Friday 9 August 2013

The Tiwai Point Subsidy

Matt and Paul have both covered the subsidy to Rio Tinto that facilitated a new contract between RT and Meridian Power. There is not a lot to say about the actual policy; Matt's "Urg" pretty much sums it up. But a few points about the politics of this are worth noting. 
  1. There was nothing inherently wrong about the a long-term contract between Meridian and Rio Tinto at favourable rates. I believe that in the past transmission constraints meant that the opportunity cost of power delivered to Rio Tinto was not necessarily the wholesale price elsewhere on the grid. And I also understand that the smelter was drawing power fairly evenly throughout the day rather than mostly at times of peak demand. I stand to be corrected on both those points, and maybe Meridian negotiated poorly in the past, but, absent government subsidies in the past, these were normal commercial transactions that should not colour our opinion about the subsidy announced yesterday. That subsidy should be criticised on its own merits. 
  2. It is hard to believe that the decision was not affected by the political capital the government has tied up in its asset sales programme. Again, however, that should not colour our opinions about the policy. The policy would not be any better if it were motivated by different objectives. 
  3. Labour are totally on the right side on this one, but it is notable that Clatyon Cosgrove's reaction reported in this Stuff article, framed things entirely in terms of it using taxpayer's money to facilitate the partial sale of Meridian. It would be good to hear a clear statement from Labour that they are opposed to corporate welfare of any kind, and, if it were them, they would have just let Rio Tinto close down the smelter. As it stands, they might be saying that National paid a subsidy for the wrong reasons, but they would have done the same in order to protect jobs in Southland. I haven't seen the news coverage. Has anyone seen if a journalist has put this question to Labour? 


  1. Cosgrove was asked that question on Radio New Zealand. My concentration was on other things so can't give you a summary.

  2. The thing I dont get about it helping with the sale of Meridian is: if this deal increases the value of Meridian by less than $30m then they are throwing money away. If it increases the value of Meridian by greater than $30m then Meridian themselves would presumably have done the deal anyway. What am I missing?

  3. I did a quick back of the envelope run of the numbers on this one from an employment point of view. At the current unemployment benefit rate of $230 gross per week for a single adult the cost to government of paying the dole for the 800 workers at the smelter comes to a shade under $10 million per year. So government has effectively bought 5 years of employment for those 800 staff for the cost of 3 years dole payments. Given that those workers are almost certainly on significantly more than $230 gross per week it kind of looks like a win-win for both sides. I might be missing something here though.

  4. Lats,

    What you are missing (I think) is most of those workers wont end up on the unemployment benefit, at least not for long. There is plenty to done around the place - e.g. rebuild Christchurch.

  5. Swan,
    Given our unemployment rate I'm not sure you can guarantee that they will mostly find work. Certainly those choosing to stay in Invercargill may have trouble doing so. I accept what you say up to a point, but if someone made redundant from Tiwai takes another job then all they are doing is preventing someone else from taking it. It is still a net loss of 800 jobs, and therefore 800 potential unemployment benefits to be paid, not to mention the support businesses who may need to lay off staff if Tiwai goes under.
    FYI I am far from being a National supporter, but I am trying my hardest to be impartial and to bring a little rational number-crunching to the mix.

  6. I was thinking the same thing. And how could a 3-year deal for what is really quite a small amount of money make a significant difference to the estimated present value of a the future stream of profits?