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10:25 am, March 24th, 2013 - 27 comments
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Today we again have the Herald’s resident ignoramus Damien Grant sounds off about something he knows nothing about. As usual just looking at numbers without understanding what they represent and leaps to wrong conclusions. For a start he tries to compare the $8000 Watercare charge for a new water supply connection with the much smaller $300 Chorus charge for a phone/data connection.
Let’s start with some simple engineering. It’s MUCH more expensive to supply water than data. One is a physical substance that inherently involves high pressures, flows and energy. The other is electrons or photons. A large 1m diameter pipeline may easily cost $1m to install a length of just 100-200m. It demands a substantial trench, bedding material, lots of large diggers, trucks, and cranes, lots of specialised welding, and concrete blocks weighing many tons at every bend in order to restrain the large forces involved.
A pumping station will cost anywhere between $3-10m to build. It requires large amounts of energy, monitoring and maintenance to keep it running safely and reliably. A bulk water supply plant is a huge investment of civil, mechanical, electrical and automation engineering. It requires a level of staffing and cost to maintain and operate it that is entirely different to a modern data-centric telephone system.
By contrast a new fibre trunk involves a few small trucks and a mole-plough. Well there is bit more to it than this … but fundamentally the costs are much lower. The UF Fibre project is costing something in the order of $3-5b to rollout to the whole country. It would cost at least that much to re-build the water supply to say just Wellington. That’s the fundamental flaw of Grant’s argument. Water and data are quite different things and cannot be meaningfully compared.
Worse still he goes onto compare two different business models. The electricity industry and the water industry have traditionally charged quite differently. Early technology meant it was fairly easy to measure electricity consumption while it was clumsy and difficult to measure water. Besides water supply was always seen more as a fundamental human right than electricity was. It’s only been quite recently that we’ve been metering water. Even so metering is a weak tool in utility industries where typically 50-80% of costs are fixed. For this reason electricity suppliers have been split into energy and line providers; but because water supply cannot be sensibly split in this way there is only a single charge to cover both. Again different models to suit different industries.
For a typical small Auckland household their annual water bill is around $600, while their total power bill is maybe $2400. Of course Vector can low-ball it’s connection fee, because it knows perfectly well that it can re-coup the real cost of providing the connection (which is much higher) with it’s on-going monthly line charges. By contrast water supply charges the total connection fee is upfront at the time of installation. And of course the $8000 fee Watercare charges covers far more than the bit of pipe from the main in the street to your house; it represents your portion of the entire cost of providing the infrastructure upstream of your connection. That’s a pretty fair model.
It also makes the cost of urban sprawl transparent. I’ve sometimes thought that Len Brown’s correct response to the Government’s insane threats forcing expansion of the MUL is to simply say … “sure you can build new suburbs way out there, just don’t expect the rest of city to fund the services you’ll want for them”. Which is probably why the likes of Damien Grant are instinctively uncomfortable with Watercare’s clean, transparent model … because it makes it harder to socialise the costs as usual.
Your guesstimates are just as bad. Both of you commenting on something you know nothing about.
Ah no you are quite wrong. RL knows this stuff very well. It is like me commenting on AIS or c++ or how this site is running.
Yes, previous discussions lead me to believe that RedLogix is a drainlayer or in the water distribution business from the engineering side.
My mistake then.
Surely claims of ‘guesstimates’ means you knew the info was wrong? If not, why slam them as such?
I can confirm these numbers are roughly accurate. The recent Drury pump station (part of the project to help connect Pukekohe) cost around $5 million. Meanwhile, the Hunua 4 watermain project involves laying 28km of 1.9m diameter pipe, and will cost around $200 million. I.e. on average, it will cost around $1 million for a 100-200m section of pipe.
Some of his statements do require some clarification.
Developers of greenfield or infill developments do not get paid a cent for the infrastructure that is “gifted” a pro forma invoice is issued that allows for the infrastructure to be entered into council or a CCO’s books this cost is offset by the cost of the resource consent. If there is added infrastructure required to cater for the infill or greenfields operation (say a pumping station) who pays the cost, from my experience the council offers very little at best.
Around 2004 the water supply contribution of $2k/ha was abolished and replaced by a charge when the water metre was connected, this increased for manukau water clients the connection cost at the time for a meter was less than $1k which increased to $4.5k +GST there are 10-25 dwellings per ha. Go figure.
Then we have how water care has for many greatly increased the cost of water IMO was very underhanded.
And redlogic to 3.1 the labour govt by the introduction of development contributions also stops any of this cross subsidising. Also thecouncil get new infrasturcture hat requires no maintenance or financial outlays yet there are rates generated from these new developments. Take all and give nothing.
What do you expect from a fraudster.
Hear that people, it’s the sound of privatising water coming your way soon as rortney laid the foundation and the likes of Joyce and ryall will probably get asked to ‘fix’ what isn’t broken.
Watercare under right wing pin up boy Ford underinvested year after year as Banks demanded dividends to prop up his inefficient council regime. the high cost is easily justified and comparing it to fibre rollout is retarded.
Next you will be complaining the poor can’t afford housing .
You do have a point … sort of. The high cost of housing comes about because the 1990’s National government pushed local government out of subdivision business by preventing the TA’s from “cross-subsidising” their activities.
In other words they were not allowed to spread the cost of a new subdivision against current or future rate income. This essentially privatised the subdivision business.
The correct way to provide low-cost housing is to socialise the cost of providing the land, the design, engineering and services. The land should be owned by the TA and instead of rates they should charge rent. Instead of lumping all the costs of developing the raw land into a retail section onto first buyer (with the attendant huge mortgage costs) … they should be spread across the multiple generations who will build and live on that land.
The cost of the raw land is around 10-15% of the retail section; the rest of the costs arise because land development is a high risk business, with high compliance costs. In addition developers look for a minimum of a 30% margin to take this high risk into account.
It’s far cheaper and more cost effective to spread this risk by socialising it across the entire community and multiple generations. By contrast Damien Grant is using bogus numbers to try and imply that the private sector could do a better job of providing water utilities than the public sector. When in fact whenever the private sector get involved in the business … prices go through the roof.
A big chunk of the affordability comes from virtually no competition in the manufacture and supply of building materials. CHH, Fletchers, holcim and others totally cream it.
Much like Fletchers and Fulton hogan cream the big civil jobs with downers and Leighton there to make it look competitive. As an architect from Europe said ‘ so much forestry and yet wood is so expensive’, don’t stop there, concrete, steel, bricks etc etc
yep; Productivity Commission- “prices of building materials in NZ 30% higher than in Aus.”
(that Damian Grant sure is spawn)
“prices of building materials in NZ 30% higher than in Aus.”
prices of NZ building materials 30% lower in Australia than NZ……
Price of NZ workers lower in OZ (as they have to wear job loss themselves).
“The cost of the raw land is around 10-15% of the retail section; the rest of the costs arise because land development is a high risk business, with high compliance costs. In addition developers look for a minimum of a 30% margin to take this high risk into account. ”
That’s not quite true. If you’re funding your own development the risk is pretty much zero, the risk only arises because they’re using borrowed money to pay for it. The primary risk is that the money will dry up before the development is finished, a lesser risk is extra (unexpected) costs pushing up the overall cost.
Unless they’re flush the banks will lend about 60% of the value on secure assets like land and take the first mortgage over it. The rest of the development has to be funded by shareholder capital or, more commonly, mezzanine finance. Bank finance runs about 7-10% and the second tier financing was pushing 20%. (some were as high as 30%)
Mezzanine finance was capitalised so they paid interest on the interest, the real finance cost on some of the big developments that took years was well over 50%. (20% interest capitalised over 3years is 73% total interest) They added their 30% profit margin on top of that.
It’s why the state needs to be involved in at least the land development part of housing. With low cost funding the developments would cost a hell of a lot less. (5% capitalised over 3yrs is only 16% total interest)
There’s a group that particularly don’t like transparency as it makes it more difficult to carry out the fraud and corruption that is their preferred means of getting rich.
“… For this reason electricity suppliers have been split into energy and line providers; but because water supply cannot be sensibly split in this way there is only a single charge to cover both. Again different models to suit different industries….”
It can be argued that lines companies and retaliers cannot be split in this way either, but that didnt stop Treasury and Ministry of Commerce (the 2 departments that pushed neo-liberalism the most), from splitting them anyway.
You connect a phone line the same way you connect a water line. You dig a hole in the ground and drop in different coloured pipe.
Anyway, I also compared the cost of a water connection to the cost of a gas connection.
Gas is a more difficult product to deliver than water, and more expensive because while every house will usually have water, not all have gas, making the infrastructure more expensive per connection.
And do not forget, my Standard sweets, Watercare lost sixty million. Chorus makes money, as does Vector. So, from an end user’s perspective or from a tax payers perspective, Chorus and Vector do a better job for less money.
Private enterprise, you see, always wins.
Now, I know you like me to stick around so you can call me a fraudster, (how I do love the standard at the Standard), I have to attend the monthly Auckland meeting of the Vast Right Wing Conspiracy and get my instructions, so I cannot stay and play.
Hugs to Red, love your work!
Vector is publicly owned.
The Auckland Energy Consumer Trust owns 77% of Vector on behalf of consumers in the Auckland area (The old WEPB and AEPB), it is effectively a consumer co-op. The 30% NZX listing was made so Vector could purchase the old NGC.
Chrous’s infrastructure was built up over the past 100-odd years by the old NZPO. It might have done a few things wrong, but getting a phone connection to 99.9% of New Zealanders is not one of them.
Proving beyond doubt that you have NFI WTF you’re talking about.
Chorus does better for two reasons:
1.) Most of the infrastructure was in place before they were privatised.
2.) Most of the country is paying them – that’s the result of a natural monopoly.
Wouldn’t be surprised if the same applied to Vector.
But only at the cost of the rest of society. Telecom has taken ~$17b out in profits and yet we now are having to pay them even more taxpayer money to upgrade the network – work that should have been done with that ~$17b. Work that would have been done if we hadn’t sold Telecom.
Proof of the dead weight loss of profit.
You connect a phone line the same way you connect a water line. You dig a hole in the ground and drop in different coloured pipe.
Ignoramus. While there is a superficial similarity to someone with his hands in his pockets gawking over the edge of the safety barrier, that’s pretty much where it ends. Everything else about water and data is different. The ‘connection’ from the house to the street is only a small fraction of the total infrastructure required to deliver an actual service .. and the costs in each of these industries is completely different. Comparison Fail 101.
Besides Grant completely ignores the totally different business model involved. Over a say fifty year lifetime the Vector line charge would be around $50 pm * 600 months = $30,000 for their ‘connection’, while Watercare has only charged a one off $8,000 cost.
Gas is the same again … a monthly connection fee applies. And from an engineering perspective because gas has a much lower density than water it’s actually a whole lot easier and cheaper to distribute.
Sure you can claim the private sector is ‘making money’. Only because Vector and Chorus are ripping off their customer base who typically have little to no choice around their ‘line suppliers’. In terms of providing good service and value the public sector here is miles ahead.
Oh dear Red.
Watercare charge around 200 a year for a connection, plus a rate for water. About the same as Chorus and Vector.
Gas in the street, my dear, is at high pressure. The regulator at the gas meter breaks it down to low pressure so your house does not fill up with high pressure gas. Which, clearly, is something you need.
Puncture a water main and then do the same with a gas main. I think you will find the gas is at much higher pressure.
I guess you were applying Red Logix, and not actual logic. Or reason. Or facts.
he he. Bye Bye. I will be applying the Judith Collins approach to you from now on.
RL is an actual engineer, you’re a bean cruncher. Go away.
Where did you learn science? The fools club?
Gas is at a low density. It may be a high “pressure” but it has relatively little mass or energy compared to water, which is usually gravity fed with all of the energy that implies (when was the last time you saw a gravity fed gas reticulation system?). Which means that gas has little actual mechanical energy stored in its pipes compared to water. Sure it is spectacular as it decompresses is there is a leak. But it doesn’t shut ruddy great piles of dirt and rock around the way that even a minor pipe leak does. Gas simply doesn’t have the mass.
What actually matters for engineering is how much potential mechanical energy is in the pipes. That is what the system is engineered for. It shows in the strength of the pipes required for water compared to gas, the inordinate sizes of the jointing, and the pump sizes. Water requires several orders of magnitude more strength and energy because it is a liquid. Consequently everything is bigger and more costly for water than it is for gas. FFS surely even a dumbarse glorified bean counter should know that much basic physics and engineering…
So I’d suggest that you learn some frigging physics and material science before making a total dick of yourself next time.
The funny thing is that even if Damien (I question that this is ‘the’ Damien Grant though, they’re not being particularly professional considering this is a public space) was right about the pressure difference being the important factor then it still wouldn’t be a compelling argument because the pressure difference isn’t that great.
Water mains pressure is typically in the order of 400-900 kPa and could easily exceed 1,000 kPa at low points while AS/NZS 4645 (the gas distribution network standard) explicitly deals with maximum pressures of less than 1,050 kPa (it can go higher but there are additional provisions required).
Wow. This is incredible. Mr Grant (I have no idea who you are, I live overseas – apparently you write for the Herald?) – your arguments are being torn apart and your responses appear to be largely irrelevant. What is worse however, is how condescending you are “my dear”…
You’re obviously completely ideologically driven (“private enterprise always wins” – heard of Kiwibank??) and this is the biggest problem with our current government.
I have no idea how you got a column in the Herald, but judging by the weak journalism standards of that newspaper I guess I’m not surprised that they’ve put a patronising neo-liberal up in there.
Nice article Red Logix, keep it up.