BLUFF ALUMINIUM A COST-BENEFIT ANALYSIS OF THE SMELTER PROJECT

Press, Volume CXI, Issue 32774, 26 November 1971, Page 8

BLUFF ALUMINIUM A COST-BENEFIT ANALYSIS OF THE SMELTER PROJECT

(By a staff writer)

The “present worth” of the Manapouri-Bluff smelter project to New Zealand is $330 million, if money can be borrowed or invested at 6 per cent and the annual rate of inflation is 3 per cent. If the rate of interest is 10 per cent and the rate of inflation is 5 per cent the present worth is $l3B million.

These are two of the estimates, from a total of 24 possibilities calculated, by the New Zealand Institute of Economic Research in its 200-page report “An economic appraisal of the Mana-pouri-Bluff aluminium industry.” "It is essential to recognise that money today is worth more than money tomorrow because the former can be invested to yield an income in the meantime. In other words one must discount both benefits and costs according to the date of their receipt or payment, otherwise a million dollars now would appear as valuable as a million dollars in 1960 or 2060, which is patently ridiculous,” says the report. Present wor

Benefits discounted

The authors of the report calculate that the cash flow to New Zealand (“benefits”) during the term of the agreement will total $2127 million. Because most of these benefits will accrue many years ahead, they are heavily discounted: to $384 million if the rate of interest throughout the term is 6 per cent, or to $199 million if the rate of interest is 12 per cent. Development of the project will cost New Zealand a total of $231 million (most of it already spent). Discounted at 6 per cent, this cost is reduced to $219 million, but at 12 per cent it would be increased to $250 million. Subtracting the discounted cost from the discounted benefits, the "present worth” of the project is $165 million at 6 per cent interest, or minus $5l million at 12 per cent interest

In the examples quoted above, the authors have assumed that there is no inflation during the term of the agreement. They also quote examples worked out under alternative assumptions about the rate of inflation.

“Future inflation affects receipts from electricity supplied to the smelter through the replacement of generators, the imputed value of surplus energy used in the grid and taxation revenue derived from aluminium production and marketing. The over-all effect of allowing for inflation is to raise the discounted present value of both costs and benefits, and to raise the break-even rate of discount.” Interest rates The interest rates used in the institute's estimates range from 6 per cent to 12 per cent, and the rate of inflation from 0 to 5 per cent per annum. Twelve of the combinations of these various assumptions are shown in the table inset. th of project

Insufficient information is available on the costs of developing alternative sources of power to replace the power lost if the level of Lake Manapouri were not raised, according to Mr W. A. Poole, one of the three authors of the study. Lake-level question

Mr Poole was asked by “The Press” if an estimate could be made of the “present net worth” of the project on the assumption that the level of the lake were not raised. “We were commissioned to examine the position under the agreement as it is—not as it might be under hypothetical alternative agreements,” said Mr Poole in reply. “We did not venture into reporting such matters as (e.g.) the lake not raised, or raised to the level of Te Anau. As we state in the report, insufficient information is available—a comment applying equally to the objectives to be attained by a new agreement, and to the costs thereof.

“We wrote that, despite knowledge of the Cabinet Committee report, and the rei .of the Commission of Inquiry. As the former report shows (p. 24), the concept of a raised lake was an integral part of the agreement in both the 1960 and 1963 constructions. Because it was never contemplated by the parties that the lake would not be raised, the agreement contains no provision for such a contingency. The smelter is entitled to power from Manapouri delivered to Bluff, and the power price formula depends, almost completely, upon production and delivery costs from Manapouri to Bluff.

“Breaking the agreement in part (as to source of supply) breaks it completely, but special reference should be made to the price of the smelter’s power. The Cabinet Committee report seems to assume that the price formula will hold, despite breach of the agreement, and that there will be consequential loss of revenue from the smelter because of lower costs at Manapouri.” Development’s object

After outlining his reservations about specific portions of the Cabinet Committee report and the Commission’s report, Mr Poole says: “The objective of the Manapouri-Bluff development is to make us wealthier. There are few who do not seek improving material standards, either personally or for a neighbour. Snipping bits off the wealthgenerating function does nothing to help this; this has already been done with the Te Anau control. On our valuation of the costs of ‘alternative’ electricity, ft would have yielded $0.5 million per annum, starting in 10 years. “We need to be very sure that the sacrifices will get real advantages, and to check that there is no way of getting those advantages by merely appropriating some of the new wealth towards them, instead of giving up the wealth itself.”

: Mr Poole says the insti- : tute’s team of consultants ■ was given confidential infori mation during its investigations and any publication i of the results of further in- ; vestigation—such as the testing and reporting 0n.... various alternatives—"carries a high risk of violation of secrecy.”

Inflation % P-a. Interest Rate % P-a. Costs $m Benefits $m Present Worth $m 0 6 219 384 165 0 8 228 295 67 0 10 238 238 nil' 0 12 250 199 -51 3 6 229 559 330 3 8 232 398 166 3 10 241 306 65 ' 3 12 251 247 -4 5 6 245 837 592 5 8 240 530 290 5 10 244 382 138 5 12 253 297 44