Page 4468 - Week 10 - Thursday, 23 September 2010
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provided by Totalcare that this was a profitable and relatively low risk business, it quickly became apparent that Totalcare’s fleet business had always relied on charging ACT government agencies very high vehicle management fees.
The resulting profits were then used to subsidise various operations, including providing leases to private individuals. The government did not consider this to be an appropriate use of public money and decided to put an end to the practice. This led to the ACT government fleet contract with Rhodium being renewed on 30 June 2006 on a cost-recovery basis only.
This decision by the government was taken in the full knowledge that it would have a direct impact on Rhodium’s profitability. Before then, Rhodium had been charging government agencies a management fee of $190 per vehicle per month. Even though on a cost-recovery basis Rhodium’s fleet management fee had been substantially reduced, the new management fee of $90 per vehicle per month was still more than three times competitive market rates.
It soon became apparent that Rhodium could not operate profitably without the previously embedded cross-subsidies. In November 2006, upon receiving independent advice about the current and future business risks, the government decided Rhodium should be sold. After conducting an open competitive tender process the government came close to securing the sale of the company. However, the sale could not be finalised as the emergence of the global financial crisis had a material impact on the ability of the only remaining suitable bidder to raise the necessary finance.
At that point the government’s independent sale adviser indicated it was no longer likely Rhodium could be sold as a going concern having regard to the prevailing market situation. By that time, Rhodium had also suffered a decline in value as commonwealth agencies, which had been Rhodium’s main customer base, were banned from entering into reverse novated leases and the major car manufacturers decided to withdraw discounts for these types of leases.
The combined impact of these external factors, which were beyond the control of either Rhodium or the government, meant that Rhodium was no longer experiencing an increase in leasing customers. Allowing Rhodium to continue operating was not considered a viable option due to the high risk of increased financial losses and Rhodium’s small size compared with long established and much larger market competitors.
It is indeed unfortunate that all the identified risks, which led to the government’s decision to sell the company, actually crystallised during the sale process, and therefore derailed the sale. The government was left with little choice other than to arrange for the company to be wound down.
On 21 July 2008, the government announced that the sale would not proceed and Rhodium would be wound down by disposing of the various business undertakings to external providers. This in itself was a relatively complex task, given the diversity, length and number of leases that had been issued, and the limited appetite of the market due to the financial crisis.
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