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Desal plant figures don't hold water

Published: The Age, 7-Dec-09
Author: Kenneth Davidson

In the modern democratic state, the durability of the big policy lie is prolonged by secrecy, and where this is no longer tenable, by creating an artificial maze to make the relevant information as difficult as possible to find, and once found, almost impossible to interpret.

Take the case of the Wonthaggi desalination plant. Last month Premier John Brumby's office released a media statement based on a ''project summary'' that shows that the net present cost (NPC) of the 30-year project as a public-private partnership was $5.7 billion compared with $6.7 billion if the Government did the job. This is based on the public sector comparator (PSC), which is a government creation that purports to show the true cost to taxpayers if the Government undertook the project. Ergo, a saving of a billion dollars, which was duly reported in the media.

But even based on the figures the Government grudgingly includes in its summary, the PSC shows no such thing. A reasonable interpretation of the document shows that over the 30-year period, Victorians will pay $650 million a year for the water supplied by the PPP (Macquarie Bank, the French multi-national, Suez and the builder, Theiss). This compares to $425 million a year it would cost as a government project. The difference of $225 million a year is the rent that will accrue to the PPP groups and their financiers.

Public or private, the 150-gigalitre desal plant is not needed. The additional water could be produced at a sixth to a quarter of the cost by a judicious mixture of conservation, recycling and diversion dams.

The Government asked itself the wrong question and is offering as an answer a cover-up. Implicitly the project summary recognises that the construction and operating costs are the same for both the PPP and the PSC. The Government, like the PPP, AquaSure, would contract out construction and buy the stainless steel pipes and reverse osmosis filters from comparable sources and the main operating cost - electricity - would be bought from the National Electricity Market Management Company grid.

The main difference between the two NPCs postulated by the Government is the risk that is purported to be transferred from the Government to AquaSure. The PSC calculated that AquaSure would take on risks worth $782 million NPC, which translates to an annual burden equal to $82 million a year.

The main risks of operating a desal plant are many. For example, at some time in the next 30 years a future government might not want to take all the 150 gigalitres of desalinated water available; there could be interruptions to power supply; likely changes to the price of power and the exchange rate risk at the time when the foreign debt in the highly geared project needs to be rolled over.

The monthly service payments incorporate ''a security element that is paid to the extent that the project delivers water that is ordered or is capable of delivering 150 gl per annum'', which amounts to a ''take or pay'' contract, plus an unspecified usage payment depending on the water ordered each month, which probably amounts to a bonus.

Electricity prices will skyrocket because some form of carbon tax will be imposed on electricity generators, but the cost of this will be passed on to water consumers irrespective of who owns the desal plant.

All this does is simply underline the madness of using electricity to produce water when non-electric alternatives are available.

The project only got off the ground because AquaSure got a government guarantee for its borrowings. It was flooded with offers of loan money because the generous deal it got from the Government meant it could offer an interest rate slightly above the risk-free, long-term bond rate and a government guarantee at the same time.

In other words, the ''risk'' transfer that purports to make the PPP the superior proposal is a fiction. But the most egregious element in the PSC is to apply a discount rate of 7.3 per cent (real) to the comparator. This, after taking into account an underlying inflation rate of 2.5 per cent, implies the Government alternative had to earn a rate of return equal to 10 per cent to put it on a level playing field with the PPP bid even though the Government can borrow all it needs for a nominal interest rate 5.5 per cent interest.

The difference adds up to a colossal financial burden for the state. The difference between a return at current prices of 10 per cent apparently required by AquaSure and the 5.5 per cent needed to cover the costs of a publicly owned desal plant is an annual average extra payment of $225 million a year over 28 operating years based on an NPC of $5.7 billion.

To buy the approval of powerful local and global financial interests, the Government has mortgaged the future of this state to the hilt. The consequences of this are not yet even dimly perceived by those charged with the duty of providing good government.

Kenneth Davidson is a senior columnist:
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