NATIONAL AFFAIRS: by Colin TeeseNews Weekly
Snowy Hydro: the unresolved issues
, June 24, 2006
Prime Minister Howard's backdown on the sale of the Snowy Mountain Hydro scheme has been a major victory for the Australian public, but Colin Teese warns that the battle may not yet be over.Surely, nobody can claim to have anticipated the Prime Minister's back flip on the selling of the Snowy Mountain Hydro scheme.
Certainly, as a result of it, there must be no shortage of red faces - most notably, on the Government's side, Finance Minister Senator Nick Minchin. Only a week before he had boldly observed, "Even if the Commonwealth does not sell it, the Snowy will still be privatised. The states will certainly sell their shares."
How wrong can you be! The airwaves had hardly cleared after Prime Minister John Howard's announced backdown, when the respective state premiers weighed in.
First, New South Wales Premier Morris Iemma announced, somewhat sullenly, that, without the Commonwealth behind it, New South Wales could not proceed with the sale. Victoria's Steve Bracks, though noticeably more relaxed, was quick to follow suit.
Beyond the state politicians, surely the most miffed must have been the Australian Financial Review
. Right from the start, the paper was proclaiming that the Snowy had become a "political football". In fact, quite the opposite was true. The issue had become an "economic football", with the AFR
leading the push.
Full marks, though, to the Prime Minister, for being brave enough to admit he'd misjudged public opinion on the issue. And, although he did not say as much, it seems possible to conclude that Mr Howard may, independently, have had a change of heart. We know he was being pushed hard by some of his strongest supporters - notably Senator Bill Heffernan and, outside parliament, Channel Nine commentator and Sydney Radio 2GB host, Alan Jones.
As it turns out, and in keeping with Mr Howard's well-documented "political luck", his about-face may well have delivered the Coalition a windfall political advantage.
Certainly, the turn-about by the Commonwealth has done the Labor Party no favours. Federal Opposition leader Kim Beazley, in particular, must now be wondering what hit him. While the issue was still alive, Mr Beazley - as indecisive as ever - was floundering around with no idea of how either to gain a political advantage or make a policy out of the issue.
In happier days, a more astute Labor leader, with the public behind him, would have captured a big win by anticipating what the PM ultimately saw fit to do.
This Labor leader, however, squandered his opportunity. Only a day or two before Mr Howard's announcement, Mr Beazley was endorsing the Government's then intention to sell the Snowy Scheme. And, we may confidently assume, had he been Prime Minister - with two Labor premiers opting to sell - Mr Beazley certainly would not have been moved by public opposition.
The New South Wales premier also seems to have taken some political hits. Nor has the decision of Mr Howard - in the run-up to a state election - done the state of New South Wales any economic favours. Mr Iemma is now in a difficult position as his immediate reaction to Mr Howard's bombshell made clear.
It was his claim - and it has been picked up by others among the ill-informed - that it was up to Mr Howard to work out how to deal with the further capitalisation of the Snowy Mountains hydroelectric scheme. According to Mr Iemma, the corporation is desperately in need of funding for further expansion.
This, of course, is untrue. How can the scheme, as originally conceived, possibly need more capital? It is a fully-funded, mature project with its original cost now amortised. Its income from power-generation supplemental to base-load power needs provides it with the necessary funds to maintain the scheme in perpetuity - and continue to fulfil the purpose for which it was created.
It is worth reminding ourselves precisely what that original purpose was. The Snowy scheme was devised primarily as an irrigation project, and only incidentally as a generator and seller of electric power. Its capacity to generate electric power from the capture, release and recapture and re-release of water was to be, and is, the means by which the scheme would fund itself. As a consequence, it is enabled to provide irrigation waters for farming in New South Wales and Victoria at no cost.
That is what it has done, and can continue to do - providing only that the balance of the original concept is not disturbed.
As a result of corporatisation - and of the transfer of some of the scheme's ownership from Commonwealth to state governments - the original purpose has, to a small extent, been compromised. A corporatised Snowy has, for example, acquired some additional gas-fired electricity-generating capacity. NSW and, to a lesser extent Victoria, would like it to do more.
This is what Mr Iemma means when he tells us that a non-privatised scheme cannot generate the funds for further expansion. In other words, what Mr Iemma was wanting was a privatised Snowy to take greater responsibility for providing the electricity-generating capacity necessary to supply the growing needs of NSW.Government responsibility
In fact, as the premier well knows, the provision of his state's electricity needs is a government responsibility. It cannot be fulfilled by the Snowy without that agency departing fundamentally from its original charter. If that charter is departed from, then the Snowy's irrigation function will be weakened - perhaps even destroyed.
Mr Iemma is no doubt aware of all this, but he has another agenda. In NSW, the privatised base-load power stations are old and costly to run. Privatised replacements will necessarily be financed with short-term capital at high interest rates.
To be profitable, these will need an effective rate of return of almost 20 per cent. Cheap hydro-power from the Snowy, servicing nothing like this debt or interest burden, is an embarrassment to Mr Iemma's Government and its privatisation program.
His solution? Privatise the Snowy and burden it with new and costly private debt as it creates new electricity-generating capacity. Meanwhile, restrict its access to water for power generation by demanding that some of its stored water be diverted back into the Snowy - possibly for questionable environmental reasons. Taken together, these requirements will have the obvious effect of significantly increasing the cost of Snowy River power.
The Prime Minister's decision has torpedoed Mr Iemma's hopes - and quite possibly undermined his budget strategy - in an election year. No wonder the NSW Premier is angry.
While those who were concerned about privatising the Snowy can now rest easier, the battle may not yet be over. There are still those who want to see the Snowy scheme in its corporate form undertake a greater role in power generation - with scant concern for its primary irrigation function.
The next challenge is to make certain that the Snowy is not required to undertake greater responsibility for power generation in NSW at the expense of its irrigation responsibilities.
The states, under existing arrangements, will retain a majority shareholding in the Snowy Corporation, and NSW has already said it will be unable to fund the corporation in any new power station developments. If that is to happen, responsibility would necessarily fall to the Commonwealth. Let us hope that the Commonwealth would decline any such role. As things stand, it would presumably be unwilling to do anything to undermine the Snowy's basic role.
In that event, it may be that the two state governments involved would see no further purpose in being partners in the Snowy Corporation. That being so, it would be timely for the Commonwealth to re-assume 100 per cent ownership of the scheme - especially as, with that, would come total control over the water management.
The question then would arise: is there any sense in the Snowy continuing to enjoy corporate status? Perhaps it would be tidier if it reverted to its original role as a government authority!
- Colin Teese is a former deputy secretary of the Department of Trade.