Monday, December 11, 2006

A Grecian gathering

by Senator Mary King
Trinidad Express
December 11, 2006

I was not invited to the one-day symposium on the aluminium smelters. However, I am aware of what took place because of video recordings and notes taken by a colleague. Neither have the views expressed at the symposium nor did those of our Government posit the proposal in the context of whether we can develop globally competitive aluminium businesses, owned by the citizens of T&T (the Demas/Porter development model).

However, it is obvious that the Alcoas of this world are clear as to what subsidies they require (e.g. in the price of gas to make electricity) and what pollution levels they are willing to accept so that they can develop their competitive industry.

Colin Pratt, one of the invited experts, explained that the FDI smelters are looking for sources of fuel for the smelters that are "isolated islands"of energy. In other words, there is little else the country could do with the energy so the investor can negotiate cheap prices for, say, natural gas from the NGC.

It is worth noting that a participant from the floor asked Mr Pratt whether he considered that T&T had little else to do with its energy resources. Mr Pratt said no, i.e. we have other more lucrative uses for our energy. He also reminded us that though Norway had many smelters that country uses its isolated hydro-electric power in the aluminium industry and reserves its natural gas for input into the European pipeline where returns to Norway are much higher. He added that the US has not built another smelter in a long time, not only because of environmental concerns, but because that country has more financially lucrative uses for its natural gas.

Further, Mr Pratt pointed out that what the investor feared could happen in, say, Australia where the fuel being used was brown coal that produced large amounts of carbon dioxide (green house gas), is increases in taxes via a carbon tax. Hence investors are looking for low-carbon sources like hydro and natural gas.

Gregory McGuire (UWI) told us that the maximum price that the investors are willing to pay today for electricity is of the order US1.5 cents per KWh. In T&T the commercial price of electricity is some US4 cents per KWh. NGC will have to offer gas to the smelters at a cost substantially below the price it can get from other commodity plants in the country. As a business venture the return on our depleting natural resources for aluminium smelting is below what we are getting at the moment-a reduction on the productivity of our resources. This would be a backward step in our economic development.

Of concern is whether NGC's gas pricing strategy leans towards facilitating the smelters or maximising return on our resources. Mr McGuire then postulated that the reason our people may be willing to subsidise the smelters is because they can produce jobs. However, Paul Lochner, another Alcoa expert, stated that smelters provide a low level of job creation after the plant is built; a US$2 billion investment produces jobs for 1,000 people. Hence it is important, he said, to downplay the inflated job expectations of the society.

Mr McGuire agrees with this column that the smelters simply extend the Point Lisas model, however, I may add, with the constraint also that their productivity in the use of gas is lower than other processing plants and LNG. He concludes that we need to examine also the benefit that we could receive for this subsidy from a downstream aluminium industry. Yet he was very cautious, since Point Lisas is only now, after some 30 years, beginning to go downstream. These proposed downstream plants, UAN etc, are not really a move into the investment or innovation stages, but one still in the exploitation of basic factors (cheap feed stock).

Further, Mr McGuire pointed to the claim, also made in this space, that FDI investment did not encourage technological dispersion in the country, i.e. the locals did not learn or use the technologies introduced. Point Lisas has shown that there is little local equity participation in the sector and in investing downstream.

But the Government is banking on the creation of an aluminium downstream sector. Prakash Saith stated at the symposium that Alcoa will not be allowed to build a smelter unless Alcoa goes downstream also. The hope there is for FDI to create more jobs is the added value part of the industry.

What the Government has failed miserably to understand is that for competitive economic development the downstream will only make sense if it is owned by local or regional capital. We have an opportunity to use our brains and we can make it globally competitive. (To continue)


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