Securency gone, but risk not forgotten THE Reserve Bank has struck a good face-value price for the sale of its 50 per cent stake in the scandal-plagued plastic banknote manufacturer Securency International. But Securency has been a truly miserable investment that it will be greatly relieved to be rid of. Its latest annual report values the Securency stake at $54 million, and at the end of this month it will be paid about $65 million by Arle Capital Partners, a British private equity firm that owns the other 50 per cent shareholder in Securency, Innovia. Innovia has received warranties and indemnities from the Reserve Bank that will go live if Securency is hit by fines or penalties as a result of the charges it faces alongside the Reserve's 100 per cent-owned note-printing subsidiary, Note Printing Australia, over the alleged bribery of foreign government officials by sales agents. But the Reserve and its adviser, Macquarie, have also negotiated for the bank to receive a half-share of Securency's profits above predetermined benchmarks over the next three years. In that time Securency's profits could rise substantially. It is manufacturing polymer film for Canada's new banknotes, and that "developed world" deal has significantly lifted central bank interest in the technology. On one industry estimate, the profit share agreement could add more than $20 million to the sale price before it concludes. What might be called the risk-adjusted return is abysmal, however. The bribery scandal has dogged the central bank since it was publicly revealed by Fairfax journalists Nick McKenzie and Richard Baker in May 2009, extracting both a reputational toll and a call on management time that far outweighs the value of the deal. On Tuesday, the Reserve also released the findings of an independent review of its oversight of Securency and Note Printing Australia by consultants Cameron Ralph. Its broad conclusion is similar to the one Reserve Bank governor Glenn Stevens reached towards the end of a one-day appearance before the House of Representatives standing committee on economics last October: the bank did as much as might have been expected at the time to get to the bottom of things, but not as much as we now know it could have done. Internal allegations of corrupt payments by agents of NPA were referred by the Reserve to law firm Freehills in 2007. Freehills concluded that corruption laws had not been broken, and the Reserve, by that time in possession of a separate report on Securency that concluded that Securency's processes were "more tightly controlled," did not go the federal police until May 2009, after Baker and Mckenzie reported on corruption concerns inside Securency. "If I review this in my own mind and contemplate whether we might see some parallel set of circumstances, I think that additional step [informing police] would be prudent," Mr Stevens said in October. There should have been more scepticism and more questioning of the management of both companies earlier than there was. The new report's take is that the central bank gave "reasonable consideration" to governance arrangements at NPA and Securency, received reports, appointed people it was entitled to believe would direct the affairs of the companies with due diligence care and skill, and took "appropriate action" when the companies appeared not to be performing. There could have been more oversight applied and it could have uncovered the alleged illegal payments earlier, but that does not mean that the bank's oversight at the time was inappropriate, it states. I would say that the report helps explain the debacle, but does not totally excuse it. It was a bad judgment right down the management line not to push harder on both NPA and Securency in 2007, when the allegations were swirling. The report also makes clear that NPA and its parent were caught up in a trend to devolve the governance of government institutions in the '90s that created an ominous strategic mismatch that was apparent more than a decade ago. Management consultants McKinsey and Co told the Reserve in 1989 that NPA should operate as a self-sufficient enterprise, providing competitive note printing services, with the Reserve as its core customer. That was in keeping with the times, and NPA was given a separate board in 1990. Within a few years of its formal corporatisation in 1997, however, it was telling its parent company that a collapse in demand for banknotes after a surge in orders during the Y2K scare had left it with excess printing capacity, and that the development of an export business was crucial to its commercial viability. NPA's desire to pump up its export business alongside Securency was at odds with the Reserve's own, much more conservative governance charter. We are all wiser after the event, but a crucial Reserve failure was not to rein NPA more aggressively in at that time. The report suggests ways governance of NPA and Securency could be changed, but it's largely academic now. Securency is gone (although the technology will revert to the Reserve if it goes broke) and NPA has already been reformed, to have a board made up only of Reserve executives, and a prime directive to print our banknotes. It can only diversify if it has spare capacity, and as it turns out, within two years it will be running at full steam as it prints Australia's new generation of banknotes. It's going to take about seven years to renew the supply, and even after that NPA isn't going to be let off the leash.