Queensland Economy Watch

With an estimated damages bill in the order of $1 billion (see this morning’s Australian), the Queensland floods will have a significant impact on the Queensland Government budget (already in a $1.75 bn deficit).  Of course, a large part of the damages bill will be met by insurers.  Furthermore, based on previous experience with Cyclone Larry, and current arrangements for cost sharing under the Natural Disaster Relief and Recovery Arrangements,  the Federal Government is expected to pick up at least half of the cost to taxpayers.

Under current Natural Disaster Relief and Recovery Arrangements, residents in natural disaster-declared areas are eligible for assistance, as noted in this media release yesterday from the Deputy Premier Paul Lucas:

Assistance for evacuated Theodore residents

The types of assistance provided include grants for personal hardship ($170 per person) and to cover the loss of household contents (up to $1,640 per adult) and to contribute to the repair of property damage (up to $14,200 per family) (see Financial assistance). Furthermore the Natural Disaster Relief and Recovery Arrangements provide funding for local councils to restore local infrastructure following natural disasters.

It’s unclear what the total cost to both the Federal and Queensland Governments of Cyclone Larry was, as the Budget Papers aren’t helpful in this regard, but the total cost is likely to have been over $500 million.  Following Cyclone Larry, Federal Government assistance included ex gratia payments of up to $1,000 for people who had lost their homes, and very generous assistance to affected businesses (incl. farmers) of up to $25,000 (see Australian Government Disaster Assistance and the 2006-07 Budget).  The business assistance alone cost the Federal Government around $260 million.

Given the widespread flooding and damage to houses (not all of which will be insured) and roads and bridges, it wouldn’t be surprising if the bill for taxpayers from the current floods is in the $500 million to $1 billion range.

It is highly likely the Federal and Queensland Governments are currently formulating a joint package of additional assistance measures in response to the floods and we will see an announcement soon.  Given the Queensland Government’s relatively poorer financial situation, it is likely the Federal Government will pay a big share of the bill for any additional assistance beyond the Natural Disaster Relief and Recovery Arrangements.

To put the potential budgetary cost of the floods in context, the Federal Government has an annual budget of over $340 billion.  While the Federal Government is also in deficit, its access to credit is very good, and it has been successfully borrowing $1.2 billion per week through its Treasury Bond auctions.  Hence, while the economic costs of the floods are undoubtedly substantial, as a nation, we will cope with them fairly readily.

Queensland newspapers are dominated this morning by news about the incredible run of wet weather, including stories about its economic impact on our building industry and cane-growers.  The Queensland Times (More rain forecast for Ipswich) nicely sums up the outlook, which applies for much of Queensland:

The Bureau of Meteorology’s six-day forecast paints a dim picture of rain, rain, rain, rain, rain and rain.

If you’re heading to the Gold or Sunshine Coasts for Christmas be prepared, especially for landslides:

Big rains tipped for Christmas

Moving house no joke (re. landslides on Sunshine Coast)

The outlook for Cairns and Far North Queensland is especially bad:

Far north Queensland faces flash flooding, mudslides with Christmas Day downpour

Many Queensland regions are currently experiencing or expecting flooding:

Chaos as water soaks Bundaberg

Chinchilla residents prepare for floods

Severe weather warning for region (from Rockhampton Morning Bulletin)

The economic impacts of all this rain on the construction and agricultural sectors are significant:

Long wet drains cash from builders

Rain washes $800m in sugarcane away

Let’s hope the continuing wet weather doesn’t deter shoppers from heading to the Boxing Day sales, which retailers are counting on to make up for some fairly ordinary trading months earlier this year.

The NBN Co Corporate Plan was released today, and the projected rate of return on investment is an underwhelming 7%.  The Government argues this is acceptable through a comparison with the long-term bond rate, with the media release noting:

NBN Co’s expected rate of return is 7.04 per cent, which compares favourably with the average 10 year bond rate (July 2009 to November 2010) of 5.39 per cent. The NBN Corporate Plan shows the Government can expect to recover all its funding costs with interest.

So by undertaking a large-scale, risky $30-40 billion project the Government is expecting to earn a premium of 1.6% above the long-term bond rate.  Given the large amount of uncertainty around ultimate take up rates and the cost of building the network, as well as around whether Telstra will play ball, this premium is way too small.  The Government would be better off investing its money in a managed fund with Colonial First State.

The NBN Co Corporate Plan actually identifies the significant risks associated with the project on pages 143-144, when it concludes the NBN Co has a cost of capital of 10%, which is the rate of return the project must generate to attract investment from private sector investors.  NBN Co will have to clarify how it thinks it is an economically viable business if its internal rate of return (as reported on page 23) is 7% but its cost of capital is 10%.

The State Government will learn an important lesson – about the risks to governments in embarking on risky business ventures – as a result of the failure of the state-owned ZeroGen clean coal company.  The Courier-Mail reported this morning:

State Government drops ZeroGen project after taxpayers pump $150 million into the plan

Despite the ZeroGen failure, the Queensland Government has made the correct call to support the development of clean coal technology, given the risks to Queensland’s coal industry (and exports) arising from the possibility of measures worldwide to control greenhouse gas emissions.  With several hundred years’ worth of coal reserves in our state, it is clearly in Queensland’s economic interests to develop clean coal technology.  If we can minimise greenhouse gas emissions from coal-fired power stations, we can continue to use coal, which is cheap and plentiful, to deliver electricity at a much lower cost than alternatives such as renewable energy.

The US Government has wisely avoided the risk of setting up its own clean coal business and has decided to simply grant money to a private sector consortium (which involves BHP Billiton, Rio Tinto, among other major players):

US awards $1 billion for clean coal power plant project

This way the US Government can ensure essential R&D gets done, but without taking on any of the downside business risk associated with the project.

Of course, with R&D on clean coal occurring in other parts of the world, the case for a major R&D investment in Queensland is diminished.  As it rebuilds its clean coal policy in the wake of the ZeroGen failure, the Queensland Government could usefully look to clean coal R&D projects overseas to see if there is any contribution Queensland can make to what rightly should be a global effort.

If you’re in the market for a property in South-East Queensland, you’d be advised to check out the latest Commonwealth Government-funded maps of the potential impacts of climate-change-induced sea-level rises on coastal communities:

Visualising sea level rise – South-East Queensland region

It’s not exactly something that would excite Hollywood and form the basis of a doomsday movie, but it would make you reconsider buying a place in New Farm or Brisbane bayside.