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Time to come clean on the cost of water

Published: The Age, 31-May-10
Author: Kenneth Davidson

Victorians haven't been told the full story on how much they could pay.  The Minister for Water, Tim Holding, has misled the electorate over the price of water from the Wonthaggi desalination plant, which will have the capacity to produce up to 40 per cent of Melbourne's water.

Two years ago the retail price of water was 85¢ a kilolitre when the price reflected the cost of dam water of about 40¢ a kilolitre, so that the average household paid about $800 a year for its water. Now households pay about $1000, even though they are using less under restrictions.

Tim Holding told Parliament on November 26 last year that the ''net present cost of water'' over the 30-year life of the contract with AquaSure would be $1.37 a kilolitre, which means the price of water to households after the retail mark-up would be $2.20 a kilolitre in 2012 for an annual water bill of $2000.

So, on Holding's own say-so, the price of water will double - meaning that most low-income families won't be able to maintain a garden.
But Holding (and the Brumby government) hasn't been telling the full story. The day after Holding's announcement in the lower house, Greens upper house member Greg Barber asked Treasurer John Lenders (who represents Holding in the upper house): ''I gather that the $1.37-per-kilolitre amount may just have been a mathematically derived figure. Can the Treasurer explain what it means in terms of the price of water?''

Lenders responded: ''While the question is probably more appropriate for the Minister for Water, it is certainly one that I will get an answer for him.''  And the result? Nothing! There is no record of a response in Hansard and no record of a written response to Barber, according to Barber's office.

The Coalition parties have apparently taken Holding at his word. They have shown no interest in the simple arithmetic behind the real price of water and the grossly misleading statement by Holding.  They apparently believe the wholesale price of water is $1.37 throughout the 30-year life of the contract. If so, the subsidy from the Victorian taxpayer will be billions of dollars just for the wholesale price.

The latest official estimated capital cost of the borrowings to finance the desal plant is $5.1 billion. This money has to be serviced and insured against default because, according to ASIC records, AquaSure appears to be a $12 company. Holding has said the government no longer guarantees the debt, so it must have given a ''take or pay'' guarantee to take the water.

But at what price? On the most conservative assumption, AquaSure will have to pay 10 per cent on its borrowings repayable over 30 years. This means the annual repayments on capital alone are $537 million a year, or $3.58 a kilolitre. In other words, the $1.37-a-kilolitre payment that Holding announced to Parliament doesn't even cover the cost of capital.

But there's more. The plant will cost just over $200 million a year to run, based on paying the premium for renewable energy as specified by the government - by coincidence, similar to the $1.37 claimed as the total cost by Holding.  No wonder there has been no response to Barber's question. A meaningful answer would have revealed the actual wholesale cost of water supplied with green energy would be $4.90 - almost four times higher than Holding told Parliament. This converts to a retail price of $7.90, meaning the average household water bill will be about $3000 after the desal water is mixed with the dam water.

The only possible way the government could get the wholesale desal price down to $1.37 a kilolitre is if the government and Aquasure have made a novation agreement whereby Aquasure has inflated the capital requirement to finance a kickback to the government (via a side agreement with Melbourne Water) in order to reduce the price of water reported to Parliament for the first few years. This payment would be recouped later in the contract. To clarify this possibility, the whole contract with the numbers should be made public.

The standard claim of the Liberal Party is that it is the best party to manage the state's finances. The Greens are denigrated as environmentalists who can't add up. At least the Greens are numerate enough to smell a rat and sufficiently courageous to point out the emperor has no clothes.

There are other big issues that haven't been explained. Why was Chloe Munroe, former deputy secretary of Treasury - which approves public private partnership deals - and more recently the secretary of Holding's department responsible for water policy and water trading, appointed as chairman of AquaSure after AquaSure won the tender?

Further, Munroe is a commissioner of the National Water Commission, which advises governments including Victoria's on water trading, and more recently has been appointed to the board of Hydro Tasmania, which could sell water to Victoria more cheaply than AquaSure.
Munroe's appointments represent fundamental conflicts of interest.

Kenneth Davidson is a senior columnist.

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