Politician admits wasting billions of dollars

Ok , an ex-politician. But even among ex-politicians, how many admit to being partly responsible for wasting billions of taxpayers’ dollars, as former Hamer and Kennett government minister Rob Maclellan does in The Age his morning?

The sources of this waste are Alcoa aluminium smelters near Geelong and in Portland, a Victorian coastal town. By the time current contracts expire The Age estimates that these smelters will have received $4.5 billion in electricity subsidies.

As Maclellan now concedes, ever agreeing to this arrangement was a ‘collective moment of insanity’ around the cabinet table. There are many such moments, but at least Maclellan is, albeit far too late to do anything about it, admitting to this one.

31 Responses to “Politician admits wasting billions of dollars

  • 1
    Rober Merkel
    October 17th, 2009 20:41

    Yes, and politicians are still falling for the same old schtick.

    Do you know much about the history of why the stupid bloody smelter got up in the first place?

  • 2
    Son of the Ratpack
    October 17th, 2009 23:07

    It sounds like classic 1970s industry policy, where too much subsidy was never enough. And it had a regional angle as well, with the smelter conveniently located in the reponsible minister’s electorate. The small matter of having to transport the hugely subsidised electricity from one end of Victoria to the other was an added bonus.

    Here’s an idea. Shut the thing down. Then that greenhouse gas factory, Hazlewood power station, could be shut down as well. The scoreboard would read: Victorian state budget saves hundreds of millions on subsidies and Australia cuts back hugely on greenhouse has emissions. Talk about win-win. As for the unemployed in Portland as a result,pay them a triple dole for life. It would still be worth it.

  • 3
    JC
    October 17th, 2009 23:12

    Andrew:

    I’ve seen some studies that strongly suggest The Age’s and Merkal’s constant smears against these plants is simply another extremist concoction, such as the one that coal companies receive massive subsidies. These statements are simply untrue or rather have a nasty habit of never being proved and to environmental extremists the mere accusation is sufficient.

    While it is true, the Alcoa plants pay for electricity at below the price most consumers do, however that in itself is no proof that there is a direct subsidy. Even the subsequent loss by the government doesn’t mean the 30 year contract was established on the back of subsidies or that it wasn’t a commercial decision.

    I’ve the very valid argument that evidence of lower prices to Alcoa is a consequence of the smelters running full speed at off peak hours and allows the power plants to maintain base load furnace temps ready for the peak period.

    The “expert” The Age hired to investigate is also quite telling. How on earth would an accountant be able to determine if the initial decision to sell the power at a particular price is a subsidy. You need a heavy duty economist to do that. An accountant would simply not have the formal training.

    Robert Merkal and his like minded extreme environmentalist friends need to show proof of these subsidies to plants and coal companies or from now on they should be simply treated as vicious smearers lacking complete credibility. it’s time to show the evidence that Alcoa acted in bad faith and that all the power and coal producers are receiving subsidies or retract the lie.

    Merkal has also suggested it is acceptable to being abusive towards skeptics of both the science the those who like Lomborg suggest that doing nothing (leaving the GDP growth trajectory unmolested) is a superior policy.

    Merkal’s suggestion the ETS is a perfectly libertarian policy which is frankly laughable.

    http://clubtroppo.com.au/2008/12/19/david-evans-greenhouse-sceptic-debates-his-views-on-troppo/

    I’ll repeat, evidence of lower prices is not evidence of a subsidy as there are countless other perfectly valid explanations too.

  • 4
    JC
    October 18th, 2009 00:01

    Rat pak:

    How exactly would you close it down? Would you buy back it’s contract or simply try to walk away?

    You can’t determine if the plant is taking subsidies even if the price of energy it buys is less than your price. “Closing it down” before the contract expires may also be punishment for a government decision.

    Also why pay people a triple dole if it’s the firm that would be damaged as a result of walking away from a contract. It doesn’t appear to me that the workers are the ones that have the long term contract.

  • 5
    Son of the Ratpack
    October 18th, 2009 06:56

    JC, the government doesn’t need to do anything. Alcoa have said, according to the media reports, that they will shut the place down the
    themselves and walk away if they don’t get further subsidies to compensate them from the effects of the CPRS. (If you don’t like the word subsidies, substitute ‘assistance with their electricity bill’.) I assume that Alcoa are telling the truth and will walk if they don’t get what they want. I say, let them walk. Apparently Finland is a good place to make aluminium with low carbon electricity. I am more than happy to import aluminium from there, just as I am happy to import cheap shoes from China that used to be made here.

    And as I said, we can cut the dirtiest electricity producer too without threatening anybody’s ability to switch on the lights. And save the
    Victorian government a motza.

    What is not to like about this idea? The people who work at the smelter will lose their jobs. We could leave them to their own devices to find jobs in the wind farm and whale watching industries or whatever else happens at Portland. That might be OK. But I am feeling generous.

    As

  • 6
    JC
    October 18th, 2009 08:43

    Ratpak:

    They will need assistance because in comparative terms they would be disadvantaged by the ETS if other countries don’t follow.

    ” Shutting the place down” achieves nothing and in fact could send these firms to places that don’t have environmental rules therefore doing nothing to global emissions.

  • 7
    Son of the Ratpack
    October 18th, 2009 10:23

    JC, Alcoa’s Portland plant consumes electricity about equal to what Hazlewood produces. Hazlewood would have to be the most greenhouse intensive electricity generator in the world, or close to it. Shut down Portland and Hazlewood can be shut as well. Where would Alcoa go in the world that would create more GHGs than Hazlewood, a brown coal generator that uses ancient technology even by the standards of brown coal generators?

    It is very difficult to imagine a situation where more GHGs get produced globally if all that happens is Alcoa goes elsewhere, no matter where that is. But as I said before, Finland is the country of choice for smelting, and they have nuclear power, which is not without its issues (though the Finns are world leaders in nuke technology and waste disposal) but are GHG free.

    Hazlewood produces about 5% of Australia’s electricity. Electricity generation is by far the largest source of our GHG emissions and Hazlewood is the most emissions intensive of all the generators. Shut Hazlewood (not needed without Alcoa) and we are just about there in hitting the 5% GHG cut in the CPRS. This is without doing anything at all about other elecricity generation, transport or agriculture. What an easy peasy way to meet our GHG targets. Other countries should be so lucky.

    Shut down Portland and one of great policy mistakes of the 1970s gets undone. Like a lot of stuff from the 1970s, no doubt it seemed like a good idea at the time. It was a response to the jobs crisis of the mid to late 70s, which was a big deal. Dick Hamer did the best thing for his state as he and his Cabinet saw it in a business friendly way. But it was a mistake all that was made a long time ago. We don’t have to persist with these errors into the 2010s.

  • 8
    JC
    October 18th, 2009 13:04

    Ratpak:

    You continue to assume that Alcoa receives subsidies. Can you offer any verifiable evidence?

    If you think brown coal is bad you ought to do a little digging (no pun) and find out what China burns over there. The vast majority of Chinese coal use is domestically sourced and it’s crap too emissions wise.

    Lastly Victoria is head towards looming power shortages and your blaze references to shutting this or that down sounds more than a little disturbingly authoritarian.

  • 9
    Son of the Ratpack
    October 18th, 2009 14:03

    Alcoa receives a subsidy in the sense that the Victorian Government pays a large part of their electricity bill. That was the deal that got them to set up in Victoria in the first place. I am not saying that it is a subsidy in the sense of the overall price of the electricity is less than the cost of producing it.

    I am not in favour of authoritarian solutions. I am in favour of letting Alcoa and Hazlewood shutting themselves down, as they say will they do if they don’t get what they want.

    If Alcoa sets up shop in China, that will probably be a net positive in GHG terms. China has some old dirty plants, but its plants are a lot cleaner than Hazlewood.

    The case for letting Alcoa go, in any case, be made compellingly without any reference to the implications for GHGs. It is just a bad idea for governments to attract companies by offering to pay their bills. Fortunately we don’t do that anymore. The last time it was seriously suggested was during the dot com bubble when a lot of people thought it would be a good idea to pay billions to Intel to set up a chip plant here. The rationale was little more than Ireland and Israel are doing it so we should do. Luckily it didn’t happen. These days the only similarly dumb ideas which happen are paying Tiger Woods $5 million to play a few rounds of golf. Which is bad enough, but not in the Alcoa league.

  • 10
    JC
    October 18th, 2009 14:24

    Alcoa receives a subsidy in the sense that the Victorian Government pays a large part of their electricity bill. That was the deal that got them to set up in Victoria in the first place. I am not saying that it is a subsidy in the sense of the overall price of the electricity is less than the cost of producing it.

    Ratpak, the Alcoa deal preceded the privatisation so we can’t reach a rational conclusion from the fact that because the state government is paying for the power now it wasn’t on commercial terms at the time the deal was signed. We can’t even tell from the previous minsters statements for the following reasons. He offers no evidence other than his assertions and for all we know he is simply doing a Doctor’s wife imitation. Other than accusations there hasn’t been any evidence to show that Alcoa is receiving a subsidy except from environmental extremists. The fact that The Age used some accountant raises my suspicions that The Age writer doesn’t even know what a subsidy is and or is simply being dishonest.

    I am not in favour of authoritarian solutions. I am in favour of letting Alcoa and Hazlewood shutting themselves down, as they say will they do if they don’t get what they want.

    To relocate where exactly: to a place where emissions would be even worse and they would be if they located to places like china for the reasons I mentioned? High grade, high thermal density coal is not widely used in China as even our exports are very low in total volumes consumed.

    If Alcoa sets up shop in China, that will probably be a net positive in GHG terms. China has some old dirty plants, but its plants are a lot cleaner than Hazlewood.

    No they are not as China burns some of the lowest grade coal in the world that it sources from it’s own mines. You’re dreaming.

    The case for letting Alcoa go, in any case, be made compellingly without any reference to the implications for GHGs. It is just a bad idea for governments to attract companies by offering to pay their bills.

    They didn’t when the contract was conceived. The reason the government is paying its bill is the result of a previous contract when Alcoa was sourcing power from the SECV a state monopoly. Perhaps the government set the terms on some scale that no longer applied. As I said we don’t know.

    Fortunately we don’t do that anymore. The last time it was seriously suggested was during the dot com bubble when a lot of people thought it would be a good idea to pay billions to Intel to set up a chip plant here. The rationale was little more than Ireland and Israel are doing it so we should do. Luckily it didn’t happen. These days the only similarly dumb ideas which happen are paying Tiger Woods $5 million to play a few rounds of golf. Which is bad enough, but not in the Alcoa league.

    Your analogies/examples are incorrect. If the government decided for some reason to leave the Alcoa deal out of the privatization picture then it doesn’t directly equate to the examples you have offered.

    Closing down Hazlewood without compensating the state with the same energy production potential and leaving us with the hazard of blackouts to satisfy green demands is not only authoritarian it’s fascist in the traditional sense of fascism which is authoritarian statism.

  • 11
    Rajat Sood
    October 18th, 2009 20:13

    The whole saga is a great advertisement for getting (or keeping) the government out of industry and industrial decisions. While the craziness largely ended in Victoria well over than a decade ago, the same cannot be said of other Australian jurisdictions. This includes the Federal Government – protection for the car industry is worth much more than $4.5 billion.

  • 12
    Rober Merkel
    October 18th, 2009 22:19

    If the subsidy figure is accurate, back of the envelope callculations suggest it probably would have been cheaper to simply pay the 800-odd staff at the smelter a full salary to do nothing for 30 years.

  • 13
    JC
    October 18th, 2009 23:33

    Robert:

    What are you actually saying? How on earth can you even make that assertion?

    How about the firm’s assets?

    How about its lost profits potential.

    The workers are not even the prime factor in the strict scheme of things as the government never had a contractual arrangement with them.

    What exactly is the evidence of a subsidy? Do you have any? I have already carefully explained to you that the government payment to Alcoa is not itself evidence of a subsidy. And the joke is that The Age used an accountant to figure out a subsidy when its possibly the first time he’s ever seen that word let alone trying to figure it out.

    I’m honestly not trying to sound offensive but you really have no idea if you believe what you’re saying.

  • 14
    Son of the Ratpack
    October 19th, 2009 07:18

    Fortunately the Victorian government doesn’t have to do anything like repudiate contracts signed when the SECV was privatised or at anyother time. All they have to do is do nothing when the CPRS comes into play and Alcoa will go away of their own accord. Or so they say. And if they do, well 30 years is a good innings.

  • 15
    Andrew Norton
    October 19th, 2009 07:40

    JC – I think you are the only person contesting the point that this is a subsidy – at the very least, for industry policy reasons, a previous state government signed a deal with Alcoa that is unlikely to have passed any normal commercial test.

  • 16
    M
    October 19th, 2009 09:40

    JC everyone within the electricity industry knows its a subsidy, that was just how Aluminum smelters got setup. Apparently the price Portland pays is under $20/MWh. Current average prices are more like $35-40.

    Aluminum uses 15% of australia’s electricity and produces 6% of emissions. However in export terms it is worth billions each year ($4b in 2000, so more now). So subsidizing the industry isn’t necessary a net loss for the country.

    Remember that the contracts were signed between a commercial and non-commercial entity. Who do you think got the better deal? Alcoa has been doing power purchase deals all over the world for decades.

    Note also that the SECV was not an especially commercially efficient operation, they massively over-supplied the electricity market because they kept building new power-stations (thats what engineers do). Last coal station built was in 93-96. Nothing new since, no new baseload is likely in Vic for another 5 years. As I said massively over-supplied.

  • 17
    Rajat Sood
    October 19th, 2009 10:10

    There’s an account of the history of the Portland smelter contract in chapter 3 of the book, “Warring Tribes” by the late Bob Booth (2003 revised edition). He basically says that the problem was that the tariff agreed between the Government and Alcoa was linked to the world aluminium price, which fell throughout the ’80s and ’90s and led to a tariff that was well below what the SECV charged large customers generally. Booth says: “This agreement on pricing, reached in 1984, has worked out to be very satisfactory to Alcoa due to the operation of the metal price linkage mechanism” (p.42). While this leaves open the possibility that it was ex ante a reasonable deal, Booth goes on to say: “The poor choice of a base date world aluminium price and an excessively generous sensitivity factor included in the contract drove the tariff down to a floor price that was generally only sufficient to cover the fuel costs of Loy Yang…”. Although the choice of a particular base year may be unfortunate, it seems harder to excuse the government agreeing to a ‘generous’ sensitivity factor that effectively put taxpayers in the position of taking a leveraged punt on world aluminium prices.

  • 18
    JC
    October 19th, 2009 12:23

    Andrew:

    Perhaps. However we don’t really have the evidence and to be frank, the very, very last “authority” I would trust on the subject is “The Age”.

    I would prefer to see some evidence before I accept anything they say and The Age’s accountant “findings” doesn’t cut it.

    M:

    Aluminum smelters buy their power at a discount, because they buy in huge predictable bulk which is not evidence of a subsidy. And to be even more than frank, we’ve been hearing from environmental extremists that coal companies receive subsidies and yet not once over all the years I’ve heard this canard have I ever seen any evidence it is the case. Christine Milne, makes this accusation at every opportunity and I honestly don’t think she would know how to spell the word let alone what it means.

    Perhaps while Robert Merkal is here is could show us or link to the evidence as he’s been using that accusation for a while now from what i recall.

  • 19
    JC
    October 19th, 2009 12:26

    Rajat:

    From you citation a bad business deal is not itself evidence of the intent of a subsidy which is really my point.

    Anyone who isn’t extremist on this issue… Why concede any single point to the alarmists when there is no need to do so without them presenting fool proof evidence and not an accountant “findings” like the untrustworthy Age.

  • 20
    Andrew Norton
    October 19th, 2009 13:30

    JC – There was more on it a feature story in The Age to which I did not link (did not seem to be one). Your evidence seems to be your suspicion of The Age, but you don’t really have a good theory of what Rob Maclellan would come out now and say it was a bad decision. I would have thought that in the battle of competing heuristics that ‘business deal done by state government is dodgy’ was stronger than ‘The Age makes up stories’.

  • 21
    JC
    October 19th, 2009 15:40

    Well that could very well be, Andrew. But unfortunately there’s also a decent history of conservatives doing a runner and start batting for the other side. Fraser, the Doctors wives, the good Doc. Hewson. The last one was especailly interesting, sitting on the board of a solar company receiving subsidies while also spouting alarmism on the ABC.

    I’m asking for the evidence, real solid economic evidence that Alcoa was/is receiving a subsidy as against a bad business decision by the former government.

    And yes, you’re correct in saying that i wouldn’t trust The Age. In fact I stopped buying the paper as it’s become a propaganda sheet.

    Almost every time an environmentalist speaks these days s/he talks about the the subsidies going to the coal companies and as yet I have not seen evidence of this claim despite its widespread use. I would welcome anyone that could show evidence.

  • 22
    melaleuca
    October 19th, 2009 16:31

    “I would welcome anyone that could show evidence.”

    Seek and ye shall find Matthew 7:7

  • 23
    Andrew Norton
    October 19th, 2009 16:38

    We’re not talking about ‘subsidies’ in the sense of coal companies getting concessions in the ETS (ie, effectively lower taxes). We’re talking about spending that directly reduces normal business costs, which is a subsidy in my mind, even if it started out as a normal commercial arrangement that went wrong, which I don’t think was the case. State governments should never underwrite normal business costs for a particular company (or indeed any compaies, but special deals for a particular company are the worst). Opposing this isn’t going over to the other side. It is what classical liberals fundamentally believe in, and still is even if other tribes for their own reasons agree with us.

  • 24
    JC
    October 19th, 2009 17:25

    Andrew:

    I’m not talking about subsidies to the coal companies through the ETS. Almost every environmentalist says that coal and power companies here receive subsidies here and now. They have said and continue to say it. It’s almost like an automatic reflex. You go to a doc; he tests your reflexes by hitting a knee with a rubber hammer. Stick an environmentalist in front of a camera or give them space in a propaganda sheet and they reflexively say exactly that.

    A bad business decision is not a subsidy and judging from Rajat’s history lesson it seems like it was more of a bad business decision. It’s are not the same thing and in my mind it is important we delineate these things properly or otherwise the term “subsidy” will lose its real meaning like “externality” has where people use it now to provide a cover for personal preferences.

    I’m not for a second suggesting the government should ever get into bed with any private operation save for receiving the monthly supply of stationary and even then i have my doubts that providing them with pens, ink and paper is a goof idea.

    I’m concerned that we’re falling into the trap of wrongly defining something that in fact may not have been the case.

    As it looks now, if Rajat’s history lesson is right it seems it was a bad business decision rather than a straight out subsidy so in effect my hunch about The Age’s version is inaccurate seems to be right.

  • 25
    JC
    October 19th, 2009 17:26

    That’s about the only place you would find it , mel. It’s based on faith.

    I knew the moment Christine Milne began to mutter it that it was wrong.

  • 26
    melaleuca
    October 19th, 2009 17:43

    Here’s one example: http://www.isf.uts.edu.au/publications/CR_2003_paper.pdf

    Type coal subsidies australia into your browser and you’ll find dozens of links detailing the subsidies.

  • 27
    Andrew Norton
    October 19th, 2009 18:12

    On a quick look the link melaleuca gives and the Productivity Commission put annual assistance to the fossil fuel industry at around $500 million a year – though some of this comes from concessions available to all industries. I’m sure most of it is dubious, though I doubt any of it is necessary to the industry’s profitability.

  • 28
    JC
    October 19th, 2009 18:27

    Mel:

    1. They include things like agency costs and abatement. Australian geo-science ought to be privatized .

    2. Petroleum subsidies for exploration. it doesn’t really sound huge.

    In any event they are also including non-abatement costs.

    Total direct subsidies which includes agency costs is around $4 billion. It hardly ranks with the noises we keep hearing about how huge they are. Keep in kind that China recently signed on to the deal worth $50 billion with just one firm.

    3. In not altogether certain that exploration costs ought to be treated the same and firms ought to be able to expense those costs asap.

    4. I can’t see anything significant as subsidies to ongoing operations in the same way say the motor vehicle business in subsidized to run unprofitable operations.

    5. They also include subsidies to low income housing as part of the thing which amount to $264 million. My guess is that is ought to be part of welfare.

    6. They estimate the emissions non abatement at $416 million

    7. They estimate road use subsidy of $1.2 billion

    In short it’s trumped up. Add all these up including the dishonesty of adding in welfare low cost housing and the aluminum smelters and road and it takes up most of the so called subsidies.

    In short it’s bullshit.

  • 29
    JC
    October 19th, 2009 18:37

    Exactly, Andrew. It’s immaterial. Most of mel’s google search links take people to such things as Greenpeace sites where one propaganda piece suggests the coal industry in NSW receives $9 billion in subsidies but don’t detail them.

  • 30
    melaleuca
    October 19th, 2009 18:48

    Don’t be dishonest, JC. You know perfectly well I’ve never linked to a Greenpeace site or any even remotely associated site. I pretty well always link to academic sources, as per the above link.

  • 31
    JC
    October 19th, 2009 18:58

    Mel

    Read what I said again.

    Most of mel’s google search links take people to such things as Greenpeace sites

    Which was in direct reply to this:

    Type coal subsidies australia into your browser and you’ll find dozens of links detailing the subsidies.

    A nice heart felt apology should be in order, Mel.