LAND OF POOR WHITE TRASH APPROACHING

Kenneth Davidson October 4, 2010

Our costly infrastructure projects look like train wrecks in the making.

The former prime minister of Singapore, Lee Kuan Yew, is reputed to have said in the 1980s that Australia was destined to become the ''poor white trash of Asia''. He may yet be right.

Infrastructure is the enabling investment of the future. Get this wrong and Australia's future is constrained. Energy, transport, telecommunications and water are the key to our future in the context of the global issues of peak oil, global warming and water.

Recent decisions in all these areas by both state and federal government are not reassuring.

Telecommunications is a $40-billion-a-year industry generating more than $5 billion a year in profits. Thanks to government policy to build the $43 billion NBN network and pay Telstra $11 billion to rip out its copper, these profits are up for grabs to rent-seekers such as Optus whose fixed-network profits are largely based on arbitrage, rather than competition based on engineering excellence.

Optus is Telstra's main competitor. Telstra offered the government a less ambitious, but nevertheless more than adequate, broadband service than NBN - financed largely out of existing cash flows from the copper network. The offer was refused, largely on the advice of Optus and other arbitragers, because the offer involved bypassing Telstra's exchanges, which are essential for the arbitragers to tap into Telstra's network in order to provide their ''competitive'' service.

In the name of competition and structural separation, Telstra's ability to earn a surplus of some $40 billion over the next decade for reinvestment and dividends is to be trashed and the company transformed from a centre of genuine global telecommunications excellence into another rent-seeking retail operation.

Given Lee's remarks, it is indeed ironic that Optus is a subsidiary of Sing Tel, which is owned by the Singapore government through Temasek Holdings. It seems that the Broadband Minister, Senator Stephen Conroy, prefers the interested advice of Optus and investment banks such as Lazard, rather than the disinterested advice of the owner of Mexican telcos and vice-chairman of the UN Broadband Commission for Digital Development, Carlos Slim Helu. Slim was in Australia for a conference last week and said the NBN was far too expensive.

Apart from New Zealand, the rest of the world agrees with Slim. Norway and Germany are now rolling out broadband along the lines suggested by Telstra and rejected by the government. Hopefully, the new Parliament will block the NBN legislation.

The NBN is another train wreck in the making, like the Wonthaggi desalination plant, which unfortunately is already on line to a major crash.

Only governments made up of fools or knaves sign on to projects with a capital cost of $43 billion, in the case of the NBN, or $4.8 billion, in the case of the desalination plant, without considering the alternatives that could provide the same service at a fraction of the cost.

The Wonthaggi desalination plant and the water it will produce will cost up to six times world's best practice - as recently announced by the Saudi Arabian government for a 368-gigalitre plant with a cost under $A2 billion.

The analysis of the costing of this project is set out in the London-based industry newsletter, Global Water Intelligence, which tracks desalination projects.

The capital cost for Victoria's desalination plant is $4.8 billion to produce 150 gigalitres. The Australian cost is $32 million per gigalitre, compared to $5.5 million per gigalitre for the Saudi plant.

On this basis, if the Victorian government had employed the Saudi government to oversee the engineering, procurement and construction, Victorians would have saved $4 billion.

Even allowing for a billion dollars of extras at Wonthaggi (difficult to find), it is appears that the Victorian taxpayer has lost upwards of $3 billion. It is hard to believe that any government could be this incompetent. The $3 billion to $4 billion at the beginning equates to an extra $11 billion in interest charges over the next three decades - enough to build and operate the best underground metro in the world.

The big difference is the Saudi government rejected public/private partnership financing and funded its plant on its own. Incredibly, the Brumby government guaranteed the Wonthaggi financing. The government should have borrowed the money itself and saved at least a couple of billion dollars upfront. But this still leaves plenty of financial fat in the engineering and construction contracts to be explained.

In the past five years a number of desalination plants have been built around the world - including two in Perth - where the cost differentials, although not as great as with the Saudi plant compared to Wonthaggi, still beggar belief.

A royal commission is imperative. Wonthaggi is no one-off. Government financial guarantees to sustain PPPs have become standard policy. Like the NBN and Wonthaggi, the $750 million Frankston bypass PPP is supported by the taxpayer because no bank or private investor would risk their own money on such an obvious financial lemon, quite apart from the fact that it is an act of environmental vandalism.

Kenneth Davidson is an Age senior columnist.

kdavidson@dissent.com.au

This story was found at: http://www.theage.com.au/opinion/politics/land-of-poor-white-trash-approaching-20101003-162ll.html