ASX-listed CSR takes $9.5m provision for leaky NZ schools

CSR Building Products (NZ) [ASX: CSR], the unit of the ASX-listed building products maker, faces a bill of up to $9.5 million after cutting a deal with the government to settle looming legal action over the nation's leaky schools, a fraction of the near billion dollar writedown taken on New Zealand's state-owned schools.

The New Zealand unit of CSR took a $9.5 million provision to meet product liability claims in the 2014 financial year, having not made a similar provision in 2013, according to financial statements lodged with the Companies Office. CSR declined to say how much of the provision related to a confidential settlement with New Zealand's Ministry of Education in January to see off the threat of legal action from the Crown entity. The local CSR unit supplied cladding sheets and cladding systems which were purchased and installed in school buildings.

"The provision is based on estimates made from historical warranty data associated with similar products and services," CSR said in a note entitled 'Provision for product liability'. "The company expects the settle the majority of the liability over the next year."

The ministry, which oversees education policy and annual spending of more than $13 billion, filed the proceedings last year as it embarked on a remediation programme on 800 buildings across more than 300 schools, with an estimated cost of some $1.5 billion. Settlements and legal action are being pursued with several major suppliers of buildling materials, including CSR.

When CSR was named as a party in the suit last year, it talked down its role saying its low level of market share of the product meant "any potential financial impact related to this action would not be material to the financial results of the company."

CSR was the second firm to cut a deal with the ministry after Australian building products maker James Hardie settled in December, which the government department said dealt with more than 40 product liability claims. Before the settlement, James Hardie said it faced potential costs of up to US$47.6 million related to a slew of leaky building claims, including a provision of US$15.2 million for the ministry's suit.

The company now anticipates a provision of a net US$10.3 million to cover its weather-tightness claims as at June 30, according to James Hardie's first-quarter earnings statement.

The education ministry is still pursuing legal action against Carter Holt Harvey after the New Zealand-owned building products maker failed in a bid to have the case quashed.

Budget documents show the government department spent an additional $10 million on legal action over the defective buildings in the 2013/14 financial year, which was covered by the surplus from Christchurch insurance settlement funding. A further $10.4 million was set aside for legal costs and building testing in the May budget for the next two years.

The ministry said there were 742 buildings in the remediation programme and a further 1,346 were identified as a high or medium high priority for more testing, according to the 2013 Briefing to Incoming Minister, when Nikki Kaye was appointed associate education minister.

The incumbent National-led government is touting its settlement and litigation over leaky schools as one of a number of successful initiatives in upgrading the country's school network, and Kaye this week announced $3.3 million of work to earthquake strengthen and deal with weather-tightness problems at Ngaio Primary School in Wellington.

The cost of leaky school buildings was first recognised in the education ministry's books in 2010, when it took a $930.4 million impairment charge on the $8.12 billion carrying value of its school buildings portfolio, made up of 16,981 buildings across 2,143 schools. As at June 30, 2013 the ministry had a weather-tightness provision of $935 million, and valued the buildings at $7.9 billion.

The ministry flagged more than $2 billion of capital spending on school buildings between the 2013/14 and 2016/17 financial years, according to its 2013/14 statement of intent, which includes both earthquake strengthening and fixing leaky buildings, as well as upgrading school infrastructure as part of its plan to link the nation's education network with ultrafast broadband.

"The scale of this problem is such that the process to address these deficiencies across the network will be a central component of capital work for the next decade and possibly longer," the ministry said. "Our knowledge of the full extent of latent deficiencies is being progressively refined as programmes of inspections continue across the network."

The education ministry's 2014 statement of intent doesn't mention weather-tightness issues.

(BusinessDesk)