The power play!

When some people get their share of what a group wanted, the first thing they do is seek a bigger share. Following on from the previous post, we won the right to purchase a durene-rich gasoline stream. Now what? Superficially, the answer should be obvious: design the plant, build it, float a company, etc. What actually happened was that I got a much deeper view of how the management of large companies operates. Basically, the egos of many of the managers get in the way. The first thing that actually happened was that ICINZ wished to take over completely the development, thus leaving the small company with nothing to do. They argued we had no experience and could contribute nothing; my concern was that they had equally no experience in a venture this size. I wanted the parent company ICI to do it, and had that happened, I would have been happy to walk away. The UK parent was clearly competent to do this, but it was far from clear that ICINZ could do it. I tried to get them to hire a project manager from the UK, but without luck. However, it was not all bad. We managed a concession: the right to purchase the eventual product at factory price, i.e. nobody could get it cheaper. While ICINZ was busy getting the project underway, we had to work out ways of using the product in further downstream ventures. One of the stranger outcomes of these maneuverings was that the joint venture company had to have its own Board, and it decided to call itself ICI Synchem. The small company put forward the founder with a legal background as its director.

What happened over the next two years could even make a small book. Basically the tension grew, and at one stage I was called into a Board meeting to act as a witness. Our lawyer then accused ICINZ of intending to supply durene to an American company to make pyromellitic acid there, which could compete with the proposed venture. ICINZ denied this vigorously, things got heated, but there was no evidence provided. To maintain the joint venture, that director had to resign, and I found myself a director of an ICI company. (Actually, I was already – that is another story – so that made two.)

Two years later, during which the venture spent $5 million developing the project, the New Zealand government killed the project by selling the synfuels plant and refusing to include the supply contract. Worse, they sold it to one company, without competitive tender or negotiation. They did not inform us, and recall, ICI at the time was one of the largest chemical companies in the world, and one of the largest methanol producers. Even apart from the durene, ICI at least could have been a bidder. ICI then walked away from the venture when it became apparent the new owners would not negotiate supply, with ICI Australia taking over and absorbing ICINZ. There was no legal action for breach of contract.

Why did they do that? Who knows? The Synfuels plant was not a success, but recall in a previous post I showed that it would have been reasonably straightforward to make it earn up to $500 million per year more, and simply selling most of the methanol it made would have made it much more profitable. This illustrates a major problem with a government owning a major productive facility: politicians tend to have fixed ideas, and they apply them wherever they can. This Synfuels plant was so outside their experience they simply had no understanding of what they had, and since it started with the opposition party, why not make it look as bad as possible? That illustrates one of the problems with democracy that will become more prominent in my future history novels: too many voters do not put in sufficient effort to understand what they are voting for.

Why no legal challenge? For ICI it was not necessarily a bad outcome. Their PEEK and PES factories were now no longer under pressure, and since essentially all the work that had been carried out could be called research and development, with the takeover it probably qualified for the Australian 150% tax write-offs. ICINZ had also collected the minor party’s share of the cash, and finally, after shifting staff into ICI Synchem, it could unload certain staff without some of the financial liabilities. Our financiers also did not sue because they had their eyes on the state-owned Bank of New Zealand, which was about to be privatized. The small company was effectively wiped out financially. (At that time, contingency law suits were banned in New Zealand, and when you take a financial hit like that, there is no possibility of paying hideously expensive lawyers, whose only incentive is to keep the suit going as long as possible.) Then, to make things worse, shortly after this, Wall Street decided to collapse. I was down to the financial survival mode! One thing I did have was plenty of spare time so I decided to try my hand at writing again. Rightly or wrongly I felt this unusual history might give me inspiration for novels that were a little different.

 

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Indecision: Time for joint venture infighting.

As indicated in a previous post, it took the new Labour government three years to reach a decision on whether to sell any of the durene-rich hydrocarbon stream. Senior business people tend to have big egos, and doing nothing does not feed big egos. Accordingly, some of them began to feel they had to do something, the only opportunities to do anything were against the other parties, hence the dynamics within the three parties to the joint venture began to change. The question was, where did everyone stand?

The very small company was in a rather peculiar position: apart from my experience as a chemist, it had no knowledge, but it was the cause of getting the tender process being in existence, and it was the registered start of the process. Without them, there would be no process, and everyone knew it. I doubt ICINZ had any love for the small party, but they believed the politics of the situation meant that the government would want some New Zealand content, so our position had to be accepted. Subsequent evidence suggested that those politicians could not care less whether there was new Zealand content or not. All they wanted was a clean run at the next election.

Our financier was a major merchant bank that was making a lot of money out of start-ups in the overheated economy that came with the freeing up of the economy in the mid 1980s, but that did not mean it was our natural friend because it also had its eyes on the government asset sales program, so it had good reasons not to irritate the government, and it stood to make more money from the asset sales than it did from this start-up, or so it thought.

The position of ICINZ was also of interest. It represented the multinational, but it had local shareholding, as part of the price that ICI paid to get its preferred sales position. In the normal course of events, the UK parent, ICI, would not be particularly concerned about the dilution of its interest, because it expected essentially all the products that were handled by ICINZ to have originated in the UK, or maybe Australia. They were probably somewhat puzzled that this “colonial outpost” could be the origin of the only cheap source of dianhydrides, important polymer intermediates, in the world, but what could they do about it?

Recall that in the previous protected environment, certain multinationals, including ICI, set up local companies and encouraged these to be good citizens and develop industries in New Zealand. Unfortunately, ICINZ had a poor reputation. As an example of the problem, in the early 1970s, ICINZ decided to get involved with a project to develop montan wax from peat deposits. This project failed, partly for technical reasons (which the UK parent would never have let happen), but in my opinion mainly because, to save money, they constructed the plant near existing road infrastructure, as opposed to close to the better quality resource. Capital expenditure was another interesting exercise, as they had discretion up to a certain amount, beyond that they had to get Australian approval, or seriously beyond that, they needed UK approval and UK management. As it happened, I believe the site they started mining had the worst quality peat. I assume management would have got their knuckles rapped for that, so when the durene opportunity came up, at first they were gun-shy, particularly since the project would compete with two significant UK plants. They hoped the project would go away. When it did not, and when they were superficially locked out, which could mean that one of their opposition might start to get preferences on local sales of all the chemicals they were importing as well, they were only too happy to form a joint venture with a small company if that got them onto the field. The small company could be dealt with in due course.

In a situation like this, perhaps the most important assets a small company has are its contracts. What I found was that all parties honored to the letter their contractual obligations, but anything not specifically agreed was a potential minefield for the smaller partner. One problem with the government delay was that cash kept going out, but the venture was not getting anywhere. The smaller company had to do most of their share “for free”, or through sweat equity. But after the three years of getting nowhere, decision time came and our venture won. It seemed to be well worth it then.

One of the other consequences of this delay was that it gave the participants time to think. During this period we looked at all the chicanery going on in the overheated stock market bubble that was being generated. As one of our financiers remarked, during this period you could float a brick shithouse! That, of course, was of no value to the development of a sound business proposal, but it did give me the inspiration necessary for some of the “bubble–aspects” for my novel “Red Gold”, which outlines the nature of one class of fraud that becomes prevalent in overheated markets.

Politics versus economic sense: an example

In a previous post, I noted that following the Labour party election victory, a hidden ultra-right wing faction within it took economic control and introduced the economic policy of the party that won 2% of the votes. How did they get away with this? First, New Zealand has no upper house, so there was no procedural method available to stop them. Second, only too many of the regular Labour MPs had little or no interest in economics; they merely wanted to do good things, which is one of the problems with many Socialist governments. The third reason is more difficult to explain, but they also gave their supporters something that made such supporters accept their economic fate, and it was cash-free: they declared New Zealand “nuclear-free”. This created a serious problem with the United States, because their naval ships were forbidden entry unless they declared themselves “nuclear-free”, which, of course, went against (the perfectly reasonable) US policy of not declaring what their armaments were. Of course they never mentioned that New Zealand had a nuclear sciences institute, or that locally made short-lived isotopes had important medical uses. It was also notable that this policy had no purpose other than to shore up votes and keep the left wing part of the party shut up about economic matters. I suppose the policy also forked any discussion on nuclear power. While the policy was presented as the highly emotive “no nuclear bombs here”, it also forbade nuclear powered ships. All of this, in my opinion, shows one of the many failings of democracy, or at least what we call democracy. In my opinion, it is more a periodically elected autocracy. That, of course, does not mean we should go back to what we have previously had, but it does suggest we should not be complacent and simply accept our fates. One of the themes of my novels is this issue of governance. I freely admit I do not ahve the answers, but that should not prevent me from illustrating some of the problems.

However, the sell-off took considerable time, and the synthetic fuels plant was far down the queue. The reason for this, in my opinion, showed another ugly side of politics. The new government had more interest in shouting about the disaster that the previous government had imposed on them than on helping the country, and accordingly, they were running down the synfuels plant, making it seem the worst investment under the sun. This was helped by the so-called “huge cost over initial prediction”. This huge cost over-run, of course, arose because the initial cost was not for what had to be built. The real villains were the incompetent civil servants, but the previous governing politicians had to take the blame, because that is where the votes lay. All of this blame-throwing could only depress the value of the plant, so sale had to be deferred. Worse, anything that improved the value of the plant, such as this durene venture we were advocating, also had to be put off as long as possible.  Votes appear to be all a politician thinks of at times.

The questions were, what did  they have, and what could they have? What they had were two of the largest methanol making plants in the world, and being new, they would have been the most efficient then. Tacked to that was a plant that passed the methanol through zeolite, and if 32 units of methanol went through, no more than 14 units of hydrocarbon could come out, the other 18 being water. The methanol was wet, containing about 10% water. So, what could they do? First, look at what was made. A relatively high per centage of the hydrocarbons were in the lpg range, with a surprisingly high percentage of this could be converted to isobutylene. There were also a number of aromatic hydrocarbons that were worth considerably more as chemical feedstock, such as durene and 2,5-dimethylnaphthalene. Drying the methanol and selling it was obvious since they had twice as much of it, and the unit price was higher, but there were further things. At the time there was a great market for methyl tertiary butyl ether (MTBE), which was an octane enhancer. This market eventually collapsed, because retail petrol tanks in the US were constructed in a way where MTBE could leach out, but reacting methanol with isobutylene would have given a good return for several years, and there are other uses for isobutylene. My financiers asked me what could be done, and I presented them with a report that essentially said, leaving aside the durene, if a further hundred million dollars were invested, there would be an additional return of five hundred million per annum. I was told this was to be presented to the politicians, but I do not know whether it was. In this particular case, the financiers were also making a lot of money by being part of the asset-selling process, and taking fat fees from doing it. In any case, nothing was done to improve the economics of the plant. That my report was ignored is not important, but surely someone else could have done the same thing. It was almost as if the government preferred the synfuels plant to lose money! It was then that ICINZ did some charitable work: they offered to build a small plant to extract and sell durene for the government. The idea was to ensure that their design worked, and of course they would get further engineering data should they get the right to purchase, an they would get costing data to improve our bid.

Meanwhile, time passed and the government still refused to make up its mind whether it would sell the durene rich hydrocarbon stream. It was not until the next election was on the horizon that they finally decided that something had to be done. They had milked the “cost overrun” for every vote it was worth, while there was the possible risk that being unable to make a decision in a whole election cycle might play into the opposition’s hands.

Economic development – big versus small

In previous posts I covered part of the energy crisis of the 1970s, as it affected New Zealand. The key part was that a large offshore gas field was found, and to use it, an offshore platform had to be built, and that meant using large amounts of gas. The government of the time had decided that large-scale projects would get the country out of its bind. This strategy was criticized heavily by many who kept saying, “small is beautiful”. As it turned out, the big projects did not solve the country’s woes, so the question is, why not? The debate, in my opinion, was wrongly based. The problem is that for any project, you have to select the right project, choose the right way to go about it, then follow General Wesley Clark’s dictum: choose a plan that might work and make it work.

Let’s consider the two options. The advantage of “small is beautiful” is that, because a small project failing does not seriously reverse your fortunes, you can afford some mistakes. On the other side of the coin, each success makes a relatively small impact, so you have to get it right many more times. At the personal level, where “small” is relative to your net assets, this may seem highly desirable to those of a nervous or conservative nature, but the fact remains, those who stay working at the “small” level, stay small. The problem is, a small project can take up an inordinate amount of management time.

The advantage of the “big” project is that, if it works, it solves problems. At the personal level, you will find that everyone who gets really wealthy (neglecting those who inherit) at some early stage in their career “take a risk”. If you look more closely at those who make it, though, I believe you will find that they did their very best to minimize risk, and while you hear a lot about those who were successful, and you hear many of them argue you should take risks, what you do not hear about are those who took the risk and failed. My view is, luck plays a big part in such success. When you are really young, of course, you can afford a wipe out, after which you start again, hopefully somewhat wiser.

What the New Zealand government of the 70s did was to adopt “big” projects, because only big projects would solve their problems. They realized that within the public service there was a very limited pool of people capable of delivering, so they wanted their efforts to get the maximum benefit. What they did not recognize was that that pool was very much smaller than they believed, and worse, only too many of those the politicians recognized as being capable, were being recognized largely through their own promotional skills. The politicians overlooked the fact that their advisers, top public servants, had no particular experience in this area, except possibly in defending positions that were subsequently shown to be poor. As I noted in a previous post, they could not even work out what exactly they were quoted on regarding the synthetic fuels plant. But then the worse part came to light. When the synfuels plant was up and running, nobody stopped to ask, what had they built? They might have thought it was a synthetic fuels plant, but it should have been viewed as a chemical plant. One of the sillier aspects was that they made methanol and converted that to hydrocarbons, the weight of hydrocarbon being less than 50% that of the methanol (because they also made water). Since at the time methanol was selling for about 20% more than petrol, they could have received about two and a half times the income by just selling the methanol. But this would have forced the ex-public servants to admit they had been wrong in the first place, and they were not going to do that! As noted in the previous post, the first rule of a mediocre organization is, do not revisit the past. They do not want to improve; they want to avoid confessing to error. Unfortunately, everybody makes mistakes; the successful learn from them while the incompetent persist with them.