Bringing back Australian Manufacturing: Discard programmed obsolescence

[divs4ever]

If governments are going to own power assets then they need to appoint experts to the board of the ownership authority and take their advice, not indulge in their own fantasies.

fantasies , fairy tales , and kitty-raiding will happen , it is just human nature ( in politicians and policy-makers )

when in a computer club i talked to various experts , and even the most expensive consultants were over-turned by policy advisers ( until things totally screwed up )

i remember a story of a bank johnny ( obviously from the accounting side ) complaining about the call-out fee of an external consultant ( because the in-house guys were out of their depth )

the consultant pointed out that while the discussion took place the bank lost the entire ( in-house ) IT budget for the month , and he hadn't even started investigating the IT issue .

he had another interesting story about a major airport as well ,( including debates over his fees )

 

[SirRumpole]

You see Mr @SirRumpole , not as easy as state or government owned vs private.

No reason we can't have both.

Like public/private education and public/private health, the commercial operators would need to provide something extra to justify their higher prices.

 

[qldfrog]

No reason we can't have both.

Like public/private education and public/private health, the commercial operators would need to provide something extra to justify their higher prices.

Why should it be higher?

 

[SirRumpole]

Why should it be higher?

Well, they have to make a profit for their shareholders, but if they can deliver at a consistently lower price than State owned, good for them.

 

[divs4ever]

No reason we can't have both.

Like public/private education and public/private health, the commercial operators would need to provide something extra to justify their higher prices.

remember governments only spend taxpayer money ( either current tax receipts or future tax receipts dressed up as bonds ) so a government takes on little risk , so you don't see government officials dragged into bankruptcy over failed projects .

proper capitalism will determine the prices ( if they are too high nobody will buy the product/service , if too low the business will go bankrupt )

 

[SirRumpole]

proper capitalism will determine the prices ( if they are too high nobody will buy the product/service , if too low the business will go bankrupt )

Doesn't really apply for essential services.

 

[divs4ever]

Doesn't really apply for essential services.

maybe it should

sure we may end up like the slums in India for a while , but at least the productivity would be genuine

 

[sptrawler]

The pipeline was still privately funded, even if it was underwritten by a government contract.

But, am talking about all the privately owned gas power stations, wind turbines, solar installations, gas storage etc etc

My point is simple that the energy system in Australia relies on a lot of funding coming out of the private sector, pretty much all of the growth is private.

If you look at this asset map, from just one company in WA (APA). You can see that quite a bit of their assets have been built privately.

View attachment 188507

You miss the point completely, their wojldn't have been a pipeline if the Govt hadn't sibsidiesed it by buying gas it couldn't even use at that point.
The privates will only build something they can make money on, the Govt has to supply services and provide growth, as I said if it was left to the private sector their wouldn't have been a Karatha to Bunbury pipeline.

 

[Smurf1976]

Is that about "gold plated" poles and wires?

That has relevance but I'll explain it this way.

Suppose hypothetically that I become the owner or at least CEO of a company that has a 7% market share for electricity across the NEM states.

What can I do to grow the business and increase profit?

Well I can aim to grow that 7% market share and to do that it's all about marketing. Most consumers don't understand the product, so they're not making a hard headed decision, but by offering some frequent flyer points, a few gimmicks like a prize draw and maybe sponsoring a sports team I can convince them to switch. So I'll leave it to marketing experts to make it happen - if they decide we need to run fashion shows or have a cake baking competition well that's what we'll do.

The other thing I can do is ensure my traders, and every company in the industry has traders working around the clock, do everything possible to create volatility in the market. By doing that it helps financially break any competitor who doesn't have their own generation, unless of course they buy the rather expensive hedging that I'll be more than happy to sell them.

Notice something here? There's no focus on reducing cost. The entire focus is on increasing revenue indeed serious $ will be spent on doing so.

Now suppose that instead of owning or being CEO of a company with a 7% market share nationally, I am instead in charge of a company that has a monopoly in SA but isn't allowed to operate anywhere else as per the law. Further, I'm required to justify prices charged to retail customers (everyone except heavy industry) to government via a formal process that's essentially a court-like interrogation under oath.

Now what can I do to grow the business? Can't just put the price up given the bit about being required to justify it.

Well I could encourage people to put up Christmas lights and use more electricity at home but that's not really going to get very far, any benefit there will be trivial.

I could try and poach some of the gas industry's sales for heating, cooking and hot water but, and this is a key point, that's only going to work the public are convinced electricity is cheaper. With only one supplier it becomes dead easy for anyone independent to make a blanket statement there as to what a consumer should do and there's no arguing, physics is physics. So I can grow this market but I'm going to have to really sharpen the pencil when it comes to price, it needs to be low.

Then there's the big one, manufacturing. If I can convince industry to set up in SA then they've no choice other than to use my electricity and they'll be using lots of it. Thing is though, any manufacturer is going to have some very hard headed accountants, they won't be fooled by marketing, and they'll want to lock the price in under long term contract. That being so, this is only going to work if I can actually produce it cheaply enough to attract manufacturers and still make a profit.

From there it heads straight down two paths. First is I'm going to need to be ruthless with the engineering. I need the most economical approach to everything but it must be technically robust, it has to work. Every option will need to be examined, there's no room for ideology here, but cost minimisation must be a core focus. Plus I need to minimise overheads, I can't avoid employing workers and I need to pay them fairly if I want good performance and loyalty to the company but they need to be actually doing the work that needs doing. That's the key, we can't have unnecessary administrative overheads here, not when we're trying to beat literally the entire world.

And that's exactly how state-owned electricity in SA managed to supply the public at just under half the present retail price in real terms whilst making a $130 million profit back in 1992. It was, of course, also absolutely central to the ability of the state to attract and sustain manufacturing.

That's not about ownership though. I could just as easily have said AGL, which has always been a shareholder owned company since its establishment in 1837 (yes 1837 that's not a typo, it's among the oldest businesses in Australia in any industry). During most of its history as a monopoly gas supplier it did exactly the same, sought to grow the business through price competition with other fuels and by being cheap enough to attract industry to NSW that wouldn't have gone there had gas been expensive.

Now consider the others were all playing the same game. All competing to attract industry to their respective states and all competing head on against other fuels for the local market. That kept the pressure on to minimise costs.

That's not to say there weren't some blunders made, it's not say there wasn't definite room for improvement (especially NSW and Vic), but overall there's far more competitive pressure when success requires low price and growing the industry locally than there is when it can be achieved simply through marketing to an unchanged total customer base.

Same applies in lots of situations. If all your eggs are in the one place then you're going to go all out to promote business in that place. If growing your own business requires that you attract other businesses to your state in order to use your electricity, gas, trains or whatever is is that you're running well that's what you're going to pursue, you're going to do everything you can to grow the local industrial base because that's directly linked to your own business and its growth.

An infrastructure company such as APA does have that pressure, to generate more profit from the existing assets they need more usage in the existing locations so they do have that incentive to attract industry. Where it fails is the retailers don't have the same incentive - it's far easier for XYZ Energy Co. to put its efforts into poaching household consumers from rivals or into profiting through wholesale trading than it is to get someone to build a new factory in Australia who most likely will end up using another retailer anyway.

As I said though, not interested in the politics of all this. My comment's purely economic based on things I've been involved with or observed.

 

[qldfrog]

That has relevance but I'll explain it this way.

Suppose hypothetically that I become the owner or at least CEO of a company that has a 7% market share for electricity across the NEM states.

What can I do to grow the business and increase profit?

Well I can aim to grow that 7% market share and to do that it's all about marketing. Most consumers don't understand the product, so they're not making a hard headed decision, but by offering some frequent flyer points, a few gimmicks like a prize draw and maybe sponsoring a sports team I can convince them to switch. So I'll leave it to marketing experts to make it happen - if they decide we need to run fashion shows or have a cake baking competition well that's what we'll do.

The other thing I can do is ensure my traders, and every company in the industry has traders working around the clock, do everything possible to create volatility in the market. By doing that it helps financially break any competitor who doesn't have their own generation, unless of course they buy the rather expensive hedging that I'll be more than happy to sell them.

Notice something here? There's no focus on reducing cost. The entire focus is on increasing revenue indeed serious $ will be spent on doing so.

Now suppose that instead of owning or being CEO of a company with a 7% market share nationally, I am instead in charge of a company that has a monopoly in SA but isn't allowed to operate anywhere else as per the law. Further, I'm required to justify prices charged to retail customers (everyone except heavy industry) to government via a formal process that's essentially a court-like interrogation under oath.

Now what can I do to grow the business? Can't just put the price up given the bit about being required to justify it.

Well I could encourage people to put up Christmas lights and use more electricity at home but that's not really going to get very far, any benefit there will be trivial.

I could try and poach some of the gas industry's sales for heating, cooking and hot water but, and this is a key point, that's only going to work the public are convinced electricity is cheaper. With only one supplier it becomes dead easy for anyone independent to make a blanket statement there as to what a consumer should do and there's no arguing, physics is physics. So I can grow this market but I'm going to have to really sharpen the pencil when it comes to price, it needs to be low.

Then there's the big one, manufacturing. If I can convince industry to set up in SA then they've no choice other than to use my electricity and they'll be using lots of it. Thing is though, any manufacturer is going to have some very hard headed accountants, they won't be fooled by marketing, and they'll want to lock the price in under long term contract. That being so, this is only going to work if I can actually produce it cheaply enough to attract manufacturers and still make a profit.

From there it heads straight down two paths. First is I'm going to need to be ruthless with the engineering. I need the most economical approach to everything but it must be technically robust, it has to work. Every option will need to be examined, there's no room for ideology here, but cost minimisation must be a core focus. Plus I need to minimise overheads, I can't avoid employing workers and I need to pay them fairly if I want good performance and loyalty to the company but they need to be actually doing the work that needs doing. That's the key, we can't have unnecessary administrative overheads here, not when we're trying to beat literally the entire world.

And that's exactly how state-owned electricity in SA managed to supply the public at just under half the present retail price in real terms whilst making a $130 million profit back in 1992. It was, of course, also absolutely central to the ability of the state to attract and sustain manufacturing.

That's not about ownership though. I could just as easily have said AGL, which has always been a shareholder owned company since its establishment in 1837 (yes 1837 that's not a typo, it's among the oldest businesses in Australia in any industry). During most of its history as a monopoly gas supplier it did exactly the same, sought to grow the business through price competition with other fuels and by being cheap enough to attract industry to NSW that wouldn't have gone there had gas been expensive.

Now consider the others were all playing the same game. All competing to attract industry to their respective states and all competing head on against other fuels for the local market. That kept the pressure on to minimise costs.

That's not to say there weren't some blunders made, it's not say there wasn't definite room for improvement (especially NSW and Vic), but overall there's far more competitive pressure when success requires low price and growing the industry locally than there is when it can be achieved simply through marketing to an unchanged total customer base.

Same applies in lots of situations. If all your eggs are in the one place then you're going to go all out to promote business in that place. If growing your own business requires that you attract other businesses to your state in order to use your electricity, gas, trains or whatever is is that you're running well that's what you're going to pursue, you're going to do everything you can to grow the local industrial base because that's directly linked to your own business and its growth.

An infrastructure company such as APA does have that pressure, to generate more profit from the existing assets they need more usage in the existing locations so they do have that incentive to attract industry. Where it fails is the retailers don't have the same incentive - it's far easier for XYZ Energy Co. to put its efforts into poaching household consumers from rivals or into profiting through wholesale trading than it is to get someone to build a new factory in Australia who most likely will end up using another retailer anyway.

As I said though, not interested in the politics of all this. My comment's purely economic based on things I've been involved with or observed.

May i raise a slight twist in your explanation?
But then religion got involved in the form of global warming belief: a huge enough number of retail customers first decided they wanted a specific colour of electron.
They asked that to their retailers who had then to provide that at a premium.
If green electron were produced by let's say nuclear or other baseload mean, it would be no issue:
15 % consumers wanting green electrons..simply generate the consumption of these 15% with these green generation..a premium can be paid by these 15% and all is good, no one else affected, the system working as you explain.. BUT
There is no coloured electron baseline of much significance in Australia..no nuclear, no major hydro but Tasmania..
So once the percentage of these religious minded consumers became big enough, generation needed to actually be changed,and overbuilt in green, affecting the pricing past the initial church members and affecting the whole consumer base.
Worse, once the church members base started to be big enough to get the balance of power in our duopoly system, the laws and regulations were changed to suit the religions.
And the generators got not only vastly feast and famine green generation, but also mandated closure of black coloured generation units.
We were doomed from the start.
Even with a unique state controlled and vertically integrated monopolistic energy provider, we would never have avoided price explosion.
Maybe reduced but it is structurally wrong
Canada, France, Norway,NZ could have had a smoother path, maybe, had their government not added silly regulations to cater for the zealots but not us .
Only nuclear, and you know my reluctance here, could have allowed Australia this non overly expensive move to the religion as we lack cheap hydro .
But nuclear has the wrong tint of green....
PS...I have to say i am guilty: in the 2000s, i checked the box for green energy, paying a premium for my coloured electrons, while installing a 1kw PV solar system for nearly $9k then (but my church donation was heavily subsidized by red leaders).
Little did i know then that i was starting the crusade which led to this debacle.

 

[Smurf1976]

As a practical illustration of what I'm on about, AGL (shareholder owned) and Hydro Tasmania (state government owned) both have a number of things in common.

The one of relevance here being both have effectively the same company as their largest customer, that being Rio Tinto albeit via subsidiaries and in both cases that's running smelting / refining operations at sites remote from any mine so that's near enough to manufacturing, it's relevant to the thread.

Rio Tinto couldn't care less about who owns it so long as they're credible both on the technical side and on the financial side. Bearing in mind nobody expects actual perfection, but the terms of what's acceptable are in the contract and that'll specify the agreed terms both technical and financial.

Contract? Yes contract - these deals are always done under contracts which are typically on a take or pay basis extending over many years. 15 years isn't uncommon, 40 years has been done in the past.

Now where a lot of this goes wrong I'll explain by saying there'll be an assortment of people negotiating those contracts. Senior management yes, legal yes, but also engineering and this is the bit economists really get wrong.

Engineers negotiating financial contracts? Why would that be? Shouldn't they stick to engineering and leave the business deals to businesspeople?

Well here's the catch. It's creative engineering on both sides that finds ways to get the cost down. If a company like RT just put out a financial tender and treated it as a purely financial exercise they'd never get anywhere, they wouldn't be refining in Australia that's for sure. To make it work requires both parties working together, looking at the technical aspects of both the energy supply and the refining operation, and coming up with cost cutting measures to mutual benefit.

That's integral to the process and is where much of this goes wrong, the two parties can't be at arms length in an adversarial manner. On the technical side there needs to be full disclosure and active co-operation to make it work as cheaply as practical, a point almost universally lost on people from finance, law or politics.

Back to my point that manufacturing, especially refining, in Australia isn't impossible to make work financially but it does require some smarts. It has to be lead by technical people who can come up with ways to offset the high wages and so on and still be competitive. It won't work financially to just take standardised "off the shelf" approaches that aren't optimised technically - that works in low cost countries but not here.

 

[Value Collector]

You miss the point completely, their wojldn't have been a pipeline if the Govt hadn't sibsidiesed it by buying gas it couldn't even use at that point.
The privates will only build something they can make money on, the Govt has to supply services and provide growth, as I said if it was left to the private sector their wouldn't have been a Karatha to Bunbury pipeline.

I think you miss my point, or at least are blurring it.

All I originally said was, Although WA and Queensland have not sold their grids, they both have relied on a lot of private investment in their energy systems.

I think you should understand that, that statement is true. I am not saying the government hasn’t also made large investments.

 

[Value Collector]

Well I think everyone who consumes energy wants it at the cheapest price and everyone who produces, distributes or sells it wants to do so at the maximum price.

The bottom line is what is in the national interest? That's what we elect politicians for and we need some far sighted ones of old, not fanboys for what a few blue sky companies are trying to sell.

As you have said, all the politicians are out of their depth, and we need some experts with the chutzpah to speak truth to power and do it publicly.

Do you know anyone like that?

I don’t think most rational investors that allocate money into regulated energy infrastructure are happy to just earned a decent return on their capital, they aren’t looking to break records.

 

[sptrawler]

I think you miss my point, or at least are blurring it.

All I originally said was, Although WA and Queensland have not sold their grids, they both have relied on a lot of private investment in their energy systems.

I think you should understand that, that statement is true. I am not saying the government hasn’t also made large investments.

I beg to differ, you said the pipeline was privately funded, when from memory the State Govt funded it and it was due to that and the take or pay contract that the pipeline was built.

It was only due to the fact the pipeline was built that the private sector could build the gas turbines that you mentioned.

So in reality it wasn't the private sector that provided the infrastructure for growth, it was the Govt, which is the opposite of what you were infering in your post #193.

I'm only debating this due to the fact many think it is the private sector that create the growth, when that only applies if the private sector can make money out of it, Woodside would have preferred to just export the gas directly from Karatha to Japan.

There wasn't even a market in Perth, the only gas in Perth in those days was the old Freo gas company that had a tiny pipe from Dongara and a small reticulation footprint in Perth.

If the W.A Govt hadn't paid for the pipeline, imagine the strife W.A would be in now.

I agree with you that we should buy from the cheapest supplier, however I wouldn't be happy if our vaccines were bought from China, Thailand, Vietnam etc, not because they may or may not be inferior, but because if we manufacture it here we know what we are getting and know ee can get it when we need it.

The same with manufacturing grid batteries here, they may be more expensive, but tgey are such a critical piece of infrastructure going forward, we should be making them here if possible.
Ony my opinion as usual.

 

[SirRumpole]

I don’t think most rational investors that allocate money into regulated energy infrastructure are happy to just earned a decent return on their capital, they aren’t looking to break records.

Sorry, that's a bit confusing. Investors are just out to earn a "decent' return?

What is "decent" ? eg if inflation is 2%, is 4% a decent return?

If the cash rate is 3% is 6% decent?

According to the list below, energy companies are doing a lot better than that.
----------------------------------------------------------------------------------------------------------------------------------
Profits for utility companies range widely from country to country and region to region. In part, due to barriers to entry and other legislative restrictions on competition, both laterally and horizontally. As of the first quarter of 2022, the average net profit margin in the utility sector was 9.68%. For the trailing 12 months (TTM), the net profit margin increased to 10.88%.


As far as other margin measures, the average gross margin increased to 66.04% in Q1 2022. The average earnings before interest, taxes, deprecation, and amortization (EBTIDA) margin was 34.29%.


To gain a perspective on the range in profit margins across the sector, we can compare the most recent profit margins of two different electric utilities operating in different parts of the world. Spark Infrastructure Group and Duke Energy (DUK). Spark Infrastructure Group supplies electric power and infrastructure across Australia and reported a net profit margin of 29% for 2021. In contrast, Duke Energy runs generation projects in the U.S. and Canada and had a net profit margin of 15%.
-----------------------------------------------------------------------------------------------------------------------------------

What's the Average Profit Margin for a Utility Company?

Supply and demand forces are limited among energy producers, which is directly linked to the average profit margin for utilities.

www.investopedia.com

 

[Value Collector]

I beg to differ, you said the pipeline was privately funded, when from memory the State Govt funded it and it was due to that and the take or pay contract that the pipeline was built.

It was only due to the fact the pipeline was built that the private sector could build the gas turbines that you mentioned.

So in reality it wasn't the private sector that provided the infrastructure for growth, it was the Govt, which is the opposite of what you were infering in your post #193.

I'm only debating this due to the fact many think it is the private sector that create the growth, when that only applies if the private sector can make money out of it, Woodside would have preferred to just export the gas directly from Karatha to Japan.

There wasn't even a market in Perth, the only gas in Perth in those days was the old Freo gas company that had a tiny pipe from Dongara and a small reticulation footprint in Perth.

If the W.A Govt hadn't paid for the pipeline, imagine the strife W.A would be in now.

I agree with you that we should buy from the cheapest supplier, however I wouldn't be happy if our vaccines were bought from China, Thailand, Vietnam etc, not because they may or may not be inferior, but because if we manufacture it here we know what we are getting and know ee can get it when we need it.

The same with manufacturing grid batteries here, they may be more expensive, but tgey are such a critical piece of infrastructure going forward, we should be making them here if possible.
Ony my opinion as usual.

What I said in relation to WA was this

“Queensland and WA might not have sold, but they have relied on heavy private investment to keep the lights on.
It’s the same in WA, most of the states energy is coming from the private sector that built and owns the gas pipelines, gas power plants, wind farms, and solar.”

This statement is true is it not?

You are talking about just one pipeline, there are many others, eg the goldfields pipelines and others that have been privately funded

But, before you go to far into the woods, just re-read that part where I quoted myself, that is true is it not?

 

[sptrawler]

The pipeline was still privately funded, even if it was underwritten by a government contract.

But, am talking about all the privately owned gas power stations, wind turbines, solar installations, gas storage etc etc

My point is simple that the energy system in Australia relies on a lot of funding coming out of the private sector, pretty much all of the growth is private.

If you look at this asset map, from just one company in WA (APA). You can see that quite a bit of their assets have been built privately.

View attachment 188507

What you said at #193, when refering to my post about the Karatha to Bunbury pipeline is right there, which is incorrect from my knowledge.

My wife has a similar disposition, of rewriting what was said. Lol

The take or pay contract only gauranteed W.A some of the gas, the Govt not only had to pay for the gas, they had to build the pipeline to be able to use it. Lol

That's why I said politicians have to make calls that sometimes aren't profitable, but are essential infrastructure and is why the privates are usually useless at doing it.

Anyway it is history now and APA did allright buying it.

 

[Value Collector]

Sorry, that's a bit confusing. Investors are just out to earn a "decent' return?

What is "decent" ? eg if inflation is 2%, is 4% a decent return?

If the cash rate is 3% is 6% decent?

According to the list below, energy companies are doing a lot better than that.
----------------------------------------------------------------------------------------------------------------------------------
Profits for utility companies range widely from country to country and region to region. In part, due to barriers to entry and other legislative restrictions on competition, both laterally and horizontally. As of the first quarter of 2022, the average net profit margin in the utility sector was 9.68%. For the trailing 12 months (TTM), the net profit margin increased to 10.88%.


As far as other margin measures, the average gross margin increased to 66.04% in Q1 2022. The average earnings before interest, taxes, deprecation, and amortization (EBTIDA) margin was 34.29%.


To gain a perspective on the range in profit margins across the sector, we can compare the most recent profit margins of two different electric utilities operating in different parts of the world. Spark Infrastructure Group and Duke Energy (DUK). Spark Infrastructure Group supplies electric power and infrastructure across Australia and reported a net profit margin of 29% for 2021. In contrast, Duke Energy runs generation projects in the U.S. and Canada and had a net profit margin of 15%.
-----------------------------------------------------------------------------------------------------------------------------------

What's the Average Profit Margin for a Utility Company?

Supply and demand forces are limited among energy producers, which is directly linked to the average profit margin for utilities.

www.investopedia.com

Oops I meant most rational investors are just looking to make a decent return, not big record breaking returns.

A decent return would be considered some margin above the risk free cash rate, depending on the projects risk level and the exact regulation they are being asked to follow, and risks they are being asked to take.

That return can be augmented through the use of bonds etc.

 

[Value Collector]

What you said at #193, when refering to my post about the Karatha to Bunbury pipeline is right there, which is incorrect from my knowledge.

My wife has a similar disposition, of rewriting what was said. Lol

The take or pay contract only gauranteed W.A some of the gas, the Govt not only had to pay for the gas, they had to build the pipeline to be able to use it. Lol

That's why I said politicians have to make calls that sometimes aren't profitable, but are essential infrastructure and is why the privates are usually useless at doing it.

I was thinking of the goldfields gas pipeline that APA own, which is one of my big investments, if I was confused I apologise.

But as I said, my I initial point was simply that Queensland and WA rely on big private investments. They aren’t 100% owned and vertically integrated.

 

[Value Collector]

@SirRumpole

Watch this at the 2.30min mark, Warren gives a good description of the return he expects to get out of his energy utility and railroad business.

I think you will agree his approach is the right approach, and the fact that he provides the services cheap than most state grids kind of proves it, maybe we need Berkshire to take over own Australians energy system.