Home > Economic policy > Iemma’s power failure

Iemma’s power failure

December 21st, 2007

Over the fold, my column from yesterday’s Fin, on NSW electricity privatisation, which ran under the title above

The Iemma government’s plan to privatise the generation and retail sectors of the NSW electricity industry has drawn predictable applause. Yet it violates virtually every principle of good public policy.

First, it is a breach of trust with the electors. Privatisation was not mentioned in the election platform taken to the people earlier this year. In 1999, Labor fought and won an election on a platform of public ownership.

For self-described political hardheads, violating election commitments is to be encouraged rather than condemned. The conventional wisdom is that good policy is only undertaken if voters can be tricked or ignored.

The corrosive consequences of such thinking are evident in the downfall of the Howard government. Howard began in the recommended manner, by repudiating large parts of his 1996 platform as ‘non-core’. By the time of his defeat, everyone knew that any statement he made could be repudiated, or parsed into meaninglessness, the moment it became convenient to do so.

Breaking election promises corrupts public debate. It encourages the general corruption of political processes that flourished under Howard, and is also rife in NSW. Ministers perform favours for powerful interests, and are rewarded with lavishly-paid sinecures when they leave office. Dishonesty about policy encourages all other forms of dishonesty.

Even Howard took his biggest single reversal, on the GST, to the electorate. Iemma should do likewise.

The dishonesty of the policy is compounded by its packaging. The payments to electricity workers have attracted some criticism from commentators. But this overt payoff is probably the least objectionable component of the deal.

Far worse is the attempt to tie the sale to investments in new infrastructure projects. This package presentation combines economic illiteracy with the potential for a gigantic boondoggle.

According to the Sydney Morning Herald, ‘the sale will .help pay for a “new vision� for urban transport, including a European-style metro rail line.’ (Power ranger Iemma ignites state with $15b, 11 December). The quotes should be around “pay for�, not around “new vision�. There is no meaningful sense in which selling an income-generating asset allows the government to pay for anything. The sale price merely offsets the loss of income.

As a matter of public policy, either a metro rail line is a good investment or it isn’t. Whether or not electricity assets are sold can make no difference to this. However, when politicians get money that they can regard as ‘free’, they commonly squander it.

The risk of dissipating sale proceeds is nowhere greater than with the proposed metro rail line. The world’s leading authority on megaprojects, Bent Flyvbjerg, has shown that, of all classes of infrastructure projections, urban light rail is most prone to cost blowouts and revenue shortfalls. Sydney needs major improvements to its public transport infrastructure. But such investments need careful scrutiny, not cosmetic packaging.

The losses from mismanagement of sale proceeds could easily outweigh the claimed benefits from privatisation. But these benefits themselves are largely a matter of faith. Despite the sale of billions of dollars worth of assets in the past fifteen years, there has been no serious attempt to evaluate the fiscal impact on citizens.

One problem here is that we need to assess what would have happened in the absence of a sale. Fortunately, for NSW electricity, that is not such a problem. We can look at the 1997 sale proposal, which was expected to raise around $20 billion, and compare the actual outcome under continued public ownership.

Assuming (over-optimistically) that all the sale proceeds were used to repay public debt, and that the resulting interest savings were compounded at 6.5 per cent, the $20 billion would have a 2007 present value of $40 billion.

By holding on to the assets, the government received dividend and tax equivalent payments averaging around $1 billion a year. In addition, a capital restructure yielded around $5 billion in equity repayments. Converting these flows to 2007 present values yields about $20 billion.

If the estimated sale price of $15 billion for the generation and retail assets is right, that leaves the NSW public with about $4 billion more debt than they would have had if the 1997 privatisation had gone ahead. But the distribution sector, still in public ownership, is worth at least $10 billion and probably $15 billion. So, the rejection of privatisation in 1997 saved the NSW public between $5 and $10 billion. We can only hope for a repetition.

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  1. pablo
    December 21st, 2007 at 20:05 | #1

    Iemma and his treasurer, Michael Costa, whose title of the Minister for the Hunter unfortunately coincides with where the majority of jobs will be lost have ben exposed. The visit of a PRC delegation to Vales Point power station ( ie prime asset) was said by Costa to be examining clean coal technologies. Union opponents pointed out that there are no such technologies within cooee of the Hunter coast generator, exposing the GW denialist minister as a …liar. This hardly helps the helpless Iemma to sell a prime asset.

  2. melanie
    December 21st, 2007 at 20:19 | #2

    Good article!

    I lived in Adelaide for a very long time. When I moved to NSW (during the Carr years) I was shocked by the poor quality of infrastructure and the lack of strong public debate. Sydney has 2/3rds of the NSW population, but there is no plan and no discussion. If I want to see a debate about metropolitan regions and their problems and potentials I can’t find it here in Sydney!

    Maybe some of your commenters can point me in the right direction?

  3. December 21st, 2007 at 20:30 | #3

    Deleted again. Please Al, either get off your hobby horse or find a new paddock to ride it in – JQ

  4. observa
    December 21st, 2007 at 23:58 | #4

    Heard an ABC interview with Iemma this morning and he was grilled on the privatisation. He stated existing NSW power generators needed $3-4bill in investment to make them CO2 ready, whatever that is. Now assuming the 44bill is the low side of the estimate given the inevitable cost blowouts, what’s that per head of population? that’s before the extra power station needed by 2013 according to Iemma. The journo then got stuck into him asking if this was really all about hiving off the decision to build another fossil fuel plant and by inference the political flak. Basically ummm, err, well we wouldn’t preempt that decision or impose any restrictions and leave it up to the experts, mumble, mumble.

    As for bribing the unions, why would the Govt need to do that if they were transferred across to the new owners an the same wages and conditions?

  5. Ian Gould
    December 22nd, 2007 at 01:23 | #5

    “Now assuming the 44bill is the low side of the estimate given the inevitable cost blowouts, what’s that per head of population?”

    Observa, assuming you mean $4 billion, then given a population of around 6.8 million it’s around $600 a head.

    In practice that’d occur over several years reducing the NPV but let’s assume that either the NSW government or the lessors go out and borrow the whole amount tomorrow.

    So let’s see, $600 per head, assume an 8% interest rate and a ten year repayment term meaning a total cost of around $900 or $90 per annum. (Actually figures for either a secured government loan or a bond issued by an investment grade infrastructure fund are more like 20+ years at 6% pa).

    That’s $22 per person per quarter or around $60 per quarter for the average household.

    Of course, that assumes the whole bill will be met by the household sector.

    Per capita gross state product is around $45,000 , so we’re talking about a reduction of around 0.2%.

    Given that the cost is pretty much fixed and GSP grows around 3-4% per year, that ratio will reduce progressively.

  6. LuxuryYacht
    December 22nd, 2007 at 10:15 | #6

    The “core” and “non-core” distinction was a necessary evil for the Howard government in 1996 – Ralph Willis said there was a budget surplus, but it was in fact in $10 billion of deficit. What else could the government do but cut spending and not implement some of their new plans or “promises”. The Charter of Budget Honesty was meant to put an end to surprises for incoming governments.

    Although, maybe there’s something to be said for British-style manifestos so that electors can hold a government accountable for their whole programme.

  7. Ian Gould
    December 22nd, 2007 at 17:23 | #7

    “Ralph Willis said there was a budget surplus, but it was in fact in $10 billion of deficit. What else could the government do but cut spending and not implement some of their new plans or “promisesâ€?.”

    Virtually every Opposition “discovers” that the budget is in a much worse state than the outgoing government claimed.

    That way after they make the cuts, renege on their promises and budget bottom line comes out better than they claimed, they can claim credit as good economic managers.

    New CEOs do exactly the same thing – they book extraordinary losses in their first year, blame their predecessor then claim credit for turning the company around.

  8. observa
    December 22nd, 2007 at 21:25 | #8

    “Observa, assuming you mean $4 billion, then given a population of around 6.8 million it’s around $600 a head.”
    Yeah, slip the shift key and $ comes out as 4.
    JQ makes the same mistake as you do of dividing amounts by the number of folks. You can halve that 6.8 mill figure because kids, stay at home mums, pensioners, beneficiaries and uni students don’t pay the piper. Well, unless you believe mum dad and two kids earn on average $180,000. Furthermore on an income of $45,000 you currently pay $8,775 to Wayne Swan leaving you $36225 to find that extra $1200 now, assuming it doesn’t grow like cross city tunnels. That’s 3.3% of what’s left after paying the ACCC to moan about the price of petrol for you, among other things. 3.3% and you haven’t paid for a new power station yet, nor the price of carbon on top of those horrid oilco gougings. As for the carbon in the car that burns the petrol, well perhaps you’ll get a discount on that, by importing a nice Chinese carbon tax free model, although not if preliminary rumblings are anything to go by
    http://www.nytimes.com/2007/12/16/business/16view.html?ex=1355461200&en=57a05db98eef77df&ei=5090&partner=rssuserland&emc=rss
    The quantity control freaks are beginning to crawl out of the woodwork everywhere.

  9. observa
    December 22nd, 2007 at 21:43 | #9

    Here’s the ACCC http://www.news.com.au/story/0,23599,22963059-29277,00.html

    ‘The Australian Competition and Consumer Commission (ACCC) said it had written to the heads of the oil companies and the two major supermarket chains, Coles and Woolworths, asking them to justify the price jumps.

    ACCC chairman Graeme Samuel said the watchdog was “seeking an explanation of the recent significant divergence of the price of unleaded petrol in Australia relative to the international price movements”.

    “The ACCC has expressed its concern that a significant divergence has again occurred between the Australian retail price of unleaded petrol relative to the price of Singapore Mogas 95, the international indicator benchmark price,” Mr Samuel said.’

    They find no price collusion after the umpteenth enquiry and now they want the oilcos to collude on price with Singapore. Idiots! Makes you wonder when they’ll start investigating wage rises that are out of line with international benchmarks eh?

  10. Ian Gould
    December 22nd, 2007 at 21:48 | #10

    “they want the oilcos to collude on price with Singapore.”

    You can’t collude with a market.

  11. observa
    December 23rd, 2007 at 06:15 | #11

    Of course it wouldn’t have occurred to the usual suspects that the oilcos have raised prices to allow for the rumblings of govt about the need for investment in being ‘carbon ready’, not to mention the increased admin costs of dealing with the ACCC. Nope, just gouging as usual. Clearly the answer is for the ACTU to dust off its Solo brand again, or for Kevin to nationalise petrol refining and distribution in the interests of us all, just like Iemma is with electricity. Err, no hang on a bit…!

  12. observa
    December 23rd, 2007 at 06:30 | #12

    Now just imagine you’re one of the number crunchers doing the sums on buying Iemma’s new whipping boy electricity assets and you’re listening to the flak the oilcos are copping over a few cents a litre and you’re deciding how to cost that in to your overall sums eh? Idiots!

  13. Arjay
    December 23rd, 2007 at 20:02 | #13

    There are many enterprises that should always be in private hands but basic necessities like electricity,water,health etc should remain in the public domain.

    Did bank fees decrease with the sale of the Commonwealth bank?Are Victorians paying less for electricity than people in NSW?

    Why do we have a Communist Chinese Govt interested in buying our power plants,when our own Govt of NSW cannot turn a profit from a virtual monopoply position?

    How stupid and inept have our Govts become?The Chinese Govt would not be responsible for the infrastructure of power lines ,just the lucritive power stations that would wholesale energy to the various retail outlets.So when the price of power goes well beyond the consumer price index,the Iemma Govt will not be responsible.Gutless wonders we all would think?

    This Iemma Govt is selling a profitable public asset for short term gain.In the longer term taxes will increase to fill the void and the foreign owners in a virtual monopoly position,will increase prices at will.A double whammy.Morris Iemma will be unaccountable.Living standards for the majority will fall.

    In NSW,we have Govt of invertebrates.

  14. observa
    December 24th, 2007 at 10:35 | #14

    “There are many enterprises that should always be in private hands but basic necessities like electricity,water,health etc should remain in the public domain.”

    Dare I ask about basic necessities like food, clothing and shelter right about now Arjay? Anyway, one thing’s for sure, basic necessities like carbon taxes should always be in private hands now it seems. Well unless lefties see sense and demand our govts only are responsible for carbon taxing. Unless they do, they can damn well get over it.

  15. Arjay
    December 24th, 2007 at 12:02 | #15

    Observa,there is a big difference between monopoly powers and a free market situation we have with food and clothing where there are thousands of sellers,and you can actually grow food or make your own clothes,but you cannot provide your own cheap energy yet.We look like giving the Chinese Govt a monopoly.That is not good economic policy.

    Bah humbug to carbon trading.I’m not convinced that CO2 is the culprit.It is not a major greenhouse gas.Bob Carter has demonstrated that temperatures are well within long term temp variations.Did you know why Greenland was named so?Well 400 yrs ago it was exactly that.The people there are over the moon with their country’s new productivity.

    Currently we are experiencing a very mild summer.Could this be due to global cooling?

  16. Ian Gould
    December 24th, 2007 at 18:58 | #16

    “Did you know why Greenland was named so?”

    Yes, it was named grnland (not greenland) because of the numerous shoals of reefs fringing it which made it easy to run aground there.

  17. Arjay
    December 24th, 2007 at 20:23 | #17

    Ian Gould enter into the full debate instead of one liner snipes that prove nothing.If there were numerous shoals and reefs,does this not suggest a much warmer climate since the glaciers and sea ice would have overshadowed these shoals and reefs?

    Your observation true or not does not discount my fundamental argument.The 1930′s still remain the hottest decade on record and during the time of the dinosaurs co2 levels were 1200% that of the present.

  18. Ian Gould
    December 24th, 2007 at 23:00 | #18

    “If there were numerous shoals and reefs,does this not suggest a much warmer climate since the glaciers and sea ice would have overshadowed these shoals and reefs?”

    No, why should it?

    Take a look at a map of Greenland today – it’s incredibly crenelated with fjords and fringing islands everywhere.

    In fact a “much warmer climate” would have raised the sea level and covered many of those shaols. (Not to mention flooding most of the centre of Greenland, which is actually below sea level.)

    Read what the archaelogists say about medieval Greenland – a few thousand people surviving mostly by hunting and herding and trading imported Danish and Icelandic goods to the Inuit for furs.

    They imported most of their grain and wood from Iceland; grew tiny patches of vegetables in special raised gardens designed to elevate them above the permafrost and just barely managed to produce enough hay to keep a few breeding cattle alive over the winter.

    Does that sound like a particularly “green” land to you?

    Oh and those gardens and silage crops were concentrated in the extreme south of the island where the climate is warmer than elsewhere.

    When the Danes resettled Greenland in the 15th century they grew the exact same types of crops in the exact same areas.

    “The 1930’s still remain the hottest decade on record”

    Only in the continental US.

    “during the time of the dinosaurs co2 levels were 1200% that of the present.”

    Yes and temperatures were more than 10 degrees high than at present. Then the forests and swamps of the period locked up vast amounts of carbon which we’re now busy burning.

    In what way does that support your “fundamental argument”?

  19. Bobalot
    December 25th, 2007 at 05:49 | #19

    Hundreds of scientists and many organizations through many experiments and analysis have come to the conclusion that we are experiencing global warming due to mans pumping of C02(amongst other things) into the atmosphere. The general rule of thumb amongst these studies is a 90% chance of it happening.

    There are a small group of “scientists” who declare otherwise. I use the term loosely because a great majority of these “experts” have no actual expertise in the science of climate.

    But don’t worry with the help of these delusionists and google, anybody can become an expert on climate change! The major scientific bodies and hundreds of scientists and their peer review studies can go and stuff themselves!

    I love they way these chaps try to present themselves as crusaders of the truth trying to breakthrough the ‘lies of the scientific establishment’. It’s hard to keep a straight face while some of these blokes paint a massive intergovernmental conspiracy involving thousands of scientists across the world. For what purpose? Nobody actually knows.

    If I remember correctly, Bob Carter was the bloke spruiking the ‘Global warming swindle’ in Australia through newspaper articles. He got egg on his face when the numerous inaccuracies and outright lies were found in the documentary.

  20. Arjay
    December 25th, 2007 at 20:01 | #20

    Pre-industrial co2 in 1800 was 280 ppm.In 2000 it was 350 ppm.This is only a 25% increase in co2 gases.By 2050 co2 will be 500 ppm or a 79% increase since 1800.By 2100 co2 will be 800ppm or 186% increase since 1800.Worst case scenario based on past history,a 1200% increase in the Jurassic period produced a 10 degree increase in temp.By 2100 we will see an increase of 4 dg C if we continue the present rate of emitions.

    The Jurassic period also suffered an ice age amidst the highest co2 levels in recorded geological history.

    Co2 is not a major greenhouse gas.Water vapour has a much greater influence.There are probably other greater influences on our climate that we are unaware of.A 2 deg c increase by 2050 will not see the end of the planet.The proliferation of nuclear weapons and pop growth are far greater threats.

  21. Ian Gould
    December 26th, 2007 at 17:26 | #21

    “The Jurassic period also suffered an ice age amidst the highest co2 levels in recorded geological history.”

    It did?

    Got a link?

    Is there a consensus about it? Can you prove it?

    Care to explain why this particular bit of paleoclimatology is apparently 100% proven and absolutely unquestionable where ever bit of evidence that doesn’t support your position is automatically suspect?

    “Ice age” refers to those periods in the Earth’s history where there are actually ice caps. We’re in an ice age right now and until and unless global warming total melts both poles we still will be.

    Oddly, the Jurassic ice age doesn’t seem to have been noticed by many people:

    “There have been at least four major ice ages in the Earth’s past. Outside these periods, the Earth seems to have been ice-free even in high latitudes.

    The earliest hypothesized ice age, called the Huronian, was around 2.7 to 2.3 billion years ago during the early Proterozoic Eon.

    The earliest well-documented ice age, and probably the most severe of the last 1 billion years, occurred from 850 to 630 million years ago (the Cryogenian period) and may have produced a Snowball Earth in which permanent ice covered the entire globe. This ended very rapidly as water vapor returned to Earth’s atmosphere. It has been suggested that the end of this ice age was responsible for the subsequent Ediacaran and Cambrian Explosion, though this theory is recent and controversial.

    A minor ice age, the Andean-Saharan, occurred from 460 to 430 million years ago, during the Late Ordovician and the Silurian period. There were extensive polar ice caps at intervals from 350 to 260 million years ago, during the Carboniferous and early Permian Periods, associated with the Karoo Ice Age.

    The present ice age began 40 million years ago with the growth of an ice sheet in Antarctica. It intensified during the late Pliocene, around 3 million years ago, with the spread of ice sheets in the Northern Hemisphere, and has continued in the Pleistocene. Since then, the world has seen cycles of glaciation with ice sheets advancing and retreating on 40,000- and 100,000-year time scales. The most recent glacial period ended about ten thousand years ago.”

    http://en.wikipedia.org/wiki/Ice_age

    Oh and where did you get the 18,000% higher figure?

    Why do you accept it as accurate? See my comments regarding the Jurassic ice age claim.

    Over the course of the Earth’s existence, the sun’s output has increased around 10%. The Earth’s orbit has varied quite significantly.

    These changes OVER A PERIOD OF MILLIONS OF YEARS probably outweigh the effect of changes in carbon dioxide levels. They don;t explain the current rate of warming (if they do we’re in bigger trouble than we thought because either the world’s orbit has become much more unstable or the sun’s expanding at a rate that’ll cook us).

    These other factors are totally irrelevant to effect increased carbon dioxide levels will have on the Earth’s temperature. arguing otherwise is equivalent to arguing “Fires in the past were caused by lightning strikes, therefore its absurd to argue that smoking in bed could cause fires. Oh and I’m much more concerned about faulty electrical wiring anyway.”

    “Co2 is not a major greenhouse gas.Water vapour has a much greater influence.”

    As for water vapor, it contributed between 75 and 90% of the current greenhouse effect. The total current greenhouse effect is equivalent to roughly
    25-30 degrees. 10-25% of that is between 2.5 and 6 degrees. That implies an approximate effect for doubling carbon dioxide levels of a further 2.5-6 degrees.

    Now because of the saturation effect a doubling of carbon dioxide levels actually only increases direct warming by around 70% of that. But then you have positive feedbacks – warming increases evaporation which, as you noted, means more global warming from water vapor. Meanwhile, melting snow and ice at the poles exposes soil and rock which has a lower albedo and absorbs more heat.

    “There are probably other greater influences on our climate that we are unaware of…”

    This is a total non sequitor – since we are unaware if them how do you know they won’t aggravate the warming from carbon dioxide?

    What’s next – “why do we waste money on an army when we could be invaded tomorrow by giant space bees?”

    “The proliferation of nuclear weapons and pop growth are far greater threats.”

    We’ve survived sixty years with nuclear weapons and the number of nukes is decreasing.

    Population growth has slowed dramatically and world population will peak somewhere aroudn 2050 then decline.

    Tell me, since you’re so concerned about these threats what are you doing about them? Do you volunteer for Planned Parenthood? Contribute to the Union of Concerned Scientists? Or is this concern just a handy rhetorical device to avoid action on global warming?

    “Yeah I’ve heard of this “germ theory of disease” but it’s just a theory and someone showed me a website with people with science-y sounding qualificiation who say its false. And my kids cry when I get them immunised plus I’m more concerned about pedophiles. Plus I hear the vaccine companies fund these “doctors” and a whole bunch of them get grants for research on these “germs” so they’re obviously biased.”

  22. BilB
    December 27th, 2007 at 06:32 | #22

    I agree, JQ, with your panning of the Iemma’s energy direction. This is a crucial time in the Australia’s future energy planning framework. Iemma appears to have absolutlely no regard for Global Warming and its ramifications. Iemma seems to be totally possessed by short term interests, and Rudd, the person who must at this time be establishing the grand energy plan, appears to be distracted by the complexity of his massive initialisation challenge to the extent that he is not grasping the importance of keeping energy directions on hold until the full energy plan is comprehended. Iemma may well create a contractual mess that is difficult to untangle for decades to come, and in so doing dramatically derate Australia’s effectiveness at arresting Global Warming.

  23. Arjay
    December 27th, 2007 at 16:47 | #23

    For those who are interested about the reality of CO2 and global mean temperatures see http://mysite.verizon.net/mhieb/WVFossils/Carboniferous_climate.html.Christopher Scortese demonstrates that there is not correlation between global mean temp and the amount of co2 in the atmosphere.
    Now,no one disputes his data,or the way in which it was collected or presented,yet our global warming exponents ignore this reality and continue with their messages of gloom and doom.

    By the way it was the Ordivician period not the Jurrasic, in which there was an ice age and CO2 levels were the highest in our geological history.At the end of the Jurrasic temp plumetted by 6 deg c and CO2 levels actually went up.Co2 levels lag behind temp change in some instances and in others are totally irratic.See for yourself.

  24. observa
    January 2nd, 2008 at 16:05 | #24

    Another sound reason for Iemma to outsource the whipping boy perchance?
    http://www.dailymail.co.uk/pages/live/articles/news/news.html?in_article_id=505247&in_page_id=1770

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