Karioi mill — ill omen for thinking big?

Press, 14 May 1981, Page 16

Karioi mill — ill omen for thinking big?

By

OLIVER RIDDELL

in Wellington

The decision by the Government to invest SISM in the Winstone-Samsung consortium to help the operation of the Karioi thermo-mechanical pulp mill does not end the troubles of the Karioi venture. And the decision will certainly not end the embarrassment over Karioi’s difficulties for the Government. i Karioi was immediately des- f cribed by the Labour spokes- ■ man on agriculture (Sir Basil Arthur) as the pointer to the i? folly of the Government’s “think big” strategy for economic development. What he said echoes the opinions of a number of people in Wellington over Karioi who have no politi- .) cal axe to grind. ?’ The investment will take the form of SIOM in preference shares which will carry a 14 per cent dividend, and will be entitled to participate in higher dividends when the company’s trading position improves, plus a SSM loan at 14 per cent interest to be capitalised for the first three years. Ever since the Government

fS?" S’ authorised Winstone-Samsung to go ahead with the mill in 1977, there have been persistent reports around the Government departments in Wellington that it did so against the advice of its officials. Such stories are legion in Wellington. Bureaucrats are ; notoriously conservative in > their advice. But this story has > persisted and was also specific in the reasons for the negative ; advice. ? The story goes that the ' Treasury advised against it because of the nature of the marketing contract being (then) contemplated, and because it was not convinced of < the financial viability of the f cost infrastructure of the mill, particularly costs of transport. The Forest Service apparently advised against the project because its own research showed the main wood source to be of poor quality. It is easy to be wise after the event. But stories about Karioi have been rife since before there was any suggestioin of Karioi’s difficulties.

The rationale was that the Government was keen to attract overseas money and so establish an export industry that New Zealand did not have the available money to launch itself; a political decision was made to launch an export industry in the teeth of economic, marketing and forestry expertise. The exact extent of the consortium's financial problems are not known. Winstones have been criticised for being so close about the extent of their problems, but their attitude is hardly surprising. The Prime ’Minister (Mr Muldoon) is emphatic in his support for Karioi. He said investigations had shown that although the pulp mill had gone through a difficult time, there were good prospects that in the long run it could become a profitable operation making a useful contribution to export receipts. “The market for pulp has been weak in the last couple of years,” Mr Muldoon said. “This coincided with the start-up of the Karioi mill, and hit the company at a vulnerable time.

Losses have accumulated to the point that it was difficult to the shareholders to justify continued operation unless they could secure a capital injection to refinance the mill. In the Government’s view it would be an unnecessary waste of a potentially valuable national asset to allow the mill to close down because of short-term problems.”

But are Karioi’s problems “short-term”? As long as Winstones continue the present marketing arrangements with their South Korean partners they will be operating at a loss whenever world pulp prices are low. The Government does not plan at this stage to have a nominee on the board of the company, so it is not clear just how it is to ensure more satisfactory marketing arrangements are made. Pricing through its marketing arrangements is. not Karioi’s only problem. It is situated in the middle of the North Island, juust a couple of kilometres from the scene of the Tangiwai railway disaster of 1953. The costs of getting wood to it and of carrying the pulp to a port afterwards are huge

and growing. The main timber source is of poor quality, so poor that the South Koreans are unhappy about the quality of the product. Even to build a thermomechanical pulp mill, instead of another kind of plant, was a flier. This type of pulp has a limited market internationally, and when the principal market (Japan) sagged the enterprise was in real trouble. While in Japan recently Mr : Muldoon was assured that in the long term the Japanese were looking for supplies of this type of pulp and so that long-term prospects were good. That is an opinion many do not share. Before the Government decided to invest SISM in Karioi, Forest Products, Ltd showed some interest in taking it over. It is not clear whether the Government or WinstoneSamsung rejected this interest, or whether Forest Products, Ltd shied away. But over and above the specific problems the Government faces over the future of Karioi mill, and its accountability for SISM of public money, the Government’s economic strategy has had an

unwelcome bucket of cold water thrown over it. Not only is 1981 an election year, when Government policies will come under more than usual public scrutiny, but it is a key year for encouraging overseas investors in the host of other “think big” projects in the pipeline. Insofar as the expertise is available in New Zealand, the value of a number of these is being questioned. What ammunition will Karioi provide for the opponents of the second aluminium smelter at Aramoana Point? There, too, there are reports that the Government is pressing ahead against the advice of the Treasury and the Electricity Division of the Ministry of Energy. Investing SISM may take the heat off Karioi for a while. But the Government’s whole development strategy will seem less credible to voters. At a time when voters have never been more volatile, when confidence in investment never more urgent, the Government cannot afford to have its big projects embarrass it. Karioi if another millstone for the Government to carry into the General Election.