Subsidising smelters?

Invercargill Mayor Tim Shadbolt, right, reckons the government, i.e., taxpayers, should subsidise electricity prices enjoyed by Rio Tinto, the owners of the Tiwai Point aluminium smelter in Tim’s “electorate.”

The smelter company wants to negotiate a new power contract for its Tiwai Point smelter near Bluff in the face of plummeting world aluminium prices.
    But with no resolution after three months of talks, Mr Shadbolt says Prime Minister John Key must intervene.
    "I mean, they own the electricity company that's sitting around the table and they've got a vested interest in making sure our export industries and manufacturing in this county are supported."

“Supported” as used here being code for “bailing out.” Basically, the arse has fallen out of the world aluminium market, and Mayor Tim reckons Tiwai Point should keep exporting and producing at a loss, with us picking up the tab to make up the difference.

Does this make any sense? Do taxpayers, via the government, have “a vested interest” in making sure export industries are “supported”? And if so, at what cost?

The Bluff smelter was built partly to create a market for the huge hydro-electric output of the Manapouri scheme, now owned and operated by Meridian. The terms of the power supply contract were renegotiated in 2007 with the new supply agreement set to begin in January next year.
    The smelter, operated by New Zealand Aluminium Smelters (NZAS), is Meridian's biggest single customer and the contract due to kick in from January 1 is for 18 years. The smelter consumes about one-seventh of New Zealand's electricity and the price has never been disclosed…
    The negotiations come as Rio Tinto looks to sell the Tiwai Point smelter along with 12 other aluminium producing assets in Australia. Japan's Sumitomo owns about 21 per cent of the Bluff smelter.

The aluminium smelter at Bluff was always more about politics than economics.  Aluminium is made by adding electricity to bauxite.   But NZ produces no bauxite—the only reason the smelter is there is because politicians in the 1960 Labour Government agreed to build the ginormous hydro scheme at Manapouri* to make electricity for Comalco’s new smelter (built for them by the government), exporting aluminium made from imported bauxite and subsidised local electricity from a taxpayer-funded plant.  This smelter, now owned by Rio Tinto, uses one-seventh of all electricity produced in NZ to produce around one billion dollars in export revenues at a large yet undisclosed subsidy.

“If New Zealand is to experience an export-lead economic recovery,” says Mayor Tim, “then we need to retain businesses like the Tiwai Point Aluminium Smelter.”  But should they be retained if the only means they can be made economic is by you and I paying subsidies to those exporters?

After all, a subsidy to an exporter amounts to little more than a subsidy to overseas buyers. Should we really be taking money out of our own pockets to put into the pockets of customers in Japan, China, America and Europe?

And if it’s agreed we should subsidise this exporter by means of cheap electricity, by what means could the pleas of any other exporter be denied? Should we simply and without question adopt the ruinous policy amounting to buying dearly in New Zealand to sell cheaply abroad?

After all, it’s not like there aren’t other things NZers could be doing with that money themselves, or all that electricity.

I suggest Mayor Tim pick up a copy of Frederic Bastiat’s Economic Sophisms and study particularly his article on “Robbery by Subsidy,” which is what Mayor Tim is advocating. In fact, to make it easier, let me contextualise the relevant passage for him:

It is true that robbery by subsidy also lends itself to infinite subdivision of the proceeds, and in this respect is no less effective than highway robbery; but, on the other hand, it often leads to such bizarre and absurd consequences that the natives of New Zealand might well regard it as ridiculous. What the victim of a highway robbery loses, the robber gains. The stolen object at least remains in the country. But, under the system of robbery by subsidy, what the tax takes away from NZers is often conferred upon the Chinese, the Japanese, the Europeans, or the Americans. This is how it works:
    Suppose an ingot of aluminium is worth a hundred dollars to the producers at Bluff. It is impossible to sell it for less without a loss, and it is impossible to sell it for more, because competition among sellers on the world market prevents the price from rising any higher. Under these circumstances, if anyone wants to buy this ingot, he will have to pay a hundred dollars or do without it. But if it is an Englishman, say, who wants to buy the ingot, then the government intervenes and tells the producer: "Sell your ingot; I shall make the taxpayers give you twenty dollars by way of cheaper electricity." The merchant, who neither demands nor can get more than a hundred dollars for his ingot, sells it to the Englishman for eighty dollars. This sum added to the twenty francs which robbery by subsidy has extorted makes his account exactly even. The result is, therefore, precisely the same as if the taxpayers had given twenty dollars to the Englishman on condition that he buy NZ-produced  ingots at a twenty-dollar discount, at twenty dollars below the cost of production, at twenty dollars below what it would cost us ourselves. Thus, robbery by subsidy has this peculiarity, that its victims live in the country that tolerates it, while the robbers are scattered over the face of the earth.
    It is really astonishing that people still persist in considering it as an established truth that everything that the individual steals from the common fund represents a general gain. Perpetual motion, the philosopher's stone, the squaring of the circle, have long since ceased to occupy men's minds; but the theory of progress through robbery is still held in esteem. Yet a priori one might have thought that of all puerilities this was the least likely to survive.

Instead, it is alive and well and flourishing in Invercargill.

* * * * *

* I yield to no-one in my admiration for the enormous engineering achievement this scheme represents. But when thinking about it I also can’t avoid recalling Bolshevik leader Vladimir Lenin’s description of Soviet Communism as “socialism plus electricity.” I’ll leave it to you, gentle reader, to draw the connection yourself.