Daily Media Quotation
Don't Play Follow-The-Leader On Snowy
June 1, 2006
by Kenneth Davidson - The Age
Privatisation is unpopular. But until the proposed sale of Snowy Hydro Ltd, politicians on both sides of the political fence have been able to ignore public opinion because it has been next to impossible for that opposition to be translated into political action that would make the politicians sufficiently insecure about their careers that they changed direction.
Opposition to the sale of Snowy Hydro could be the exception, despite the attempt to bulldoze the sale through three parliaments without any serious attempt to debate the issue. NSW Premier Morris Iemma announced last December that he wanted to sell the state's share to cover a budget revenue shortfall and to finance a school maintenance backlog, hospital refurbishment and undertake infrastructure projects before the state election next year.
The federal and Victorian governments quickly fell into line. Premier Steve Bracks said he had no choice but to sell because Victoria would have been "stranded with 29 per cent of a private company". This argument doesn't stand up, unless NSW and the Commonwealth could somehow float the company with two classes of shares that discriminated against Victoria.
But the argument that Victoria has to follow the leader on the grounds that somehow the new owners could or even would want to lock Victoria into a position inconsistent with its public interest is even more fanciful now that the Commonwealth is considering proposals to impose a cap on individual shareholdings.
Prime Minister John Howard has indicated that he is moving closer to his ally, Senator Bill Heffernan, who is pushing for a 10 per cent cap on individual shareholdings. In that case, Victoria's 29 per cent holding could be construed as strategic - it would give the state a better say in the direction of Snowy Hydro than it has now.
Financial markets have been complaining in recent weeks that any limitations on individual shareholding or foreign ownership would lower the sale price of the Snowy Hydro.
Good. This would create an opportunity for the Victorian Government to increase its shareholding in Snowy Hydro at a discount.
There are two great uncertainties associated with the sale. The first is the seasonal timing of environmental and irrigation flows when they might clash with the privatised company's duty to its shareholders to maximise its returns from the sale of peak electricity or holding water in its upper storages to use as insurance for electricity retailers against price spikes that can drive electricity prices up to the $10,000 MWh cap.
The act setting up the corporatised company provided a great deal of latitude to Snowy Hydro to balance these conflicting claims because it could be expected by its government owners to operate in the public interest. (The awful mess governments can get themselves into if they attempt to impose their will after the sale is shown with the experience of Telstra and Sydney airport.)
Similarly, the three governments are committed to increasing the environmental flows from the present dribble to 21 per cent by 2012 and 28 per cent at some unspecified time in the future. This is water that will not available to Snowy Hydro for electricity generation. The additional flow is supposed to be made available from improved irrigation efficiency. The uncertainty surrounding the likelihood of achieving the extra environmental flows is likely to be increased with privatisation.
The Bracks Government's former argument for debt reduction, irrespective of the cost, evaporated in the Victorian budget, especially as healthy tax revenues mean the state does not have a liquidity problem.
The Government now accepts the position that it should borrow to finance infrastructure in cases in which the returns from the investment exceed the cost of borrowing.
The expected Snowy Hydro sale price of about $3 billion is based on an overall return to debt and equity finance of about 10 per cent. With restrictions on shareholdings to prevent any one buyer emerging with a strategic interest, the sale price could be less than $3 billion and the required yield on the investment pushed up to 11 or 12 per cent.
Given that the State Government can go into the market to borrow at about 5.5 per cent, it should take the opportunity to borrow with the objective of increasing its share of Snowy Hydro to more than 30 per cent.
It is money for jam.
If Victoria borrowed $42 billion to finance buying the federal and NSW shares of Snowy Hydro, it would increase state debt by about 1 percentage point, without affecting Victoria's triple-A credit rating.
It is broadly accepted now that the Government harmed the public interest by allowing Transurban to cash in its $2.9 billion concession notes future liability for $610 million at an effective discount rate of 9.8 per cent, when the Government could have borrowed the same amount for 5.5 per cent.
The Government could more than redeem itself by borrowing at 5.5 per cent to acquire a future stream of earnings with a return of 10 to 12 per cent.
The future value of the water flowing through Snowy Hydro is incalculable. The electricity is premium, clean, peak power.
At some stage over the next decade, Australia will be forced to impose carbon emission taxes or trading schemes to reduce greenhouse gases which, based on recent European experience, could add about $20/MWh to $30/MWh to the cost of generating brown-coal electricity and therefore add a similar amount to the price of Snowy Hydro power, which would boost the company's profits by $80 million to $120 million million a year or by more than $2 billion to $3 billion (undiscounted) over 25 years.
The sale of this asset would be a crime against the taxpayer.