The Last Dodo

RIP, "Think Big"

In the early 1980's the government in New Zealand decided that it was smarter than the average joe when it came to business.  The government was going to pick some economic winners.  The policy was dubbed "Think Big" which had more than a communist, central-economic-planning ring to it. 

It had been the oil shocks jolted the government into action.  Borrowing vast sums of money on world money markets, the government persuaded lenders that huge government sponsored and endorsed energy projects were pretty much risk free.  Whilst they could never stack up on a risk/return basis in the open market, they sure could if the gummint were the borrower.  In time, Think Big delivered, according to Wikipedia:

The core Think Big projects included the construction of the Mobil synthetic-petrol plant at Motunui, the complementary expansion of the oil refinery at Marsden Point near Whangarei, and the building of a stand-alone plant at Waitara to produce methanol for export. Motunui converted natural gas from the off-shore Maui field to methanol, which it then converted to petrol on-site. Declining oil prices rendered this process uneconomic and New Zealand abandoned the manufacture of synthetic petrol.  The construction of the Clyde Dam on the Clutha River formed part of a scheme to generate electricity for smelting aluminium. Construction of a proposed smelter at Aramoana on Otago Harbour never happened — largely because of resistance on environmental grounds.

However, one by one these projects failed to deliver what was promised, resulting in huge overseas debts which crippled the country economically.  One remained as planned: the Tiwai aluminium smelter, now owned by Rio Tinto.  It survived because it was provided with cheap electricity generated by one of the "Think Big" projects, the Clyde Dam.  But now it too looks to be going the way of the dodo.

Rio Tinto is faced with falling aluminium prices.  It wants to extract even lower electricity prices--which effectively means a subsidy from the entire country.  Fifteen hundred jobs in Southland are at stake.  The government has (finally) decided that it is not going to pony up more subsidies. 

The moral of the story: big businesses built off the back of taxpayers, oiled with government subsidies, eventually collapse.  They are subject to market forces which drive even otherwise good companies out of business.  It is part of what Schumpeter called the creative destruction of economic cycles.  Businesses built on the back of subsidies are substantially shielded from market forces of competition, supply, and demand.  But eventually the day of reckoning comes.  It's always better to let the malformed progeny of state sponsored business die young.  The longer it goes on, the bigger the mess. 

But there is a silver lining to the cloud.  Tiwai Point smelter consumes 15 percent of New Zealand electricity.  If it goes belly up, power prices will drop for the entire country--unless the government comes up with more mad schemes, such as, well you know, taxing energy to save the world from global warming.  Oh, wait.  They already have. 

Those who do not learn from history are condemned to repeat it.  We already are.