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The desal cup runneth over with our cash

Published: The Age 27-Sep-10
Author: Kenneth Davidson

Even if we don't turn on our new water source, we'll be paying dearly.

THE Wonthaggi desalination plant is a monument to bad government and financial chicanery. It seems fantastic but the $4.8 billion that AquaSure (Macquarie Bank, Suez and Thiess) raised on international capital markets to fund the plant was guaranteed by the government.

The deal was undertaken without proper process, which would have involved an inquiry into whether the water the plant was designed to produce -- 40 per cent of Melbourne's annual consumption - was needed, and if so, were there cheaper alternatives? (There were plenty of experts pointing out these alternatives, but they were studiously ignored.)

The $4.8 billion AquaSure borrowed comprised $3.5 billion to build the plant, a cost that was well above the going rate for this type of facility, and a further $1.3 billion to service their own equity in the project.

An astute reader might ask how much equity capital the AquaSure partners stumped up to finance the project. The answer appears to be almost nothing, apart from the $12 to register the company.

Who needs to stump up equity when the government is guaranteeing the debt that finances the equity?

After the money was raised, the government proudly announced the capital guarantee was withdrawn. Most outsiders thought this had been replaced with a ''take or pay'' contract for the water. The government denied this, but refused to say what agreement it had made instead, saying it was ''commercial-in-confidence''.

What it said was the ''net present cost of the water was $1.37 a kilolitre'', which was unbelievable, but apparently it satisfied the Liberal Party, supposedly the party of financial acuity.

The Greens had the cheek to ask what the net present cost meant in terms of the actual money paid for the water. They were fobbed off, along with others who asked why the emperor was naked.

But now we know. Even if the plant produces nothing, the government will be forced to pay under its contract $570 million a year for 30 years. This is equal to $3.80 a kilolitre without the supply of any water.

The figures were buried in the Department of Sustainability and Environment annual report tabled under hundreds of other reports.

But there is more.

If the plant is turned on, it uses electricity. The government promised it would be carbon neutral. This means consuming power at the renewable wind farm rate, which is $125 a megawatt hour compared to base rate coal-fired power of $35.

Of course, it will really be powered by brown coal, probably from Hazelwood, the closest and cheapest power station. There are two reasons for this: wind power is intermittent and grid wind output calculations are based on 8 per cent of the wind farm capacity.

This means the 98 megawatts required to run the desal plant and pump water across Melbourne can't be supplied by existing or planned wind farms.

It looks as if the renewable energy charge is a sham to get renewable energy credits to justify using coal-fired power to placate an electorate concerned about global warming.

To calculate the cost of desal water to the household, we have to add in the cost of electricity and the mark-up of at least 25 per cent each for Melbourne Water and the three water retailers.

This means the desal water cost to the end user is $1.1 billion based on the output of 150 gigalitres a year.

This cost of desal water will be $7.05 a kilolitre compared to $1.20 now. Because the desal water will constitute about 40 per cent of Melbourne's water supply, the average cost of water in 2012 will be $4.14 a kilolitre.

This is embarrassing for the Essential Services Commission, which set the price of water in 2012 at $2.20.

It is no wonder the retailers are talking about different tariffs such as high security, scarcity and environment tariffs.

What is to be done about this scandalous mess?

The first thing is the blacked-out bits in the government contract with AquaSure must be made public before the election. There is nothing confidential in a contract for 30 years that has already been signed.

Anybody who takes the Queen's coin is not entitled to secrecy - especially when they know that the price of water will be higher than poor people in Melbourne can afford. It will be the end of gardens for pensioners and low-income families.

Once the contract is public, the options for a future government should become apparent. But one thing is already clear. The plant should be mothballed before any water is produced.

If the contract is inviolate the cost will be $570 million a year. If the plant is turned on the total cost of the guarantee and the water will $1.1 billion. If the plant is not turned on we will save more than $500 million, savings that will increase as the price of power increases.

This action should not wait for a royal commission, although it is apparent that one is necessary to restore good governance in Victoria.

Kenneth Davidson is a senior columnist.


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