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Westland Milk loan heightens PGF slush fund suspicions

Westland Milk loan heightens PGF slush fund suspicions

Comment by Jenny Ruth

Dec. 28 (BusinessDesk) - Regional Economic Development Minister Shane Jones’s $3 billion Provincial Growth Fund has the laudable aim of enhancing development opportunities in the regions.

But National’s Paul Goldsmith’s dogged unanswered questioning inevitably raises the spectre that the fund may be little more than Jones’s slush fund.

The Ministry of Business, Innovation and Employment, which administers the fund, describes the fund’s aims as “to lift productivity in the provinces. Its priorities are to enhance economic development opportunities, create sustainable jobs, enable Maori to reach full potential, boost social inclusion and participation, build resilient communities and help meet New Zealand’s climate change targets.”

It’s clear that the South Island’s West Coast amply qualifies as a region of the country that could do with a boost.

On ASB Bank’s Regional Economic Scorecard for the September quarter, the West Coast ranked 12th out of 16 regions, up from second to last place three months earlier.

ASB’s scorecard considers factors from employment to construction to retailing and house prices.

“The standout for the Coast was its housing market as house prices jumped 9.5 percent over the year,” ASB said when its latest scorecard was published earlier this month.

“Outside of the housing market, though, other indicators are soft. Let’s hope the recent announcement of a government loan for a new dairy plant in Hokitika will jump-start things over 2019,” the bank said.

It awarded the West Coast a two-out-of-five star rating with five stars representing hot and one star not.

That loan, announced in late November, was $9.9 million to Westland Milk to be used to help fund a new $22 million factory to allow the company to produce value-added and higher margin dairy products such as A2 milk and colostrum.

Goldsmith has been banging on about the need to know the terms of the loan, such as the interest rate charged.

Quite reasonably, he argues that one can’t assess the effectiveness of the fund’s investment without knowing such details, details we still don’t know despite MBIE officials’ many assurances about striving for greater transparency made to Parliament’s economic development, science and innovation select committee shortly before Christmas.

However, even a cursory glance at Westland’s latest accounts shows it was already highly indebted, even before the government’s loan.

Not only that, but many a mortgage holder would envy the terms of its commercial loans.

Its long-term loans and borrowings at July 31 stood at $232.8 million, unchanged from a year earlier, and it had an additional $21 million of seasonal funding, up from nil a year earlier.

The interest rates it paid in the year ended July ranged from 2.57-3.49 percent.

But Westland’s balance sheet shows its equity is only 21 percent of total assets - even for a home-owner seeking a mortgage, that’s on the slim side.

MBIE did tell the select committee that it is working with, rather than in competition with, the banks and that the banks aren’t abandoning regions such as the West Coast.

Adding to the mystery, Westland has made no secret that it thinks it needs access to more capital to allow it to take advantages of opportunities it sees, such as producing higher margin products which the government’s loan is meant to facilitate.

Possible ways of changing Westland’s capital structure were discussed at its Dec. 5 annual meeting – after the government’s loan was announced – but that was closed to all but farmer shareholders and the cooperative issued only a short statement on the matter after the meeting.

“The cooperative’s capital structure review had attracted a number of proposals from interested parties. More than 23 parties engaged with Westland on the process,” the company said.

“Chairman Pete Morrison told shareholders that, on the strength of the indicative proposals, the board will go to the next step of the review process,” it said.

“The board will now assess the initial proposals with the intent to move forward with a selected number of parties into a detailed due diligence and final proposal process.”

Morrison is promising an update in March but said “the review process is strictly confidential and no further information will be provided until the next shareholder update.”

So much for transparency.

Westland’s former chief financial officer, Dorian Devers, is likely thanking his lucky stars that he’s left that company – he joined Contact Energy as its new CFO earlier this month.

After his mild comment on the government loan that its terms were “attractive to us,” he was lambasted during a parliamentary debate by Jones saying it was "something of a surprise to me that the CFO was breaking wind.”

Nevertheless, one does wonder how much more “attractive” an interest rate could be than the 2.57-3.49 percent Westland was already paying on its existing debt.


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