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Regional council prepares for $800k investment loss

22 Aug 2019, 7:51 AM

The Northland Regional Council says a combination of factors, including a big jump in local log prices, is behind the looming potential loss of almost $820,000 invested in a Marsden Point-based timber processing start-up.

Councillors at their monthly meeting in Whangarei on Tuesday, 20 August voted to record the almost $820,000 owed by Resource Enterprises Ltd (REL) – due to be paid by 05 March next year – as what’s known as an ‘impairment loss’.

Council CEO Malcolm Nicolson says doing so is a prudent accounting and risk management measure – but also a pragmatic move – on council’s part.

He says REL’s Marsden Pt operation has not traded since May 2017 due, among other things, to the adverse impact of a significant rise in local log prices – and the company had not paid its last two quarterly interest payments.

People in a factory.Then Maori Development Minister Te Ururoa Flavell, left, and Economic Development Minister Steven Joyce tour REL four years ago, shortly after the company drew down its regional council loan.

At the end of last month (30 July) REL’s lease had also been cancelled and possession of the site returned to its landlord Marsden Maritime Holdings Limited.

Mr Nicolson concedes that all things considered, council is uncertain if it will recover the outstanding money, but says technically the loan does not fall due until March 05 next year so it won’t know for sure whether it will be defaulted on until then.

“Recording this sum as an impairment loss doesn’t in any way discharge REL of its legal liability to repay the loan and council is working hard to protect its interests.”

However, the council is the ‘second secured party’ and the current market value of REL’s assets is estimated to be less than what it owes to the first secured party.

Mr Nicolson says recording the loan as an impairment loss now ensures the uncertainty over its status is signalled well before the new council, that would be in place after this year’s local body elections in October, takes office.

He says the loan to REL, made in a previous term of council, was made in the wake of the Global Financial Crisis, when there was a real need to stimulate the Northland economy.

“Council agreed to provide REL a five-year loan from the Investment and Growth Reserve (IGR) in October 2014 to assist with the establishment of its Marsden Pt sawmill operation.”

“The decision to invest was not made lightly; and a raft of investigation and due diligence was done, including advice being sought from a reputable forest wood processing consultancy.”

“Northland was still emerging from a recession and the council at that time was keen to support initiatives that could help create much-needed local employment and add value to the large numbers of logs emerging from Northland’s extensive commercial forests, rather than simply seeing them exported whole for processing overseas.”

Mr Nicolson says at the time it was also hoped new export opportunities for the region into the Middle East timber market would be opened up at a time when domestic demand was stagnant.

He says most of the company’s woes were linked to a large increase in local log prices, which rose about 40 percent from 2014, drastically reducing its ability to secure the logs it needed for processing at a price that allowed it to compete on the export market.

“It’s certainly unfortunate and ironically, with log prices now much lower again, the outcome might have been much different if the company was still operating in the current climate.”

Meanwhile, Mr Nicolson says while the possibility of a loss is obviously regrettable and a source of disappointment, it was important to note it would not impact on ratepayers’ bills directly.

“It’s an important distinction; the money was lent from the Investment and Growth Reserve, which is funded from council’s existing commercial investments and is specifically set aside to support economic development.” (Typically, the council contributes about $1.7M to the fund annually, with this consulted on through its Long Term and Annual Plans.)

Mr Nicolson says if the loan is defaulted on, it will mean the amount lost will not be available to be reinvested into future ventures via the Investment and Growth Reserve, rather than impacting on council’s day-to-day activities.

He says, “The loan to REL, was the only loan provided by council before it reviewed the Investment and Growth Reserve criteria in February 2018 and decided to remove loan funding for private businesses in order to refocus the Reserve towards providing grant funding to support projects which provided community benefit.

This resulted in almost $6M in grants being allocated to a variety of Northland-wide ventures which required funding, including the Twin Coast Cycle Trail and the E350 farm extension programme.”