The Govt must swallow a rather large smelter rat and declare Tiwai an economic free zone

Thursday, 31 October 2019

NZAS chief executive Stewart Hamilton makes the case for intervention to save the aluminium smelter in October.

OPINION: We are beginning the perennial dance between the Crown and Rio Tinto, majority owners of the Tiwai aluminium smelter.

Last time we did this tango John Key ignored Treasury advice and tipped $30 million from the public purse into the welcome mittens of the smelter's owners.

Now, we have the usual hand-wringing from the great and the good decrying the threat of more corporate welfare.

Even my comrades at the Taxpayers' Union have started a petition against propping up this foreign-owned smelter.

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They are wrong. Tiwai is important and if we need to swallow a dead rat to keep it we should sprinkle a bit of sugar on the deceased rodent and make the best of it.

The Tiwai Point Aluminium Smelter is crucial to the Southland economy and should be declared a special economic free zone, writes Damien Grant.

In their last published accounts for financial 2018, the smelter was sitting on $1.2 billion in assets and an accounting pre-tax earnings of $307m.

However, their entire profit appears to have come from a one-off re-valuation and their cash flow figures show a business operating on thin margins.

Aluminium was tracking over USD$2,000 a tonne for most of 2018, as opposed to USD$1,700 today, so it isn't any surprise that the smelter is considering its options.

Yet the smelter clocked up $87m in income tax liability and paid $80m in wages, of which at least $20m of which would have been PAYE.

They spend over $700m a year in New Zealand, not including capital expenditure.

The smelter is one of our biggest export earners, bringing in almost as much as fishing.

It drives demand for our currency, employs directly and indirectly over a thousand people and is an anchor for the otherwise despondent Southland economy.

There has been some ill-informed commentary that taking the smelter out of the grid will reduce electricity prices. It won't. At least not in the medium term.

Tiwai uses 13 per cent of our energy output. If it closed down organic growth would take up this slack in under a decade.

We could kick the investment can own the road for a while, but sooner or later we'd be back to where we are now.

In the short term if Tiwai closed down the extra kilowatts that would come onto the market would have little effect on electricity prices because the raw energy is less than a third of a domestic consumers bill.

Even if wholesale prices fell by ten percent this would represent a 3 per cent saving to domestic consumers, although commercial users would benefit by a greater percentage.

Counterbalancing this, stripping $1bn from our exports would cause the dollar to fall slightly, making imports marginally more expensive. Everything is connected and losing such a massive part of our economy isn't going to make anyone's lives better.

Letting the smelter close is a bad idea but so is paying a ransom to Rio Tinto. Perhaps there is another way.

The film industry has a sweetheart deal with the Crown, where they get a cheque from the Treasury equal to 20 per cent of their local spend. It runs to around $80m a year.

That's more than we get in taxes on an average year from the Tiwai smelter.

Perhaps, rather than just hand over cash, we should declare the smelter a special economic zone and drop the requirement on them to pay income tax.

If we did this to, say, a café in Napier, this would give that business an economic advantage over other café's in the region.

There are no competing aluminium smelters in Southland, so that's not a problem.

It makes the economics of the smelter 28 per cent more attractive without imposing any burden on other taxpayers. It will encourage Rio Tinto to stockpile aluminium when the commodity prices are low and reduces their incentive to close the plant.

Such zones are common overseas and have proved successful. We live in a competitive global economy where capital is highly mobile. Sometimes, however unpalatable, it pays to compete.