Smelter cost ‘strains common sense’

Press, 28 March 1981, Page 6

Smelter cost ‘strains common sense’

PA Dunedin The second smelter report by the Otago University economist, Professor Paul van Moeseke, shows that on the Government’s published figures the project will return 50c in net foreign exchange earnings for every $1 spent on national resources. At a time of unemployment the heavy borrowing necessary for the project “strains common sense,” .the professor says in his report, which was completed under an . academic publication commitment. It confirms and strengthens the findings of the original report, although it expands on these and avoids the use of figures open to argument. z Major international data has been used for all capital accounts of the project, because of the paucity of data available in New Zealand for this section.

Trade and industry figures are used ..for all imported raw materials and New Zealand costs, as well as energy used. The report also takes advantage ' of additional information available in the

consortium’s proposal. Using the Government’s base, Professor van Moeseke shows that the project would earn $B3 million in net foreign exchange in mid--1980 terms. But this is offset by money spent in New Zealand on the project. The result returns an export efficiency rate of 50 per cent, which effectively means $1 spent returns 50c overseas. He also cites a New Zealand economic model which shows such projects can adversely affect employment and reduce resources available for other investment more favourable to the creation of jobs. Electricity pricing for the project has proved most controversial. In order to avoid the argument Professor van Moeseke uses two tools. First, he divides electricity into power, which is; the cost of building dams to provide the electricity, and energy which is the cost of running the generators and transmitting . the -electricity to the smelter* Second, he does, not' include the cost .of electricity in his prpfityCalculations but

works out the project cost and shows what is left for electricity* There is no real argument over what power — dam construction — costs. At) a 5 per cent discount rate the cost of power from .the Upper Clutha project is 1.54 c a unit. But there is considerable argument over the energy cost to a smelter. Professor van Moeseke shorf-circuits this by assuming energy is free. He does not include any cost for generation and transmission of electricity, although there is one. Using trade and industry base figures for aluminium prices, , he provides _ calculations which throw light on the issue of electricity ing.First, he shows the consortium, under normal recognised production costs, cannot afford to pay more than 0.9 c to 0.95 c a unit (all figures are in mid-1980 terms) and remain profitable at trade and industry’s aluminium price'estimate* Second, he’ shows that, at this price, the smelter will be charged 1.31 c io 1.5 c a

unit when rebates are decocted.

Third, he shows the cost of power alone is il'.s4c. Fourth, he cites the Government’s own calculation that the total electricity cost from the Upper Clutha for electricity is 3.5 c a unit. The result of these figures is the consortium appears to be running at a loss, since it is charged more for electricity than it can afford. The loss, however, has to be made up in the provision of a free infrastructure (such items as land, roading, services supply and wharfage) and depreciation allowances. These are all indirect subsidies by the taxpayers. Professor van Moeseke then expands the argument to the issue of a 42.5-year supply contract. If other consumers are not to subsidise the electricity price then the smelter must be charged at an > ; increasing rate each year,:.as other consumers are, Or at a constant rate designed to recoup the full.cost. . He shows that the constant price would have to be 3.71 c ai unit for power alone

over, ths 42.5 years. Any lesser charge implies al subsidy, either directly through higher electricity charges to other ‘consumers* or indirectly through other incentives.

The report was completed for publication through Waikato University where Professor van (Moeseke took part in a seminar late last year* It contains much economic theory, and avoids conclusions.

“It is not a criticism of the Government and has nothing to do with the Otago region” Professor van Moeseke said.

“I fully recognise economics is only one of the objectives of the Government, which has other restraints to consider in assessing such a project.

“This is an academic paper and it is not intended as a criticism of the Government or the New Zealand company involved, the involvement of neither being known when the first smelter report; appeared,”- he said*

In terms of the cosf per job created, the capital cost

of the project means each direct job will cost nearly $1 million if the consortium’s estimate of jobs created is correct*

This is 27 times the aver-' age cost per job in a study, of 19 big British industries. Or in terms of gross sales per job the smelter figure is 13 times that of the particularly capital-intensive United States aerospace industry. Using the correct foreign trade multiplier, Professor; van Moeseke shows the project will create at most 6000 jobs on the basis of trade and industry figures, and not, he says, the 25,000 jobs claimed by the consortium. , Professor van Moeseke says such a large capital-in* tensive project involving an increase in borrowed capital at a time of unemployment) “strains common sense, accelerates inflation” and runs counter ,to basic economic theory. He cites evidence that) be* cause of this, such in* stitutions as the World Bank have warned repeatedly against emphasis on sucli projects in developing countries, ■ 'J-