'The Nation'
Kerry McDonald
Interviewed by RACHEL SMALLEY

Rachel The government says it's part privatisation of Mighty River Power will go ahead despite a last minute snag that could undermine the electricity market and the value of our electricity SOEs. We did ask State Services Minister Tony Ryall to appear on the programme, he declined. My guest this morning is Kerry McDonald, the former head of Comalco, it later became Rio Tinto, and now owns the Tiwai Point Aluminium Smelter. He's also been the director of the New Zealand Institute of Economic Research. He joins me now from Wellington. Mr McDonald thank you for joining the programme this morning.

Good morning Rachel.

Rachel Rio Tinto are tough negotiators, how tough do you think they are, or could they be bluffing here?

Kerry McDonald – Former Smelter Managing Director
I certainly don’t think they're bluffing at this stage. The key issue for me is their last year's financial result was a loss of three billion which was pretty significant, but they had to write off 12 billion US dollars of the value of their aluminium assets, and they actually started to sell Tiwai Point and a number of other smelters some 18 months ago now. So the new Chief Executive of Rio Tinto, Sam Walsh, really has no option but to reduce the costs of the business quite markedly and the objective is generally to take five billion dollars' worth of cost out of the business over 12 months. So they are serious and this isn't some sort of positioning for a better power deal, this is quite fundamental stuff for Rio Tinto.

Rachel Tony Ryall said in parliament that if there's a small gap he said in the short to medium term they are prepared to see what they can do to bridge it as in the government, but if that gap is over a longer term that’s a problem. What do you think he means by that?

Kerry Well I think it's a basically sensible approach to take. Aluminium smelters don’t last forever, and they're generally built in an area where there's large quantities of power available cheaply and as the demand for power grows so the life of the smelter becomes more limited. But the issue to me now is reaching agreement on maybe a five year deal, maybe a 10 year deal that gives an orderly transition on both sides of the ledger, both for the smelter and for the government. So I think the idea of negotiating and using the argument of national benefit to justify a short term arrangement, I think there's a lot of merit in that.

Rachel If the smelter was to close, and let's just look beyond the issue of job losses here, what impact would that have on our economy in terms of the balance of payments and GDP.

Kerry Well it's a very interesting question. The smelter's been an enormous contributor to the New Zealand economy, but over recent years that contribution has probably abated somewhat. Aluminium prices have been relatively low, the strong New Zealand dollar and the continual rise in electricity prices has made the smelter less profitable, so it's paid less tax, and the smelter operation right now may even been cash negative. Now having said that there will be a lot of detriments from the smelter closing. The labour productivity there is just so high and so the pay that goes to the workforce goes into the local community, will be an enormous loss, and yes it will affect the balance of payments and so on, and affect the tax base, but not as much as it would have 10 years ago. And so I think there is still a very strong argument to find a short term deal that bridges the gap between the two, that allows an orderly transition but there is no doubt that when the smelter closes it will be a significant loss.

Rachel Kerry McDonald, we have to leave it there, appreciate your time this morning, thank you.

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