Victoria 2014: The state election that neither side deserves to win

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The Age: Victoria 2014: The state election that neither side deserves to win. November 24, 2014. Kenneth Davidson Senior columnist at The Age

The desalination disaster is a blight on both Labor and the Liberals.

Bracks/Brumby Labor government: Went ahead with the Wonthaggi desalination project “without a mandate or even the most primitive business case”. Photo: Andrew De La Rue

Based on their record, neither of the major parties deserve to win the Victorian election. The dominant reason is their miserable management of the Wonthaggi desalination project.

In the case of the Bracks/Brumby Labor government, it went ahead with the project in the first place without seeking a mandate at the 2006 election and without even the most primitive business case, let alone a credible benefit-cost analysis or an open Environmental Impact Statement that could have explored the alternatives.

Proper process would have shown that, despite the lengthy drought, there was no prospect of Melbourne running out of water. Even in the worst years the rainfall in the catchment area exceeds consumption.

Melbourne Water must pay $640 million a year for 28 years for a plant that may never be called on to produce water.

Only 15 per cent of water needs to be potable. Even with growing population and with climate change leading to increased evaporation and reduced rainfall, there was plenty of scope to increase recycling and conservation to meet industrial and the bulk of household needs such as laundry, gardening and lavatory flushing which don’t require water of drinkable quality.

Sorry to be repetitive, but I still get readers who tell me that, given the drought and the expansion of the population from 4 million to 8 million, the Wonthaggi desalination plant was an understandable decision by a government panicked by the drought and is a good insurance policy for the future.

No it isn’t. The government didn’t take the advice of Melbourne Water, which wanted a dam, or ecologists, who wanted recycling and conservation.

The East West Link: Repeating a multi-billion-dollar mistake. Photo: Wayne Taylor

We do have conservation of sorts. The price of water from Melbourne Water has increased more than fourfold, from $500 per megalitre at the end of the 1990s to about $2200 now, in order to pay for the desalination plant. As a consequence, consumption has dropped from a peak of 490 gigalitres a year in the late ’90s to 380 gigalitres a year now.

But instead of the extra revenue boosting Melbourne Water’s profits, which were $242 million on revenues of $567 million in 1997-98, the profit shrank to $90 million on $1716 million in 2013-14, as the organisation is obliged to pay $640 million a year for 28 years under the public-private partnership contract for a plant which I expect will never be called on to produce water.

The Baillieu/Napthine Coalition government had two opportunities to renegotiate the contract to minimise the burden: in 2012 when the plant was completed a year late, and in 2013 when official interest rates fell to just under 4 per cent.

Under the contract the government, through Melbourne Water, is effectively paying 11 per cent on the $6.5 billion capital cost of the project. By borrowing $6.5 billion and paying off the private consortium AquaSure, the annual cost of the boondoggle would have fallen to $340 million a year – a saving of $300 million a year

Incredibly, instead of the government taking advantage of the lower interest rates, the Coalition approved AquaSure’s request to refinance its debt at the lower rate using the 28-year contract as an implicit guarantee to get the finance at the government rate and pocket the difference. Without the government guarantee, the value of AquaSure is largely the scrap value of the plant; the consortium couldn’t have refinanced the debt at any price.

Worse, the same multi-billion-dollar mistake is being repeated with the East West Link which, according to 10 transport planners and financial analysts from three Melbourne universities, will cost $17.8 billion, which is the nominal value or cash payment over the 25-year life of the private-public partnership, equal to $712 million a year.

Again, there has been no business case for this project which could survive the laugh-out-loud pub test. Like the desal plant, the East West Link will cost Victorians 10 per cent on the funds used to build the road, which the consortium will raise on financial markets at the long-term bond rate or less, backed with the security of guaranteed returns under the contractual arrangement. If the government raised the money directly at 4 per cent, the annual cost would be $431 million – a saving to Victorians of $281 million a year.

The two projects involve fabulous financial arbitrage totalling about $580 million a year on the back of government guarantees for infrastructure which is useless junk in the case of the desal plant and a major assault on the liveability of Melbourne in the case of the East West Link.

Together they will drain some $1.3 billion a year out of the pool of funds available to develop infrastructure – money that could be spent on education, health, housing and public transport. This could yield a positive return well in excess of the present cost of public borrowing, while also reducing the size of Melbourne’s carbon footprint.

Private-public partnerships are a particularly odious part of the pattern of outsourcing vital state and federal government services. These partnerships are designed to generate economic rents for vested interest groups while ensuring that who benefits and who pays is kept well beyond the reach of normal accountability mechanisms such as parliament, auditors-general and – because of the diabolical complexity of the arrangements – informed public opinion.

Kenneth Davidson is a senior columnist at The Age. Email: kdavidson@dissent.com.au

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