The officials recommended a “relatively strongly worded letter” be sent to Houpapa, setting out Ministers' expectations and indicating they will consider using their powers over the dividend policy.

Landcorp subsequently conceded, amending its dividend policy from one that Treasury was concerned would relegate dividends to the residual cash payment after all other activities had been funded, including its investment in growth and diversification projects, to one that would force the board to consider whether investments should be prioritised over shareholders’ preference for dividends.

“That encourages the board to give consideration to the public environment that Landcorp operates in, the continuous demand on capital that the government faces, and as a result, the value that shareholding Ministers place on receiving dividends ahead of capital being used for expansionary investment.”

In earlier advice, Treasury recommended the government remind Landcorp that it is the government’s “strong preference” for the company to focus on its core farming operations, and to not diversify into new products or markets outside its core business.

Treasury noted that it was “sceptical” of Landcorp’s wish to diversify into different products and different parts of the supply chain, and preferred such strategies weren’t pursued.

“There is a long history of SOEs failing when attempting to diversify, resulting in the loss of value to the taxpayer,” Treasury officials noted in a letter drafted for the government to send to Landcorp.

The government has developed an aversion to SOE executives with big innovative ideas after being burnt by Solid Energy, whose chief executive Don Elder had a vision of turning the state-owned coal miner into an environmentally friendly modern energy powerhouse. Those plans came to a grinding halt when the coal price tanked, and plans for partial privatisation were replaced by the services of a voluntary administrator.

Carden, heralded by Houpapa as a “rock star” at the company's Christmas party last year, wants Landcorp to turn its focus to premium products that consumers will pay more for. He is expanding its organic footprint, developing sheep milking, and investigating alternatives such as deer milking and growing crops that can be used as meat substitutes.

However, during his tenure the business has been hampered by the financial demands of a 45-year lease inked in 2004, prior to Carden’s 2013 appointment, to convert former forestry land near Taupo into dairy farms for private owner Wairakei Pastoral.

The papers show that the funds needed to develop the dairy operations have put financial stress on the company in recent years and risked it breaching its banking covenants when milk prices dropped. The spending commitments sucked cash out of the company and stymied its ability to pay dividends the Crown desires from its SOEs.

A strategic review of Landcorp by Deloitte in 2014 warned about the company’s exposure to the Wairakei contract and recommended Landcorp sell $200 million of farms and reduce costs across the business. However, while Landcorp informed Treasury that its preference was to repay debt and/or reinvest the proceeds back in the business, Treasury preferred the proceeds be prioritised towards the repayment of debt and/or the payment of a special dividend.

Landcorp hasn’t paid a dividend to the Crown for the past two years. It has pulled back on the scale of dairy farm conversions for Wairakei Pastoral and is in the process of selling nine of its farms with a book value of $90 million to reduce debt.


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