Senate Finance and Public Administration Legislation Committee [Part 2], , 2:11:52 to 2:24:27
The discussion returns to Snowy 2.0, focusing on the weighted average cost of capital (WACC) and discount rates used for asset valuation. Officials defend the project's positive net present value despite significant cost increases.
Topics: Snowy Hydro, Electricity grid, Infrastructure
Speakers: Senator The Hon Matthew Canavan, Senator The Hon Katy Gallagher, Marisa Purvis-Smith, Matt Yannopoulos, Unknown Speaker, Interjection
>> Thank you, Chair. Uh just wanted to go back to Snowy Hydro. Has the department um been involved at all or had any oversight or been asked to uh uh provide an updated valuation of the Snowy 2.0 project since the uh most recent blowout
in costs. We just covered a lot of this with Senator Hume, but
>> I was just going to say Senator, so uh we are we are waiting on an independent cost assessment that we engage Turner and Townsen to do uh in this current uh fiscal update. My Epho we will give some advice to government on that cost reassessment that Snowy Hydro has proposed and what funding and in what
form. Okay. My question I know you've been over the funding. My question more goes to the valuation of the asset on the books of the Commonwealth. Have you
is that is this the process doing that? I think that will be part of that
>> Right. Uh uh we went over this with Snow Hydro last night. Uh I was a little surprised to hear from them that their claim is that their cost of capital has reduced since the last reset 23 [clears throat] 24. Uh have you had a look at those uh uh conclusions of Snowy
>> Uh Senator not not that I'm aware of. We are working through all of the material that Snowy Hydro has provided to us. >> So we will go through that the form of government what what form as as the secretary has mentioned we'll provide advice on the quantum and the form of financing. Um
>> okay I just want to be clear this is separate to the financing because a valuation shouldn't be dependent on uh finance per se uh uh particularly given you you can you know potentially manipulate that valuation by different financing techniques but you know we want a proper economic valuation of what this you know is uh uh means for the commonwealth for future taxpayers. Uh so my issue here is their conclusion that their cost for capital has reduced over the past 2 years in a at a time when at least the risk-free rate in their WAC calculation should have significantly increased in the last 2 years given uh uh massive increases in long-term bond rates for the Commonwealth. Uh so have you have you spoken to them about that conclusion they have made?
>> So I didn't see that in the testimony but we'll review the hand side. I'm happy to take on notice. Well, I mean
independent of the hand side, I would have thought the conversations will be ongoing given the size of this cost play out. Have you had conversations with Snow Hydro about their calculation of their cost of capital?
>> Um, so we've had lot we're having ongoing conversations with Snowy Hydro uh to go into our analysis. I'm not aware that uh we've had that specific conversation, but I will take that away uh and to see whether we've had that conversation uh and and to to run that to ground a bit.
>> When you do the valuation for an asset like this, are you using a weighted average cost of capital or the government bond rate? What's your discount rate for the net present value calculation? I
>> I I think uh as you mentioned there are a range of methodologies uh and we'll work we'll work through
that. So what previously when you valued the snowy 2.0 project what's been the discount rate you've used?
>> Uh I don't know what it was for Snowy. I know that it has been uh around it can can be around 12% but I'm not sure what what it was for Snowy. >> What it was >> we can take that on notice.
>> Okay around 12%. They said yesterday
>> I'm not saying just to be clear I'm not saying that 12% was for Snowy. I will take that away and get back to you. I
think previously it had been in the initial dis initial uh costings around snow was about 8% from rec recollection um um they said yesterday or last night that their uh return on assets will now just be or their internal rate of return I should say would be 5 to 6% it' be well under then their cost of capital meaning it would be a negative net present value on the commonwalth government's bond sheet bond um balance sheet sorry it's late Uh, how is it currently cost? Is Snowy 2.0 uh listed its cost on the balance sheet or is it discounted to cost?
>> Uh, I I would have to take that on on notice, Senator, and get back to you.
>> Okay. And so, just going back to my question, do you calculate a weighted average cost of capital for a project like this that's inherent to the risks of that project?
>> Again, I I I can take that on notice for you, Senator.
>> Okay. All right. Um, is there a leverage uh ratio that you've previously used for Snowy 2.0?
I think I think this is saying that there are various ways uh to to calculate that. So we'll we'll take that.
seems to me sometimes this seems to be goal see uh to deliver a a particular valuation that's less embarrassing here. That's why it's good to have transparency about all the assumptions. I mean uh and I I did get alpha and beta mixed up last night. I should correct the record. So when you calculate a whack here, are you going to use a beta variable that's consistent with the risks of an electricity company uh like
we'll take that. We'll take that on.
>> So, >> we are we are waiting on advice from the cost assessment and then we have some capital partners who are also working it. So, we're we're not avoiding your questions. I just don't we do not have the precise answers to them yet. >> That is part of the process we will work up uh to support government decision
In terms of uh the decision to proceed with this project, has there been a reassessment of the net present value of the additional costs from today from today uh independent of the sunk costs that have been incurred to date?
>> Not at this point. That is part of our work to advise government on the
>> I think Snowy might have some commercial inconfidence material on that, but we will.
>> But hang on. If you haven't done evaluation of whether or not it's a positive net present value to continue the project, how has the government come to the conclusion to continue the project given the massive cost blowout? >> Well, that might be from the minister. I mean, have you seen Minister of
>> There are other financial there are the benefits of of the pumped hydro program being completed. Um,
>> but let's just be clear then. So the government hasn't received a calculation of at least and I take there's always social and other but have you received a a a advice on the net present value of the uh now additional uh costs and potential benefits of this project from today independent of the sunk costs
>> we have received information um but we are from Snowy essentially the work that Snowy Hydro has done um but as finance has said we they have undertaken it's not finalized some assurance level of that work but
>> can I I might be missing some details has the government made a decision to proceed with Snowy 2.0 No,
>> I think
>> even based on the higher costs.
>> I'm just having a look um for the media release cuz we did have some in there. >> Um completing Snowy 2.0 remains the responsible course with tunneling now 65% complete. >> Um you know, abandoning the project would undermine grid reliability, scrap 5,000 jobs, and lead to higher bills.
>> So, I'm just Yes. So that that was my recollection. So it sounds like the government has decided yes, they're going to proceed.
>> Yes.
>> Uh so I'm just wondering have you received >> a an estimate of the net present value of this project uh for the costs and benefits going forward from today from the date of that
There is material uh that we have received from Snowy Hydro uh from their board that is commercial in confidence that I think Mr. Barnes might have been referring to. Uh we are going
>> Well, I'm not referring to their testimony. I'm more interested in what particularly the finance department obviously Snow is conflicted to some degree. Be very embarrassing if they have to have to stop the project. >> So, presumably the finance department has a role here to play.
>> Yeah. Shareholders have been given uh that very clearly that it's in the best interest of taxpayers to finish the project rather than leave it unfinished. Um and um there are and including advice on the benefits of the project. Um finance finance yes based on the cost reassessment. Uh finance is testing some of that and providing that advice to government and that's why we haven't taken any decisions yet as I explained to Senator Hume about further injections into Snowy. Um but you may have covered this last night. Power station evacu um excavation is 90% complete. Drill and blast tunnels 95% complete. TBM tunnel 65% complete. Design completion 96% complete. I mean I've been down I don't know if you've been down to have a look you know it's massive. The power station underground is almost complete.
>> Okay. That's all well. No I haven't been there but that's that's not quite relevant to my question. My question is have you received advice minister on what is the net present value of of the project going forward? That is extremely relevant. It's much say from a finance perspective a lot more relevant than going to >> we have all of that information. >> So you have received that. Did that show a positive NPV? >> Yes it positive. It showed a positive net present value going forward. >> Okay. What was the net present value?
>> Well, I'm just going to like we're going through a process now around >> Yeah. We are we are going through a process that is commercially sensitive now. >> We are well I've answered your question and we are also going through a process of what information we can provide from the cross reassessment report to provide to the Senate um publicly. So those decisions uh you've asked me if have have shareholders been assured about um the net present value and the benefits of the project. Yes, we have. Finance is undertaking some assurance of that advice.
>> So was that that positive net present value uh did that include social benefits or non-economic benefits or was
it >> I don't have that information to hand. We can take it on notice and provide you with what we can.
>> So was a positive net present value
commercial and confidence information from Snowy.
>> Well, the net present value is not it's
>> we we I don't have that authority to provide snowy home.
>> Was a positive net present value figure provided to the minister? the minister
has said that I've answered that but I'm saying that we're just going through a process of what information we can provide um in order to give you know transparency on some of the advice that we've received but acknowledging that there's some commercial realities in which we're working at the moment so some of that information may not be made public
>> but given the minister has indicated and disclosed that a positive net present value figure was provided I think it's fair and reasonable chair to ask about the nature of that net present value calculation and all I'm asking is was that net present value calculation based on on just the economic uh benefits of the project to Snowy 2.0 and to the Commonwalth government or did it include social and other factors in its
>> I've answered as as well as I can for tonight and we will take uh if there's more information I can provide about that Senator Canavan I will I just want to take some advice on it. Well, just
yeah, if you could take that you're taking that on notice I mean rather than take advice. Okay. All right. Thank you,