Off-road On A Flight Of Fancy
Sydney Morning Herald
Saturday March 8, 2003
A demutualised NRMA was bound for the heights, but this year it will lose $60 million. Kate Askew and Anne Lampe investigate.
When career bureaucrat Rob Carter was lured to Sydney in August 2000 from that pinnacle of public service the chief executive's office of the Brisbane City Council he wanted to be housed in the controversial Toaster building.
Stunning views looking out from Circular Quay, sumptuous restaurants within spitting distance, not to mention all the fancy, post-modern design.
Just one problem. The Olympic Games meant the apartment, at the pricier end of the city's executive accommodation, had to be rented well ahead of Carter's arrival date and then sat empty.
But at the little road service association which needed a new boss, no expense was spared.
Carter got the temporary pad to ease his arrival into the big smoke, and a Cypress Lakes corporate membership to help keep his golfing handicap in good shape.
But not even all that lavish lifestyle, the first-class air tickets and the expensive wine list at its George Street headquarters can account for the monster that appears to be eating great chunks out of the NRMA's investment portfolio.
The $773 million nest egg that was left to the mutual to ensure its profitability was worth only $591.8 million by the end of January. Almost a quarter of it, $181.2 million, has slipped through the NRMA's fingers.
Not bad for less than three years' work. And a less than stunning case study for the benefits of demutualisation. At this rate, the organisation dear to the hearts of its two million members will be bankrupt by the end of the decade.
The stockmarket, the NRMA has discovered, doesn't always provide a never-ending flow of profits and inflating investments. Investment markets are tough.
The NRMA has always relied on cross subsidisation from investment, or insurance income. Without either, its core business rescuing broken-down motor vehicles and more, importantly, their distressed owners doesn't make a brass razoo.
Its losses since demutualisation have burgeoned. In 2001 it made a marginal profit of $339,500; last year it recorded a $23 million loss.
The rapidly deteriorating financial position was driven home this week, when, for the third time, the NRMA revised its anticipated loss for this financial year. Originally, the loss was estimated at $14.8 million. It was bumped out to $25.6 million last October. Nowit has been pushed out to $60 million.
The organisation's president of five months, Ross Turnbull, says that the rot has to stop. The NRMA can't keep plugging the hole in its accounts by selling investments.
That's hardly a revelation. Nearly a year ago, at the NRMA's board meeting held in the somewhat unusual environs of the Western Plains Zoo's convention centre, outside Dubbo, the chief financial officer, James Beecher, said as much.
He advised the board that the investment portfolio was being used to fund the company's business debts.
The odd thing was, that despite queries from all of the board an unusual bipartisan approach from the hopelessly politicised group of directors about the continuing operating losses, very little appeared to change.
At that meeting, Kate Carnell, a then member of the Nick Whitlam-led board faction, put a motion asking that the board consider the losses unacceptable and that they be addressed in the organisation's May budget.
The motion was seconded by Jean Lennane, a member of the anti-Whitlam faction. In a rare occurrence, the motion was carried unanimously.
At the time, a defensive Carter insisted to the board that the losses were part and parcel of the board's three-year strategy. He pointed out that it was a strategy that the board itself had approved.
Publicly, however, the outlook was rosy. In a media statement in August, 2001, on the release of the poor 2001-02 financial result, a loss of $23 million, things were looking up.
Looking forward, the release boasted, the company was performing to expectation and anticipated a stronger result in 2002-03.
Even as recently as January, Carter was talking up the NRMA's financial position. ``NRMA is financially secure, with an annual result $14 million ahead of expectations," he wrote in an operational review. ``Nevertheless, NRMA needs to address new opportunities for revenue generation to further reduce its losses."
His view was that those opportunities were to be found in the world of technology.
``Underpinning the whole [corporate] strategy is a major investment in customer relations management [CRM] processes and systems," he told a gathering of the Australian Institute of Company Directors in February last year. He even had the jargon to go with it. ``Building on our enhanced capabilities, there is great potential for us to become relevant to our members in all aspects of their journey not just breakdown."
In fact, Carter had so much faith in all things newfangled that not only did he drive a strategic alliance with Perth technology company ERG, but he decided that the NRMA should have a slice of the company for itself.
Thanks to the enormous delegated authority that the chief executive carried at the time, Carter went ahead and spent $20 million buying ordinary shares in ERG after consulting with the chairman Nick Whitlam and the chairman of the investment committee, Susan Ryan.
That investment is now virtually worthless.
The ERG investment was put to the whole investment committee to approve. The only problem was that it was put to the committee after the investment already had been made. At the time, then board member Tim Shaw, of Demtel fame, registered his concern, given ERG's share price had begun its tumble.
The full board was only notified when it was asked to ratify the heads of agreement with ERG over its strategic alliance.
As far back as two years ago, directors were beginning to question the investment. At the March, 2001, board meeting, director and Whitlam-faction member Dominique Collins asked about the disappointing fall in the ERG share price, to be told by Carter that although ERG was a company with a very bright future, investment bank CSFB hadn't handled the sell-down of securities by one of ERG's major shareholders, Motorola, particularly adeptly.
Within months, the NRMA was thrusting more cash at ERG. It invested another $1.25 million in a rights issue.
That original $20 million investment is now worth little more than $2 million. On Thursday, on the release of its $124.9 million first-half loss, ERG admitted there was uncertainty about its ability to continue as a going concern.
It appears that it is largely the write-down of the investment in ERG that will see NRMA's loss grow to $60 million this year, from the previous estimate of $37 million made by Carter just before Christmas. Although the NRMA wouldn't provide a breakdown, or confirm that the write-down would contribute to the loss.
And ERG was just one of Carter's pet projects.
Then there was the deal with US technology giant Oracle.
In what was essentially a research and development project, NRMA set about buying a CRM system from Oracle. That, translated, is what they call a Customer Relationship Management system. In plain English, it's a flash customer database. It's all about cross selling, allowing NRMA to sell new tyres or seat covers to its members.
By January 2002, it appeared the investment committee, and the board, were mounting opposition to Carter's and his staff's plans for the Oracle CRM. It wasn't so much the technology that was the problem, it was the scale of the expenditure.
The planned budget was more than what was deemed affordable and the plan had to be revised before going back to the committee. Insiders say Carter was prepared to spend up to $60 million on CRM but his plans were severely curtailed.
Another Carter pet project was the Intelematics joint venture with RACV (Royal Automobile Club of Victoria).
Intelematics is at the cutting edge of motoring technology it includes GPS tracking, theft protection and crash notification. But it, too, had a thirst for capital. In February 2002, after already spending $5 million, Carter came to the board asking for it to hand over $2 million more and to make available an additional $3 million to the joint venture. A plan to introduce new partners to help fund the business originally attracted interest from the automobile clubs in Queensland and Western Australia. But they backed out.
And in May 2002 the NRMA spent $11 million on a new dispatch system.
Carter did, however, have one particular business initiative up his sleeve which wasn't technology-based. He planned to take NRMA into the business of selling secondhand cars. The plan went nowhere. Not that there weren't cost-cutting measures being investigated. There were several initiatives which, if experts' reports are to be believed, would save the NRMA money.
Firstly, PricewaterhouseCoopers Legal (PwC) completed a report into a corporate restructuring a tax-driven scheme which it estimated would save the NRMA$15 million.
Then there were the plans to increase membership fees. That, according to budget papers, would have shaved $6.6 million from the burgeoning losses in 2002-03.
As well, there was a proposal to move the NRMA out of the corporate headquarters where it remains housed with the old insurance arm, IAG. That move, to Homebush or North Strathfield, would have had a $9.1 million benefit to the company's accounts over eight years.
All of those cost-saving initiatives are yet to be put into practice.
And none of the initiatives extended to cutting down on the group's outsourced public relations while it continued to spend money on legal advice and court actions at an alarming rate.
On Monday, Carter, chief executive of less than three years, departed the NRMA. It was painted by the NRMA's president as amicable. No doubt Carter was soothed by his $888,950 payment on his departure.
He did not return the Herald's calls.
Yet Carter's relationship in the past year with some members of the board, and from both factions, has been anything but tranquil.
At a board meeting in February last year, Lennane moved a no-confidence motion in him. It was defeated after the Whitlam faction backed him. Insiders say Carter approached the then president Nick Whitlam some time after that and asked to leave. Whitlam was willing to pay out Carter's contract. But not all of the board was. Carter stayed.
In the ensuing months, his relationship with the association's remuneration committee deteriorated.
An independent review by PwC of Carter's remuneration was commissioned under the then chairwoman, Maree Callaghan. The only difficulty was that Carter refused to co-operate.
Around the same time, the chairman of the audit committee, Mark Coyne, was asked to conduct two investigations into the relationship between Carter and senior management.
After establishing that relations had soured between the chief executive and some senior management, a concerned Coyne approached the company's internal auditor.
When Carter was alerted to Coyne's actions, he sent Coyne a letter saying that if a comment made to the auditor wasn't retracted, he would sue.
And that wasn't the end of the fractious relationship with the board. When the audit committee made some adjustments to the expenses policy, Carter wrote to the manager of the internal audit of the NRMA and explained that he was exempt from the changes because his conditions were set out in his contract.
President Turnbull does not blame Carter. He reckons the responsibility for the NRMA's losses should rest with the previous board.
But there is evidence that board members were seeking answers to the NRMA's financial problems and anomalies in its accounts. Apart from the exclusion of the investment portfolio value in Carter's reports to directors from April last year, there were other financial accounting anomalies that concerned directors.
The manner in which expenses were apportioned was changed several times, creating a moving feast and making it impossible for directors to compare like with like.
Lennane wrote to the Australian Securities and Investments Commission three times registering her concern about how financial information was being disseminated to the board. Her requests to management for information were rejected.
Board member Richard Talbot also wrote to ASIC voicing his concerns when he couldn't get access to financial records in order to ensure that Whitlam's and Carter's expenses conformed with its expenses policy. He also questioned three KPMG auditors when they made an appearance at a board meeting in August last year.
KPMG's response was that the NRMA was viable as a trading entity because of its size.
ASIC's response to the directors' concerns was that they had every right to pursue a civil action themselves in order to get access to the information they needed.
But where does all this leave the much-revered road service group?
As one letter writer put it in the Herald during the week: ``I have a great idea! Why doesn't it establish an insurance company ... you know, with a reduced rate for members. I'm sure it would build up into a great nest egg for them. I mean, it worked in the past, didn't it?"
And on that topic, perhaps it's not such a wild idea.
IAG boss Michael Hawker told the Herald that he had made several advances to the NRMA offering assistance.
Last year, when the NRMA looked as though it might appoint a voluntary administrator due to board ructions, IAG was one of the parties offering to take over the administration. Hawker is acutely aware of the importance of the NRMA brand, under which IAG still sells its insurance products.
Going by its performance so far, the NRMA could do with all the help it can get.
As Ross Turnbull put it this week: ``It is clear we can't continue to support operating costs by selling investments. That would eventually lead to the organisation's demise towards the end of the decade."
© 2003 Sydney Morning Herald
