Projects will cost $1185M n interest by 1990

Press, 27 July 1981, Page 4

Projects will cost $1185M n interest by 1990

Parliamentary reporter

Interest payments which will have to be met on overseas loans raised for six of the big development projects contemplated by the Government will amount to $llB5 million by the end of this decade.

This figure relates only to the overseas portion of the interest bill as it is likely to affect, the country’s balar of payments, aid is calcu lated only in It U dollars. | making no allowance for i.. I. flation.

It has been put forward by the Acting Minister of Finance (Mr Templeton) in reply to a question from the member of Parliament for St Albans (Mr D. F. Caygill). Mr Caygill had sought to find the total interest payable on the capital required for the New Zealand Steel project, the Mobil synthetic petrol, plant, the ammoniaurea plant, the second aluminium smelter, the third potline at Tiwai, and the expansion of the Marsden Point refinery. , Mr Templeton said that an estimate of the total interest was not readily available. When calculating the

national benefits of the projects, the annual stream of costs and benefits — before deducting the interest payable in New Zealand or overseas — was discounted at the public sector discount rate, he said.

•In this way, the total real resources committed to the projects were tested to determine whether" they earned a rate of return equal

. or greater than the discount rate. The discount rate was not affected by the fact that a part of a particular project could be financed by borrowings at an interest rate greater than the discount rate, said Mr Templeton. “This approach recognises that interest payments between New Zealanders represent a transfer and not a resource cost," he said. An estimate had been made, however, of the amount of interest payable on overseas loans in terms of its impact on the balance of payments.

The aggregate of such interest in 1981 dollars to the 1989-90 years for each project is: New Zealand Steel project, $l5O million; Mobil synthetic petrol plant, $345 million;

ammonia-urea plant, $lO million; second aluminium smelter. $260 million; third Tiwai potline, $135 million; and refinery expansion, $285 million.

Mr Templeton listed special factors taken into account when calculating the interest applicable to each project. For the New Zealand Steel expansion, foreign debt was assumed to be raised equal to the off-shore content of the capital costs, interest was calculated at 3 per cent real, and no debt was repaid before 1990.

For the synthetic petrol plant, a debt-equity ratio of 80.20 has been assumed, all debt is raised off-shore, the average real interest rate is 2 per cent, and off-shore debt is repaid in equal amounts over the life of the project.

For the ammonia-urea plant, a debt-equity ratio of 60:40 is assumed, $l7 million of debt is raised in New Zealand with the balance raised off-shore. The average interest rate is assumed to be 2 per cent real, and offshore debt is repaid as a first charge on available cash flow from the project.

For the second aluminium

smelter, a debt-equity ratio of 60:40 is assumed, all debt is raised off-shore, and the average interest rate is 3 per cent real. No off-shore debt is repaid before 1990. For the third potline at Tiwai Point, a debt-equity ratio of 90:10 is assumed, all debt is raised overseas, and the average interest rate is 3 per cent real. Off-shore debt is not repaid before 1990. For the refinery expansion, a debt-equity ratio of 80:20 has been assumed. Once again, all debt is raised offshore. The average nominal interest rate has been calculated at 15 per cent, and overseas debt is repaid out of cash flow.

Mr Templeton said that detailed financing arrangements for most of the projects have yet to be concluded and significant changes to the working assumptions might be necessary. These assumptions reflected. for the most past, the views put to the Government by the promoters of the projects. Financing flows might be modified by decisions taken by the Government on the financing of the over-all balance of payments deficit, he said.