Why the Government is 'thinking big’

Press, 6 October 1980, Page 16

Why the Government is 'thinking big’

By

PHILIP WORTHINGTON

Justification for the Government’s “think big” development programme rests on two main points: employment opportunities and export receipts. Job creation is an immediate bonus, and one for which the Government will be thankful, but in the longer term it is the prospect of foreign exchange earnings which the Government regards of greatest importance. This is because the export receipts are expected to reduce the country’s chronic imbalance of payments which will, in turn, stimulate the economy and further reduce unemployment.

However, while the immediate employment opportunities provided by tlie energy-intensive projects — both during construction and in permanent jobs — can be measured with some degree of accuracy, and the ancilliary “spin-off” jobs can be reasonably guessed at, the net return in foreign exchange and the effect on the balance of payments is much harder to gauge. For example, a reliable prediction is that construction of the second smelter will provide 950 jobs, and that experience in Invercargill has shown a large multiplier effect by providing three jobs in support or ancilliary services for every job provided at the smelter.

When it comes to assessing past net overseas receipts from the existing smelter, however, the computations are still no more than estimates.

It is not as simple as subtracting the cost of imports of aluminium, aluminium alloys, and raw alumina from the receipts for exports of aluminium.

One problem is that the Tiwai Point smelter, in producing primary aluminium, uses a number of imports which cannot be separately identified as relating to aluminium production, such as petroleum coke, fuel oil, and cryolite.

This means that the net

receipts are significantly overstated.

Important financial flows for debt servicing, profit, and technology are not reflected in the statistics either, so that receipts must be further discounted. On the other hand, aluminium is also exported (and imported) as components in manufactured goods and this cannot be separated, although it is likely to add to the net receipts.

Finally, tlie export prices of primary’ aluminium produced by the smelter which are used in statistics are lower than the prices used to assess the company’s profitability for tax purposes. This is because the smelter company is run as a “tolling” operation by its owners.

(In other words, the owners provide the alumina, then take and sell their share of the output from the smelter through other outlets, but the smelter does not produce a profit in its own books. Transfer prices between the smelter and its owners — alumina in and aluminium out—are not recorded as between two entities, and the profit attributable to the smelter is taken elsewhere. Under the. agreement with the Government, the smelter is taxed on a notional profit, which estimates true transfer prices. Given these qualifications, it is possible to say that in the 10 months to April 30, this year, imports of aluminium and aluminium alloys amounted to $10.4 million and imports of alumina totalled $35.4 million (total imports $45.8 million). In the same period, receipts from exports of unwrought aluminium were $125.7 million, from scrap aluminium $2.3 million, and from other aluminium exports $8.6 million (total exports, $136.6 million). -

On the face of it, therefore, the net benefit to New Zealand’s balance of pay-

rnents was $90.8 million, but remember the provisos above. In similar vein, computations for tlie net foreign exchange flow resulting from a selection of the projects in the "think big” programme are subject to many "its” and “buts.” Nevertheless, they do give an insight into the Government’s hopes for the programme, which in the next 20 years is expected io cost more than $BOOO million, or more than 15 times the present balance of payments deficit.

To simplify from the myriad projects being’ contemplated, and to put some sort of time scale (albeit artificial) on the programme, a review of a handful of the most talked-about projects and their effect on foreign exchange over the next decade gives a fair representation of the programme as a whole and examples tlie Government’s desire for export receipts.

A look at eight energy projects will suffice. These will cost in 1980 dollars some $2730 million. (That represents about $865 for every man, woman, and child in the country.) The Government expects to lose foreign exchange— to go further into debt—on these eight projects in the early years. The Government knows also that returns cannot be expected immediately; profits will not start to appear until 1983 at the earliest and in some projects the figures will not get into the black until 1987. However, by the Government’s figures, all eight projects will benefit the country by 1990. The combined loss of foreign exchange during the earlier part of the decade is expected to be about $1145.8 million. From 1987 onwards all eight of the projects will save foreign exchange, by import substitution, or gain foreign exchange by way of exports. Over the

10 years the combined gain will total about $3740 million.

On paper that is a net gain in foreign exchange over the decade of $2594.2 million or almost enough to pay off the present balance of payments deficit five times over. As an example. the proposed SBOO million expansion of New Zealand Steel will continue to require deficits until 1984. Between now and then the country will have “lost ” $153 million on this project. In the last six years of the I9SOs, the net gain in foreign exchange resulting from the expansion is expected to be $476 million. Thus, over the next 10 years, the Government expects this investment to return $323 million on the balance of payments.

The expansion of the Marsden Point refinery will cost about $4OO million. The first year of gain is expected to be 1985. Until then net outgoings are expected to be $232 million. From then until 1990 export receipts and savings by way of import substitution will provide a net gain of $715 million. On paper, therefore, the expansion is expected to provide a net gain over the decade of $483 million. The Government’s own figures on other projects are:—

Mobil synthetic petrol plant.— Estimated cost, $4OO million; first year of gain, 1987; net exchange outgoings until then, $305 million; exchange gain from 1987 to 1990, $660 million; expected net gain, $355 million.

Stan d-alone methanol plant.— Estimated cost, $l5O million; first year of gain, 1983; net exchange outgoings until then, $173 million; exchange gain from 1983 to 1990 $434 million; expected net gain, $261 million.

Third potline. Tiwai Point.— Estimated cost, $l5O million: first year of gain, 1983: net exchange goings until then, $216 milmillion: exchange gain from 1953 to 1990. $415 million; expected net gain. $394 million.

Second aluminium smelter.— Estimated cost. $650 million; first year of gain. 1986: net exchange outgoings until then. $216 million: exchange gain from 1986 to 1990, $777 million; expected net gain. $561 million.

Ammonia-urea plant.— Estimated cost, $BO million; first year of gain, 1983; net exchange outgoings until then, $3O million; exchange gain from 1983 to 1990, $215 million; expected net gain, $lB5 million. Electrification of main trunk between Palmerston North and Te Rapa.— Estimated cost. $lOO million; first year of gain, 1986; net exchange outgoings until then, $15.2 million; exchange gain from 1986 to 1990. 547.7 million; expected net gain, $32.5 million. Of course, these projects will not cease to exist in 1990, and the longer-term gains will continue to accrue. Similarly, the computations are simplistic but they are the starting point from which tlie Government has viewed the programme. Obviously the precise impact tlie projects will have on our balance of payments will depend ultimately on factors such as the world price for oil, chemicals, aluminium, and plant and machinery. The figures are only projections and the timing and cost of some of the projects are still uncertain.

Nor have finance costs and the remittance of profits been included and to this extent the figures overstate

the foreign exchange benefits.

No matter whether the individual projects are financed entirely from local or foreign sources, the import contents must still be paid for and this, too, will reduce the projected benefit. For instance. if the projects were financed entirely by the domestic market, tlie Government would then be required to finance the imported content from its own overseas borrowing. That means, the debt servicing of the projects 's likelv to be roughly the same whether the projects are funded locally, funded entirely from overseas sources, or funded by' a mixture of the two.

Some idea of the potential debt-servicing cost can be gained from the estimate that the projects are likely to involve capital expenditure of the order of $2730 million. In practice, the projects are likely to be financed by a mixture of debt and equity’ capital, of which debt will be the predominant element.

To the extent that the projects involve overseas partners and foreign equity, some part of the projects’ profits will be remitted overseas and will also reduce the current account gains. These and other variables might throw all calculations to the winds during the next 10 years, but it is this sort of calculation on which the Government is placing its bets. These are the odds it accepts in backing its “think big” policy. (Note; in the projects quoted, the figures are based on certain assumptions. These are, in order: Marsden Point refinery expansion figures assume no escalation of present crude oil and product prices; Mobil synthetic petrol plant figures assume an oil price of $4O a barrel; the Stand-Alone methanol figures based on August, 1979; prices: main trunk electrification figures are based on August, 1979, prices: both smelter projects are based on an aluminium price of $1575 a tonne.)

Comment from the Capital