A Big Think About Think Big

Listener: 17 September, 1990

Keywords: Growth & Innovation;

The disruption in the Middle East has once more raised the question as to whether a group of major projects, collectively called ‘Think Big’, were in the national interest. There has been no independent and authoritative analysis, for reasons I shall explain shortly, but there are a few things that might usefully be said.

The Think Big projects came out of a national energy surplus that developed in the mid 1970s. This was partly caused by the opening up of the Maui gas field and partly by excess capacity of electricity generation resulting from an excessive construction programme.

A number of steps were taken to reduce the surplus, including the deferring of the Maui B platform and the noncommissioning of the Marsden B oil-fired station, though it would have been better had the latter never been built in the first place.

On top of our local surplus, disruption in the Middle East in 1974 and 1979 hiked world oil (and hence energy) prices. In nominal terms they rose from $US2 or $US3 a barrel in 1973 to above $US35 a barrel in 1980. That meant that our energy surplus was more valuable, if it could be utilised.

There were a number of options for utilisation, including some that were not pursued: the aluminium smelter at Aramoana, fourth and fifth pot lines at Tiwai Point, gas reticulation throughout the South Island, fuller conversion of cars to CNG, a cement works near Oamaru, and so on.

Other options were taken up, including an ammonia-urea plant, a methanol plant, the Taranaki synthetic petrol plant, electrification of the main trunk line in the central North Island and the oil refinery extension at Marsden Point, Whangarei.

A number of projects not particularly related to the energy surplus got included, most notably the extension of the steel mill at Glenbrook, Auckland, and also various forestry-related projects. And there are some energy projects which we appear to forget, like the third pot line at Tiwai Point and gas reticulation through the North Island, perhaps because they were commercially successful.

Things went wrong with some of the projects. Construction cost overruns were particularly damning at Marsden and Glenbrook. Oil prices fell in 1986 and have hovered between $US15 and $US20 a barrel until recently. Real interest rates have proved higher than expected. And it also seems likely that the ammonia-urea plant and the steel extensions were turkeys under virtually any reasonable scenario.

A further complication was that the downside risk for the projects was underwritten by the government, so when the projects went financially wrong it was the taxpayer who carried the financial loss, not the bankers.

However, all these losses were not incurred by decisions of the National Government. Roger Douglas has a very interesting description of much of the NZ Steel story in his Towards Prosperity, including how his own government made decisions which added to taxpayers’ costs.

Most of the evaluations of the major project programme quoted by politicians are only partial. As we have seen, successful projects tend to get omitted. And the statistics tend not to be comprehensive. It is true that the projects have both substantially reduced imports and increased our exports, thus improving the trade balance, but this needs to be offset against the debt-servicing costs that the investments have incurred.

There is also confusion as to the overall impact of the projects. There was a construction and a production phase. During the construction phase the economy was lifted by the extra jobs and activity the investment generated. Claims were made that there would be a further lift during the production phase, but some crude figures I did at the time suggested that the production lift would be offset by the construction slump, so there would be no additional economic benefits after the construction phase (and indeed they have not been noticeable).

A proper economic evaluation of the Think Big projects is faced with two imponderables. First. if we had not had these projects. what would we have had in their place? For instance, would we have flared the Maui gas and spilt the Waitaki water, or what?

And second, these projects are meant to last a couple of decades. So we need to know the price of oil and other relevant commodities and products throughout the 1990s in order to make a full evaluation.

Additionally, there may be advantages from the increased self-sufficiency in hydrocarbon energy the projects generated, but we need to know the probability that a crisis will occur to make this self-sufficiency useful.

As I write this column. international commentators seem confident that the loss of oil supplies from Iraq and Kuwait will not shock the world energy (and economic) system. And. in any case, there were alternatives to whatever self-sufficiency we did obtain: we could have built an awful lot of tanks, filled with oil, for the cost of the Glenbrook and Marsden extensions.

But this sort of evaluation is not what the Think Big debate is really about. It is more about political point-scoring than trying to understand what actually happened and learning from any lessons there may be.

If the politicians had an earnest desire to know the truth on this issue. they would commission independent analysts to make a sober assessment. I do not expect to see one in the near future.