Economic Crisis

The idiocy of government

“Solar farm will save $22 million for the Sunshine Coast.” In such way an article by the Brisbane Times from Queensland, Australia announces itself in my Facebook newsfeed. My interest piqued, I click on it and read. It soon becomes incredibly clear that instead of saving money this project will waste a fortune.

The article begins:

Queensland’s first large-scale solar farm run by a local government – saving that council $22 million in electricity costs over 30 years – is now being built on the Sunshine Coast.

It will provide green power on the Sunshine Coast by mid-2017 and will slash the council’s costs of buying electricity for everything including streets lights, sports facilities, buildings, galleries, parks and libraries.”

So far so good. But I read on, and the gaping flaw in the plan soon becomes apparent.

“More than 57,800 solar panels will be built on stands three to four metres high above an abandoned canefield owned by the council. They will generate power by early 2017.

The Sunshine Coast Council will fund the $48.5 million to build the solar power plant…”

Oh dear. These geniuses are about to spend a certain $48.5 million today to save an estimated, projected, uncertain $22 million over the next 30 years.

In other words, even using their presumably optimistic projections, they already know that the project will lose $26.5 million, or 55% of the capital cost.

Even worse than that, I expect the funding will come from debt. Assuming they could borrow for 30 years at 4-5% a year then the cost of the project – and the losses incurred – would skyrocket.

In the meantime 50 hectares (124 acres) of farmland, that could otherwise be used to produce food, will be covered over for a generation.

And the solar equipment will be long past obsolete after 30 years, and worthless. Actually it will be less than worthless, since it will have to be dismantled and disposed of.

It gets even worse. Here’s local Mayor Mark Jamieson:

“Where we originally planned to save our ratepayers $9 million over the 30-year life of the project, we are now forecasting we will save $22 million.”

The article explains that a previously proposed version of the project was set to cost $30 million to make savings of $9 million. That was a net loss of $21 million, excluding borrowing costs.

The final, approved project will lose $27 million, again before borrowing costs. By scaling it up, the geniuses in the local government have dug their district into an even bigger fiscal hole. This is truly idiotic.

It doesn’t matter what your view is on climate change. Some of you may be sceptical about it, or reject it outright. Others may think we should spend unlimited funds until emissions of carbon dioxide are curbed.

Whatever your personal opinion, it’s clear where the global consensus lies. The world is attempting to reduce annual emissions of carbon dioxide, in the face of ever growing global energy demand.

A few years ago my dad installed solar panels on his barn roof. Since he lives in cloudy and rainy south east England that may seem like an odd move. But panel prices had been cut in half over the previous few years due to a supply glut, so the capital outlay and risk was much lower than before.

It’s worked out well, and makes a decent annual return. Something around 7% of the capital cost per year, linked to price inflation and after tax.

In other words spending money to have the solar panels put up was like buying an inflation-linked bond that pays 7% a year, tax free. That’s a great deal in today’s low yield environment.

But it only works because of government subsidies. The UK government pays my dad a quarterly cash amount based on the power produced by the panels.

During the English winter, with its short and cloudy days, this comes to little. Most of the power is generated during the long days of summer. No power is produced during the night time, whatever the season…a clear drawback of solar power!

In the end the government payments amount to a seasonal tax rebate for my father. But on a standalone basis – without government involvement – the equipment would be loss making.

This type of government meddling ensures misallocation of money into inefficient assets – by both themselves and by private individuals like my Dad.

This type of government meddling ensures misallocation of money into inefficient assets – by both themselves and by private individuals like my Dad. Like so much of the modern economy, this is phoney and a waste of resources.

Of course it’s not just in the field of renewable energy where we see government idiocy and overreach. You just have to look at the huge debts of developed countries, built up due to years of excessive spending on wasteful programmes, to see it staring you in the face.

Total US government debt is about 125% of GDP, when you add together federal, state and local debt. Japan leads the pack with close to 250%, after building so many “bridges to nowhere” and other boondoggles. Greece is at 158%, trapped as it is in the eurozone and a grinding depression…Italy 127%…Portugal 123%…the UK and France around 90%…the list goes on, and the debt piles continue to rise.

In the meantime, the overspending and waste continues, driven by the lust for power…the need to win votes…the interests of lobbyists…the corrupt revolving door between government ministries and their suppliers.

Or just by sheer incompetence and financial illiteracy. Even my kids could work out that spending $10 to buy $5 is a dumb deal. The councillors of the Sunshine Coast apparently don’t have that gift.

As for that climate change question? Only clean energy that’s also economical to produce makes sense.

Renowned veteran British scientist and environmental campaigner James Lovelock has a controversial view, at least amongst his fellow environmentalists. At 96 years old he’s had far longer to ponder these issues than practically all of us.

Lovelock believes that nuclear power is the logical, carbon-free stop gap for the next few decades.

Lovelock believes that nuclear power is the logical, carbon-free stop gap for the next few decades. If that idea catches on then investing in uranium or uranium miners could prove profitable.

We can use the intervening years to work out something better for the long term. More scientific research is needed. For example, perhaps geothermal power is the way forward, tapping into the Earth’s heat?

(If you’re interested in more detail about Lovelock’s analysis see his 2006 book “The Revenge of Gaia” and his 2009 book “The Vanishing Face of Gaia – A Final Warning”.)

One or two things are certain. Whatever happens to the human race, the planet Earth will survive. And government idiocy will continue in the meantime.

As for that last one, make sure you invest to protect yourself from it. The best places to look are stocks bought at the right price…and of course gold, for when the reckoning day of government profligacy finally arrives and this shiny, yellow insurance policy pays out in spades.

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.