wallarah 2 coal project - ipcn.nsw.gov.au

Wallarah 2 Coal Project Submission to Planning Assessment Commission

RodCampbellTonyShieldsNovember2017

2 Wallarah2CoalProjectsubmission

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Summary-Introduction

TheWallarah2CoalProject(Project)proposestoproduce4to5milliontonnesperannum(mtpa)ofthermalcoal.TheprojectislocatedontheCentralCoastofNSWnearWyong.TheproponentisKores,aSouthKoreangovernmentownedcorporation.

TheAustraliaInstitutewelcomestheopportunitytomakeasubmissiontotheNovember2017PlanningAssessmentCommission(PAC)considerationoftheProject.WebelievethatpointsraisedinourApril2017andSeptember2016submissions(providedasAttachment1and2)ontheAmendedDevelopmentApplicationandSecondPACreviewremainvalid,asisourconclusionthatthebenefitsoftheprojectareunlikelytooutweighitscosts.

Part1ofthissubmissionfocusesontheinternaldetailofeconomicassessmentandrecentplanningdocumentsrelatedtotheWallarah2project.Estimatesofeconomiccostsandbenefitsoftheprojecthavechangedradicallyfromtheoriginalestimateof$1,519billion1toaslittleas$32millioninthelatestreviewcommissionedbytheDepartmentofPlanningandEnvironment(DPE).2Thereasonsforthisrevisionincludechangingscopeofassessment,changingcoalpriceandapproachtoenvironmentalcosts.Whatisclearandconsistent,however,isthatthecostsoftheprojecthavebeencontinuallyunderestimated,whilethebenefitshavealwaysbeenoverestimated.

Part2looksattheWallarah2economicassessmentdocumentsfromtheoutsideandconsiderstheminthewidercontextofeconomicliteratureonmajorprojectassessment.Majorprojectstheworldoverrarelyperformaspredictedinassessmentdocuments.Systemicflawsinassessmentprocessesleadtooptimisticassessments,witharoundoneprojectinathousandbeingcompletedontime,onbudgetandachievingestimatedbenefits.Wallarah2’sdelaysandrevisionsshouldbeseenasthenorm,nottheexception.Furtherdelays,downgradesandcancellationareallpossible.

Thecontinueduncertaintyinrelationtothisprojectimposescostsonthecommunity.TheonlywaytoendthisuncertaintyisforthePACtorefuseapprovaloftheproject.Giventhatthecostsoftheprojectarelikelytooutweighitsbenefits,thisisthebestcourseofactionfromaneconomicperspective.

1GillespieEconomics(2008)Wallarah2CoalProjectBenefitCostAnalysis.p32CentreforInternationalEconomics(2017)Wallarah2CoalProjectEconomicAssessment:ResponsetoSubmissions,http://www.pac.nsw.gov.au/resources/pac/media/files/pac/projects/2017/09/wallarah-2-coal-project/department-of-planning-and-environments-assessment-report/appendix-g--cie-review-report-2017.pdf.


Part 1: Inside Wallarah 2 economic assessments

OPERATING COSTS InourSeptember2016andApril2017submissionswepointoutthatthe2016economicassessmentoftheAmendedDevelopmentApplicationassumesanoperatingcostofAUD$55pertonne,currentlyUSD$42pertonne.ThiswouldmaketheWallarah2mineoneofthecheapestminestooperateintheworldtradedthermalcoalmarketdespitebeingrelativelysmall,undergroundandoperatinginasensitivewatercatchment.Thisoperatingcostestimateapparentlyincludestheoperationofawatertreatmentplantandassociatedpipeline.3

Thisisnotcredible.Itislikelythattheproject’soperatingcostshavebeenunderstatedbytheproponents.TheSeptember2017CIEreviewnotesoftheproponent’sassessment:

Whiletheanalyticalapproachisbroadlyconsistent,theindividualcomponentsandparameterestimateswarranttesting.Someoftheestimatesaredifficulttotest,particularlywherethereislimitedpubliclyavailabledataon,forexample,thecostoftheoperations.(p7)

DespitenotingthisneithertheCIE,DPEortheproponenthavetestedtheseoperatingcostassumptions,norhavetheycontestedourpointthatAUD$55pertonneappearsverylowgiventhecircumstancesoftheWallarah2project.4

Theimplicationsoftheprojecthavingmuchhigheroperatingcoststhanassumedbytheproponentsaresignificant.Wallarah2isarelativelysmallminewithlikelyhighcoststhatwouldcompetewithexistingminesinamarketthatwillrapidlydeclineifgovernmentsmovetoactonclimatechange.Australiahasalreadyapprovedhundreds

3CIE(2017)p134NoteinparticularthatGillespieEconomics2016assessmentincludessensitivitytestingofhowa20%changeinoperatingcostsaffectsbenefitstoNSW,butnottheoverallviabilityoftheproject.SeeTable4.7,p49.Thisdoesnotassistdecisionmakersunderstandwhethertheprojectislikelytofacethedelaysandchanges,orwhetheritwillproceedandprovidetheclaimedlevelofbenefits.

ofmillionsoftonnesofcoalproductionintothe2040s,5whiletheParisAgreementrequiresasignificantreductionincoaluse.

Furthermore,theprojectproponentisalargecorporationwithnoshortageofcompetingprojectsforitscapitalinvestment.

APPROVAL OF UNECONOMIC PROJECTS Wallarah2’slikelyhigheroperatingcostsanduncertainplaceinthecoalmarketmeansthatPACapprovaloftheprojectisunlikelytoleadtoimmediateconstruction,jobcreationandpaymentofroyalties.Theprojectwouldlikelybedeferredorsoldandclaimsforassistancemadetogovernments.Furthermodificationsmayberequiredtomaketheminemorecompetitive,potentiallybriningincreasedcoststothecommunity.Therealitythatplanningapprovalisoftensoughtfornon economicprojectswasnotedbytherecentPACfortheBylongCoalProject,whichquotedfromthatproject’sproponents:

Internationalminingcompaniesroutinelymakeinvestmentdecisionsacrosstheirportfoliosthatonthesurfacemayappearsub economic,butforotherstrategicreasonsareattractivetothebroaderbusiness…ifthemineistrulynoteconomicallyviable…theprojectwouldbeunlikelytoproceed.Thiswouldresultintheclaimedbenefitsnotbeingrealised,butwouldequallymeanthatnoneoftheimpactsoftheminewouldeventuateeither.6

Thisiscorrect.Theapprovalofanuneconomicminewouldnotbringthebenefitsortheimpactsoutlinedintheeconomicassessments.Thisdoesnotmeantherearenoimpacts,however.Thereareclearcoststothecommunityifaprojectisapproved,butthetimingandfinalnatureofitisunknown.Propertypriceswouldbeaffectedbythisuncertainty,nottomentionpersonalanxietybythoselivingnearby,andtheconsiderablecommunityenergythathasgoneintoopposingtheWallarahprojectwouldlikelycontinue,ratherthanbeingdirectedinmorepositivedirections.PACapprovaloftheprojectislikelytoprolongtheuncertaintyaroundthisprojectratherthanendit.Onlyrejectionwillprovidecertainty.

5Dennissetal(2016)Nevergonnadigyouup!Modellingtheeconomicimpactsofamoratoriumonnewcoalmines,http://www.tai.org.au/sites/defualt/files/P198%20Never%20gonna%20dig%20you%20up%20FINAL.1.pdf

6Gilligan,Goldberg,O’ConnorandFisher(2017)BylongCoalProjectSSD6367ReviewReport,http://www.pac.nsw.gov.au/resources/pac/media/files/pac/projects/2017/02/bylong-coal-project/review-report/bylong-coal-project--review-report.pdf


Therealitythatprojectproposalsarenotalwaysviableandimposefurthercostsonthecommunityhasbeguntobeacknowledgedbyotherjurisdictions.TheNorthernTerritory’sScientificInquiryintoHydraulicFracturinghasjustreleaseditseconomicassessmentthatincludesanassessmentoftheprobabilityofgivenlevelsofdevelopmentproceeding.7Contrarytomostindustry commissionedassessmentsthatestimateeconomicbenefitbasedonanassumptionthattheprojectproceeds,thisassessmentmakesitclearthatthereisuncertaintyaroundprojectsproceeding.Thehighestlevelsofemploymentandincome,whicharetypicallyreferredtobyindustryadvocatesaswhatcouldbe“unlocked”,areconsideredtohave“low”to“verylow”probabilityinthisassessment.

ThisisincontrastwiththelatestreviewsoftheWallarah2projectbyCIEandDPE,whichassumeapprovalwillleadtodevelopment:

Onthebenefitsside,ataminimum,CIEindicatesthattheNSWGovernmentwouldreceiveroyaltypaymentsofbetween$154mto$257minpresentvaluetermsoverthelifeoftheproject.BothCIEandGillespieagreewiththequantumofthisbenefit.8

Thismaybethequantumofroyalties,iftheprojectproceedstoconstructionsoonafterapprovalandcontinuesatexpectedproductionratesforthefull25years.Noneofthisiscertainandnoneoftheassessmentsassistdecisionmakersinunderstandinghowprobablethislevelofbenefitis.Basedonestimatesinourearliersubmissionsitisclearthatthisisuncertain.Therepeatedclaimthathundredsofmillionsinpresentvalueroyaltiesarea“minimum”ofbenefitthatwouldaccruetoNSWismisleading.

ThePACmustconsiderthepossibilitythatitcouldapprovetheWallarah2Projectbutzeroeconomicbenefitscouldresultifpricesarelow,orbetterreturnsareavailabletotheproponentelsewhere,orifexternalcostsarehigherthananticipatedintheEIS.ExactlythissituationoccurredwiththeCobboraCoalProject,whichwasassessedbythesameconsultant,GillespieEconomics,claiminglargeeconomicbenefitsusingsimilarmethodology.CobborawasmetbyDPEwithsimilarenthusiasm,despiteabundantevidencethattheprojectwasunviable.

7SeeACILAllen(2017)TheEconomicimpactsofapotentialshalegasdevelopmentintheNorthernTerritory,https://frackinginquiry.nt.gov.au/news/?a=456788

8DPE(2017)RESIDUALMATTERSREPORT:STATESIGNIFICANTDEVELOPMENTWallarah2CoalProject(SSD4974),p21https://majorprojects.accelo.com/public/9d3ef028b398b005e90258f77f5f4c09/RESIDUAL%20MATTERS%20REPORT%20Final.pdfSeealsoCIE(2017)p7

ThePACapprovedtheCobboraprojectinMay2014.TheAustraliaInstitutewrotetoChairGabrielleKibble,outliningtheflawsinthePAC’sreasoning.Inresponseshewrote:

RegardingtheeconomiccomponentoftheCobboraCoalProject,asthePACreportindicates,NSWTreasuryon1July2013announcedthesaleoftheventure.Thereforeanyprospectivepurchaserwouldcarryoutduediligencetosatisfythemselvesoftheprojectsviabilityaspartoftheirpre purchaseconsideration.(Correspondencedated3June2014)

Therewasnopurchaserbecausetheprojectwasnotviable.Instead,theNSWtaxpayermusttrytocleanupthesocialdamagecausedbythecommunityplanningforaminethatnevercame.9ThePACandDPEcouldhaveavoidedthedebacleofCobborabyconsideringtheeconomicallymarginalnatureoftheprojectandtheprobabilitythatitwouldfail.SuccessiveWallarah2PACshavebeenmorescepticalofthisproject’seconomicclaims,anapproachwehopewillcontinue.

9WellingtonTimes(2014)DunedoowinsinCobboraFunding,http://www.wellingtontimes.com.au/story/2457575/dunedoo-wins-in-cobbora-funding/


Part 2: The outside view of Wallarah 2 economic assessments

Wallarah2,CobboraandBylongallfitintoapatternofsystemicallyflawedeconomicassessmentsthatisseennotjustinrelationtoNSWcoalprojects,butinmajorprojectassessmentworldwide.Mucheconomicassessment,particularlywhenitisdonebytheprojectproponents,suffersfromcriticalbiasesthatarehighlylikelytocauseoverestimationsofthenetbenefitsofprojects.Aconsiderableamountofacademicliteratureisdevotedtothisphenomenon.

WHY NET BENEFITS ARE OVER-ESTIMATED Thebiasesthatleadtoover estimationofthebenefitsandunder estimationofthecostsincostbenefitprojectsarewelldocumented,particularlybymegaprojectexpert,BentFlyvbjerg,andtheworkofNobelPrizeWinnerforEconomicsDanielKahnemanandhiscolleagueAmosTversky.

Theirworkidentifiessystemicflawsinmajorprojectassessmentincluding:

• Optimismbias–whereanalystsunderestimatethecosts,completiontimesandriskofplannedactions,whereastheyoverestimatethebenefitsofthesameactions.10

• Planningfallacy thetendencyforpeopleinvolvedinbasetheirforecastsofthefutureonthebestcaseratherthanthelikelycase.

• Strategicmisrepresentation–whereproponentshaveanincentivetopresentthebestcasetoinvestorsandregulators.

• Principalagenttheory–whereanagentorconsultanthasanincentivetodeliverworkthatfurtherstheinterestsoftheirprincipleorclient.

ArguablyalloftheseflawshavebeenatworkinassessmentsofWallarah2andotherNSWcoalprojects.Flyvbjerghighlightsstrategicmisrepresentationandtheprincipalagenttheory.11Thesetheoriessuggestthattherearestrongincentivesforprojectproponentstodeliberatelyoverstatethebenefitsandunderestimatethecostsand

10Kahneman&Tversky(1979)Prospecttheory:Ananalysisofdecisionsunderrisk,Econometrica,47,p313–327;Kahneman&Tversky(1979)Intuitiveprediction:Biasesandcorrectiveprocedures,inMakridakis&Wheelwright(eds)StudiesintheManagementSciences:Forecasting,vol12

11Flyvbjerg(2008)CurbingOptimismBiasandStrategicMisrepresentationinPlanning

risksofprojects.Forexample,politiciansmaywanttohaveprojectsbuilttomeetpoliticalobjectives.Managersmaywanttohaveprojectsbuiltbecausetherearetangibleandintangiblerewardsforgettingthemunderwayandforrunningabiggercompanythanasmallercompany.Ifseniormanagersarekeenonaproject,companyemployeesknowtheywillmeetwithmoreapprovaliftheyworkpositivelyontheprojectratherthanbeinganegative,thoughmorerealistic,critic.Employees’ownershipofacompany(forexample,companyshares)isoftensmallcomparedtotheirsalaryandpotentialbonus,consequentlytheirlossesifaprojectfailsaresmallbuttheirrewardsforsuccessaremuchgreater.Managersandemployeesmayalsorightlyreasonthattheywillhaveanotherjobelsewherebythetimeaprojectfailsandthattheblameforthefailurewillbediffuse.

KahnemanandTverskysaythoseinvolvedwithaprojecttaketheinsideview.Peoplewhotaketheinsideview:

• makeforecastsbyfocusingtightlyontheprojectathand,consideringitsobjective,theresourcestheybroughttoit,andtheobstaclestoitscompletion;and

• constructintheirmindsscenariosoftheircomingprogressandextrapolatecurrenttrendsintothefuture.

Thisresultsinoverlyoptimisticforecasts.12KahnemanandTverskycontrasttheinsideviewwiththeoutsideview.Theoutsideviewexaminestheexperiencesofaclassofsimilarprojects,laysoutaroughdistributionofoutcomesforthisreferenceclass,andthenpositionsthecurrentprojectinthatdistribution.13

ConsideringthecontextofothergreenfieldscoalproposalsinNSW,theWallarah2experienceisnotunusual.TheonlysuchprojecttoproceedinrecentyearshasbeenMaulesCreek,inthefaceofconsiderablecontroversy.OtherssuchasCobbora,Watermark,RockyHillandCaroonahavenotgoneaheadandhavemostlybeenabandoned.

FLYVBJERG AND THE DANGERS OF COST BENEFIT ANALYSES

12Flyvbjerg(2008)CurbingOptimismBiasandStrategicMisrepresentationinPlanning:ReferenceClassForecastinginPractice,EuropeanPlanningStudies16:3-21,p9https://www.researchgate.net/publication/233258056 Curbing Optimism Bias and Strategic Misrepresentation in Planning Reference Class Forecasting in Practice

13ParaphrasingFlyvbjerg(2008)CurbingOptimismBiasandStrategicMisrepresentationinPlanning,p9


BengtFlyvbjergistheworld’smostcitedscholaronmegaprojects.HehasadvisedtheUKGovernmentonits“GreenBook”usedtoevaluateprojects,theUSGovernmentandseveralcorporations.14Flyvbjerghascollectedstatisticsonmegaprojectsfromaroundtheworld.WithacapitalcostofAUD$1.5billion,theWallarah2projectisaroundthesizeoftheprojectsassessedbyFlyvbjerg.Insummarisinghisworkonmegaprojects,Flyvbjergwrites:

Successinmegaprojectmanagementistypicallydefinedasprojectsbeingdeliveredonbudget,ontime,andwiththepromisedbenefits.If,astheevidenceindicates,approximatelyoneoutoftenmegaprojectsisonbudget,oneoutoftenisonschedule,andoneoutoftendeliversthepromisedbenefits,thenapproximatelyoneinonethousandprojectsisasuccess,definedas“ontarget”forallthree.Evenifthenumberswerewrongbyafactoroftwo—sothattwo,insteadofoneoutoftenprojectswereontargetforcost,schedule,andbenefits,respectively—thesuccessratewouldstillbedismal,noweightinonethousand.Thisservestoillustratewhatmaybecalledthe“ironlawofmegaprojects”:Overbudget,overtime,overandoveragain.Bestpracticeisanoutlier,averagepracticeadisasterinthisinterestingandverycostlyareaofmanagement.15

Inreferencetobenefitcostanalyses,Flyvbjergfurtherwritesthat:

Whencostanddemandforecastsarecombined,forinstanceinthecost benefitanalysesthataretypicallyusedtojustifylargeinfrastructureinvestments,theconsequenceisinaccuracytotheseconddegree.Benefit-costratiosareoftenwrong,notonlybyafewpercentbutbyseveralfactors.Asaconsequence,estimatesofviabilityareoftenmisleading,asaresocio economicandenvironmentalappraisals,theaccuracyofwhichareheavilydependentondemandandcostforecasts.Theseresultspointtoasignificantprobleminpolicyandplanning:Moreoftenthannottheinformationthatpromotersandplannersusetodecidewhethertoinvestinnewprojectsishighlyinaccurateandbiasedmakingplansandprojectsveryrisky.16

14SaidBusinessSchool(2017)BentFlyvbjerghttp://www.sbs.ox.ac.uk/community/people/bent-flyvbjerg

15Flyvbjerg(2014)Whatyoushouldknowaboutmegaprojectsandwhy….,p11,emphasisadded.16Flyvbjerg(2008)CurbingOptimismBiasandStrategicMisrepresentationinPlanning…,p5,emphasisadded.

OVER ESTIMATION IN THE MINING INDUSTRY Researchhasfoundthattheresourcesindustrysuffersfromthesameover optimismthataffectsotherindustries.In2014,ChristopherHaubrich,amininganalyst,gaveapapertitled“WhyBuildingaMineonBudgetisRare:AStatisticalAnalysis”.17Haubrichconstructedadatabaseof50miningprojectsandfoundthatcapitalcostoverrunsaresignificantandpersistentwithaveragecostoverrunsof20%–60%recordedsince1965.Manyprojectsrunovercostbymuchgreaterpercentages–seeFigure1below.Haubrichstatedthattheminingindustryhasaworserecordthanotherindustries.

Figure1:DistributionofCapitalCostOverruns18

Haubrichalsofoundthatmarginalprojects,suchasWallarah2,arelikelytohavelargercostoverruns.Haubrichstatedthatthiswasbecausewhenprojectsaremarginal,theincentiveisto“sharpenyourpencils”andreducecostestimatesinordertomaketheprojectnumbersviable.Haubrichfoundnorelationshipbetweenthecostoftheprojectandcostoverruns.17Haubrich(2014)WhyBuildingaMineonBudgetisRare:AStatisticalAnalysis,16October2014,http://www.canadian-german-mining.com/files/events/2014-10-16 CIM MES Rocks Stocks/3 Chris Haubrich Why Building A Mine on Budget is Rare -A Statistical Analysis.pdf

18Haubrich(2014),p22.


GlobalconsultingfirmEYfoundthatminingprojectsrunover budgetbyanaverageof62%,andthat50%ofprojectswerereportingdelays.Only31%ofprojectscameinonbudget.EYquotedmediacoverageofsomeprojectswithcostoverruns:

AmajorcopperandgoldoperationinCentralAsia:TheNationalFinanceMinisterhadbeenquotedassaying:“NooneunderstandswhytheprojecthasgoneUS$2boverbudget.”

AmajorironoreprojectinBrazil:Todate,theprojecthasexperiencedanoverrunfromtheinitialestimateofapproximately690%.Thechiefexecutiveofficerofthecompanyhasgoneonrecordtosaythat“theyareworkingveryhard”toensurenomoredelaysorcostoverrunsontheproject.

ABrazilianmegaproject:ThisprojectsawcapitalcostsescalatefromUS$3.6bin2007toUS$8.8bin2013.Mediasourceshavedescribedthisinvestmentasoneofthisorganization’s“mostsignificantfailuresofrecentyears.”19

COST OVER-RUNS AND REVENUE SHORTFALLS IN THE OIL AND GAS INDUSTRY

WestneyisaHouston basedengineeringandriskconsultanttotheoilandgasindustry.Theyestimatethattheprobabilityofoilandgasprojectsrunningontimeandoncostisonlybetween5%and25%.20WestneyalsoquoteIndependentProjectAnalysiswhofoundonly22%oflargeoilandgasprojectswereontimeandonbudget.21Boththeseestimationsleaveasidethequestionofwhethertheprojectsalsoachievedtheirstatedbenefits(i.e.revenue).TohelpanswerthisquestionWestneyquoteaPricewaterhouseCoopersstudythatfoundonly2.5%ofmegaprojectsmettheirobjectivesofscope,cost,scheduleandbenefits.22

19EY(2015)Opportunitiestoenhancecapitalproductivity:Miningandmetalsmegaprojects,http://www.ey.com/Publication/vwLUAssets/EY-opportunities-to-enhance-capital-productivity/$FILE/EY-opportunities-to-enhance-capital-productivity.pdf

20Briel,LuanandWestney(2014)Built-inBiasJeopardisesProjectSuccess,p2,http://www.westney.com/wp-content/uploads/2014/04/Built-in-Bias-article-SPE-as-published.pdf

21Boschee(2012)PanelSessionLooksatLessonsLearnedfromMegaprojects.SPEToday,10October2012.QuotedinBriel,LuanandWestney(2012).

22PricewaterhouseCoopers(PwC)(2009)Needtoknow:Deliveringcapitalprojectvalueinthedownturn.QuotedinBriel,LuanandWestney(2012).Notethisstudyreferstoallmegaprojects,notjustoilandgasmegaprojects.

EYanalysed365oilandgasmegaprojectsandfound65%wereover budgetand73%overschedule.Thebudgetoverrunswerenotsmall–currentprojectestimatedcostswere,onaverage,59%abovetheinitialestimate.EYnotedtheseestimateswerelikelytounderstatepoorperformanceasasubstantialamountoftheprojectswerestillunderway.Onceagain,EYonlylookedatcostperformanceanddidnotcoverrevenueperformance.23

23EY(n.d.)Spotlightonoilandgasprojects,p4-5,http://www.ey.com/Publication/vwLUAssets/EY-spotlight-on-oil-and-gas-megaprojects/$FILE/EY-spotlight-on-oil-and-gas-megaprojects.pdf


Conclusion

NSWlegislationandguidelineslargelyignorethesystemicbiasesthatcauseprojectionsforminingprojectstooverestimatetheirbenefitsandunderestimatetheircosts.ThesesystemicbiaseshavecausedFlyvbjergtoproposetheironlawofmegaprojects:overcost,overtime,overandoveragain.

OverandoveragaintheestimatednetbenefitsfortheWallarah2projecthavebeenreviseddown.Benefitswereoverstatedandcostsunderstated.Thereisnoguaranteethatthelatestestimatesareaccurate,despitebeingafractionoftheoriginal$1.6billionestimate.Indeed,asthenetpresentvalueoftheprojectapproacheszero,thereisevenstrongerincentiveforconsultantsandproponentstopresenttheprojectinapositivelight.

Theoutsideviewofthisprojectisclear:surroundedbyotherfailedgreenfieldsmineproposalsinNSW,theWallarah2projectalreadyhastheoddsstackedagainstit.Theworldoutlookforthermalcoalishighlyuncertainandapprovedsupplyabundant.Theprojectisnotinastrongcompetitiveposition.

Theinsideviewisalsobleak.Itisarelativelysmallmineoperatinginasensitivearea.Costsarelikelytobehigherthanmanyofitscompetitors.Assessmentsofnetbenefithavebeencontinuallyreviseddown.Manypointsineachassessmentarehighlycontestable.

NeithertheinsideviewnortheoutsideviewoftheWallarah2projectisappealing.ThePACshouldrefuseapprovalandprovidelong overduecertaintyfortheCentralCoastcommunity.

Attachment 1: April 2017 submission to Second PAC Review


Introduction

TheWallarah2CoalProject(Project)proposestoproduce4to5milliontonnesperannum(mtpa)ofthermalcoalforexport.TheprojectislocatedontheCentralCoastofNSWnearWyong.TheproponentisKores,aSouthKoreangovernmentownedcorporation.

TheAustraliaInstitutewelcomestheopportunitytomakeasubmissiontotheApril2017PlanningAssessmentCommission(PAC)considerationoftheProject.WebelievethatallpointsraisedinourSeptember2016submission(providedasAttachment1)ontheAmendedDevelopmentApplicationremainvalid,asisourconclusionthatthebenefitsoftheprojecthavebeenoverstatedandthecostsunderstated.

InthissubmissionwewouldliketobringseveralpointstotheattentionofthePAC,pointsthathavenotbeenaddressedintheResponsetoSubmissionsontheAmendedDevelopmentApplication,24thePeerReviewofEconomicAssessment,25ortheAddendumReport.26Thesekeypointsare:

• Financialviabilityoftheproject,including:o Operatingcostsreported;o Implicationsforneteconomicbenefits;and

• Treatmentofwaterissuesineconomicassessmentoftheproject.

FINANCIAL VIABILITY WepointoutinoursubmissiontotheAmendedDevelopmentApplicationthattheclaimedoperatingcostsoftheProjectintheeconomicassessmentareverylow.Ourestimatesarethatthecostsassumedintheeconomicassessmentequateto$AUD55(USD$39.6)pertonne.Asmentionedinoursubmission,thiswouldmaketheProject24HansenBailey(2016)AmendmenttoSSD-4974–RTS2,https://majorprojects.affinitylive.com/public/b6e3fbaa65628f29da7e27041ac62977/Wallarah%202%20Coal%20Project Amended%20DA%20RTS%20Part%203.pdf

25CentreforInternationalEconomics(2017)PeerreviewofeconomicassessmentWallarah2CoalProject,https://majorprojects.affinitylive.com/public/27e2e38b9ebb348863a3e5f36d11a357/Wallarah%202%20-%20Economic%20Expert%20Review%20-%20Feb%202017.pdf

26DepartmentofPlanningandEnvironment(2017)ADDENDUMREPORT:STATESIGNIFICANTDEVELOPMENTWallarah2CoalProject(SSD4974),https://majorprojects.affinitylive.com/public/5071f10a8e6f2582bd76a9c00a7f8725/2.%20Wallarah%202%20Coal%20Project%20SSD%204974%20-%20Addendum%20Report.pdf

oneofthecheapestminestooperateintheworld,averysurprisingassumptionforarelativelysmall,underground,greenfieldmineinAustralia,outsideofthemajorminingareas.

Thisestimateof$AUD55pertonneandtheobservationthatitmakesitoneofthecheapestminesintheworldtooperatearenotcontestedinanyoftheresponsedocuments:

• TheResponsetoSubmissionspointsout:o AnEISdoesnotneedtoconsiderfinancialviability;o “Economicimpactassessmentmakesnocommentonthefinancial

viabilityorprofitabilityoftheproject”;ando CoalpreparationcostsareexpectedtobelowandtheProjectis

relativelyclosetoport.• ThePeerReviewofeconomicassessmentmakesnoattempttoassessthe

veracityofoperatingcosts,noting:Thefinancialviabilitycanimpactontheprofitabilityofthemine,impactingontheexpectedrevenuefromcompanytaxes.Thefinancialviabilityofaprojectcouldalsohas[sic]implicationsforwhobearstherehabilitationcostsoftheproject.(p27)

Thisisastatementoftheobvious–financialviabilityandprofitabilityarethesamething.Theyobviouslyhaveimplicationsforanyunmetrehabilitationcosts.ThePeerReviewmakesnoconsiderationofwhethertheminemaybeforcedtodelayorinterruptoperationsifcostshavebeenunderstatedandwhatthismaymeanfornetbenefitstothecommunity.

TheDepartment’sAddendumReporterroneouslysaysthatinthePeerReview:

CIEgavespecificconsiderationtothekeypointsraisedintheAustraliaInstitute’ssubmissionincludinginrelationtocoalprices,companytaxandthefinancialviabilityoftheamendedproject.ThesewereconsideredintherevisedestimatesofthebenefitsoftheamendedprojectprovidedbyCIE.WhileCIEquestionedsomeoftheinputstotheCBAandthemethodsused,CIEconcludedthattheEIAisbroadlyconsistentwiththeEconomicGuidelinesandwouldresultinanetbenefittoNSW.

Thisisfalse.TheCIEdidnotconsiderwhetherclaimedoperatingcostswererealistic,orwhethertheprojectislikelytobefinanciallyviable,orwhetherthiswouldaffectnetbenefitstoNSW.


Ourpointisthatoperatingcostsappearheavilyunderstated,givingamisleadingimpressionoftheProject’slikelyfinancialandeconomicposition.Thereasontheproponentwoulddothisisforcorporatestrategicpurposes,asstatedinourprevioussubmissions.Inouropinion,theProjectisbeingpursuednotbecauseitisprofitable,butforcorporatestrategicreasons,suchas:

• Bankingapprovalforpotentialfuturedevelopment.

• ApprovalwouldaddtothesalevalueoftheProject.

• Lackofapprovalwouldresultinanassetwritedown,withimplicationsforcompanybalancesheetsandthecareersofthepeopleresponsible.

TheongoinguncertaintyovertheProjectimposescostsonthecommunity.Peoplelivingwiththeuncertaintyofapotentialcoalprojectimpactingontheirpropertyvalue,businessplansandwatersourcesexperienceserioussocial,financialandpsychologicalcosts,nottomentiontheamountoftimetheongoingassessmentprocessrequiresofthem.

Inourview,theProjectshouldberejectedonthisbasis.

WATER ISSUES ThepotentialeffectsoftheProjectonwaterresourceshavebeenhugelycontroversial.Itisinappropriatefortheeconomicassessmenttoincludenodetailedconsiderationoftheseimpactsandtoassumethatallimpactswillbeoffsetbymitigationmeasures.

ThePeerReviewclaims:

Basedontheproponent’sResponsetoSubmissions(datedNovember2016)andtherecentresponsesbytheNSWGovernmentagencies,weunderstandthatactionswillbeundertakentomitigateimpactsandthatanyresidualimpactswouldnotmateriallychangetheresultsoftheCBA.(p23)

AcursoryexaminationofAgencySubmissionsshowsthisisnotcorrect.TheDepartmentofHealthsubmissionstates:

OurconcernaboutimpactsfromtheprojectontheCentralCoast’sdrinkingwatersupplyremains(see2013submission)….Itisimportanttoconsiderwhatmaybetheimpactonthesesuppliesiehavingaclearprocessforidentifying

whetheraboreisaffectedbytheproject.Methodstomitigatethesepotentialimpactsareessential.27

TheDepartmentofPrimaryIndustriessubmissionstates:

DPIWaterrequeststhattheproponentprovideupdatedinformationonwaterlicensingfortheproject,includingreferencetothenewandamendedwatersharingplansandinformationonhowthepredictedtakeofgroundwaterwithinthesewatersourceswillbelicensed.

DPIWateralsorequeststhattheproponentprovideinformationonthewatermanagementcomponentsoftheprojectasawhole,includinganychangesthatmayaffecttheoriginalSurfaceWaterandGroundwaterImpactAssessments,thegroundwatermonitoringprogram(includingbaselinedata)andtheproposedwatermanagementarrangementsfortheproject.28

CentralCoastCouncilcommissionedadditionalengineeringconsultingreportsandwroteintheirsubmission:

TheEISunderestimatesthepotentialimpactongroundwater.TheconclusionsreachedintheEISareprimarilytheresultoftheinputparametersadoptedfortheirnumericalmodelling.TheseinputparametersareprimarilydrivenbytheunsuitablemethodbywhichthemakeupoftherockanditsdefectshavebeensampledandarenotconsistentwithavailabledataormodellingwithintheEIS.Further,themodellingassumesrechargeofthewatersystembasedonaverageclimaticconditions.

Theeconomicpeerreviewiswrongtoimplythatgovernmentagenciesaresatisfiedwithallwatermanagementplans.TheCIEarewrongtothencarrythisintotheireconomicassessmentasanassumptionthatimpactstogroundwaterwillhavezerocostandthatimpactstosurfacewaterandwatersupplieswillhaveamaximumcostof$1million.ThisisaveryoptimisticapproachandonethatoverlooksthepotentialimpactsoftheProjectonwater–theveryissueatthecentreofmuchofthecontroversyaroundtheProject.

27NSWHealth(2016)https://majorprojects.affinitylive.com/public/25428161cb2ed1c68a7cb88779a37223/Wallarah%202%20Coal%20Project Amendment%20to%20DA CCPHU%20Health.pdf

28NSWDepartmentofPrimaryIndustries(2016)https://majorprojects.affinitylive.com/public/15918488d8f9cc187573bf569ce9e546/Wallarah%202%20Coal%20Project Amendment%20to%20DA Department%20of%20Primary%20Industries.pdf


CONCLUSION OurconclusionremainsthattheProjectisunlikelytobefinanciallyviable.Itscostshavebeenunderestimatedanditsbenefitsoverestimatedintheeconomicassessmentoftheamendedproject,asinthetwopreviousiterations.Thisisnotseriouslycontestedintheresponsetosubmissionsortheeconomicpeerreview.

IfapprovedtheProjectislikelytostall,withongoinguncertaintyovertheProjectimposingcostsonthecommunity.

IftheProjectdoesproceeditcouldimposemajorcostsonthecommunitythroughwaterimpactsthathavenotbeenseriouslyassessedinanyofthemanyeconomicreports.Ifdrinkingwateroraquifersaredamagedbytheprojectandengineeringworksrequiredtoaddresstheseimpacts,costscouldeasilyexceedthe$200millionestimatedroyaltybenefit,anoptimisticestimatethatassumestheProjectexperiencesnodelays,periodsincareandmaintenance.ThisestimatealsoassumesthattheProjectcancompeteonworldcoalmarketsfor28years,astheworldmovesawayfromthermalcoal.

Attachment 2: September 2016 submission on Amended Development Application


Wallarah 2 Coal Project Submission on Amended Development Application

Rod Campbell September 2016

ABOUT THE AUSTRALIA INSTITUTE TheAustraliaInstituteisanindependentpublicpolicythinktankbasedinCanberra.Itisfundedbydonationsfromphilanthropictrustsandindividualsandcommissionedresearch.Sinceitslaunchin1994,theInstitutehascarriedouthighlyinfluentialresearchonabroadrangeofeconomic,socialandenvironmentalissues.

OUR PHILOSOPHY Aswebeginthe21stcentury,newdilemmasconfrontoursocietyandourplanet.Unprecedentedlevelsofconsumptionco existwithextremepoverty.Throughnewtechnologywearemoreconnectedthanwehaveeverbeen,yetcivicengagementisdeclining.Environmentalneglectcontinuesdespiteheightenedecologicalawareness.Abetterbalanceisurgentlyneeded.

TheAustraliaInstitute’sdirectors,staffandsupportersrepresentabroadrangeofviewsandpriorities.Whatunitesusisabeliefthatthroughacombinationofresearchandcreativitywecanpromotenewsolutionsandwaysofthinking.

OUR PURPOSE – ‘RESEARCH THAT MATTERS’ TheInstituteaimstofosterinformeddebateaboutourculture,oureconomyandourenvironmentandbringgreateraccountabilitytothedemocraticprocess.Ourgoalistogather,interpretandcommunicateevidenceinordertobothdiagnosetheproblemswefaceandproposenewsolutionstotacklethem.

TheInstituteiswhollyindependentandnotaffiliatedwithanyotherorganisation.AsanApprovedResearchInstitute,donationstoitsResearchFundaretaxdeductibleforthedonor.Anyonewishingtodonatecandosoviathewebsiteathttps://www.tai.org.auorbycallingtheInstituteon0261300530.Oursecureanduser friendlywebsiteallowsdonorstomakeeitherone offorregularmonthlydonationsandweencourageeveryonewhocantodonateinthiswayasitassistsourresearchinthemostsignificantmanner.

Website:www.tai.org.au


Introduction

TheWallarah2coalprojectproposestoproduce4to5milliontonnesperannum(mtpa)ofthermalcoalforexport.TheprojectislocatedontheCentralCoastofNSWnearWyong.TheproponentisKores,aSouthKoreangovernmentownedcorporation.

TheWallarahprojectiscontroversialandhasfacedcommunityoppositionastheareaisnotamajorminingarea,hassensitivewaterresourcesandisnearAboriginalland.ThenstateoppositionleaderBarryO’Farrellpledgedtostoptheprojectifelectedandfamouslyworea“waternotcoal”t shirtonavisittothearea,apledgehereversedaftertakingoffice.O’Farrell’spremiershipendedpartlyduetoabottleofwinesenttohimbylobbyistNickDiGirolamo,alobbyistforKoresandotherinterests.29

TheAustraliaInstitutewelcomestheopportunitytomakeasubmissionontheAmendedDevelopmentApplicationoftheWallarah2CoalProject.OursubmissionrelatesmainlytoAPPENDIXJEconomicImpactAssessmentoftheapplication,byconsultantsGillespieEconomics.

Theeconomicassessmentisflawed.Itoverstatesthebenefitsoftheprojectwhileunderstatingitscosts.WhiletheeconomicassessmentconcludestheWallarah2projectwouldbringconsiderableneteconomicbenefits,infacttheprojectisunlikelytobefinanciallyviableandwouldlikelyresultinanetcosttotheNSWcommunity.

PAST ASSESSMENTS OF WALLARAH 2 PROJECT ThelasteconomicassessmentoftheprojectwasdescribedbythePlanningAssessmentCommissionas“notcredible”:

InconsideringthemeritsoftheprojectasawholetheCommissionhasfoundthatthebenefitsclaimedfortheprojectbytheProponent(andlargelyadoptedintheDepartment’sPreliminaryAssessmentReport)arenotcredible.

…

TheCommission’sviewisthatthePAR’sacceptanceofthebenefitsoftheprojectaspresentedbytheProponentissimplynotcredible.Noattempthasbeenmadetoaddressthespecificpointsraisedbythecriticsoftheeconomics

29Nichols(2014)BarryO'Farrell'droppedin'onmeetingattendedbyNickDiGirolamoandChrisHartcher,http://www.smh.com.au/nsw/barry-ofarrell-dropped-in-on-meeting-attended-by-nick-di-girolamo-and-chris-hartcher-20140226-33i5u.html

assessment,yetthesepointsappeartobesoundlyarguedandentirelyplausible.Itisnotacceptablepracticetoglossoverthismaterialwithafewgeneralisationsofthekindfoundonpp.48and50ofthePAR.30

PartofthePAC’sconcernsovereconomicassessmentofthisprojectrelatetothelargedifferencesbetweenthedifferentassessmentsofit,allbythesameconsultant,GillespieEconomics.Thefirstassessmentoftheprojectestimated:

OveralltheW2CPisestimatedtohavenetbenefitstothecommunityof$1,519Mandhenceisdesirableandjustifiedfromaneconomicefficiencyperspective.31

Yetfiveyearslater,thesameconsultants,GillespieEconomics,evaluatingthesamemine,assumingthesameproductionrateandanevenhighercoalpricefound:

Overall,theProjectisestimatedtohavenetbenefitstoAustraliaofbetween$346Mand$531Mandhenceisdesirableandjustifiedfromaneconomicefficiencyperspective.32

Threeyearslater,readersaretold:

Overall,theProjectisestimatedtohavenetsocialbenefitstoNSWof$274Mto$485M(presentvalueat7%discountrate)andhencerelativetothe‘withoutProject’scenario,isdesirableandjustifiedfromaneconomicefficiencyperspective.33

Thehugedifferencesinestimatednetbenefitsarenotadequatelyexplainedtoreaders.Theyrelatelargelytochangesinscope.GillespieEconomicsinitiallyconsidered“thecommunity”toincludetheSouthKoreangovernment,whileinthelatestassessmenthaslimiteditsscopetothecommunityofNSW.

TheWallarah2projectisnottheonlyprojecttohaveexperienceddifficultieswithassessmentbyGillespieEconomics:

• Gillespie’sflawedassessmentoftheWarkworthExtensionProjectwasakeycontributortotheLandandEnvironmentCourt’sdecisiontooverturnthatproject’sapproval.

30PAC(2014)Wallarah2CoalProjectReviewReport,http://majorprojects.planning.nsw.gov.au/index.pl?action=view job&job id=4974,pageiand65

31GillespieEconomics(2008)Wallarah2CoalProjectBenefitCostAnalysis.p332GillespieEconomics(2013)Wallarah2CoalProject-AppendixWEconomicImpactAssessment.p1633GillespieEconomics(2016)Wallarah2CoalProjectEconomicImpactAssessment.p5


• Gillespie’sassessmentoftheAshtonSEOpenCutprojectwasabandonedbyproponentsYancoalwhenthatprojectwaschallengedincourt.

• Gillespie’sassessmentoftheCobboracoalprojectestimatedanetbenefitof$2billion.ThehopelesslyunviableprojecthadtobeabandonedbytheproponentsatacostoftensofmillionstotheNSWtaxpayerandthecommunityofDunedoo.34

• Gillespie’sassessmentoftheT4coalterminalestimatednetbenefitsof$60billion.Thisprovedahugeoverestimate,withareviewcommissionedbythePACconcluding“Inourview,theassumptionsadoptedforthescenariosmodelledbytheProponentarelikelytopresentanoptimisticviewofthelikelybenefitstosocietyarisingfromtheProject.35Theprojectlooksunlikelytoproceed.

Therearemanyotherexamplesofflawedanalysisbythisconsultant.InfactitwasGillespieEconomics’assessmentoftheearlieriterationsoftheWallarah2projectthatsparkedextensivereviewsofNSWGovernmentGuidelinesoneconomicassessment:

ThePlanningMinister,PruGoward,saidonMondayherdepartmentwouldcommission‘‘separateexperteconomicanalysis’’forallfutureapplicationsformajorminingprojects.

Theannouncementfollowsareportlastweekbythestate'sindependentplanningbody,whichslammedMsGoward’sdepartmentforuncriticallyacceptingtheproponent’sclaimsaboutthebenefitsoftheproposedWallarah2minenorthofWyong.36

Giventhisbackground,itissurprisingthattheproponentpersistswitheconomicassessmentbyGillespieEconomicsandthattheDepartmentofPlanningandEnvironmentacceptsit.

34SeeGillespieEconomics(2012)CobboraCoalProjectEconomicAssessment,andABC(2015)NSWGovttosellCobboracoalmine,http://www.abc.net.au/news/2015-11-20/nsw-govt-to-sell-cobbora-coal-mine/6956274

35SeeGillespieEconomics(2012)PortWaratahCoalServicesTerminal4Project–EconomicAssessment,andCIE(2014)PortWaratahExpansionT4ReviewofEconomicAnalysis.

36MckennyandWhitbourn(2014)Miningassessmentstobebeefedupafterscathingreview,http://www.smh.com.au/nsw/mining-assessments-to-be-beefed-up-after-scathing-review-20140616-zs9sd.html

Economic assessment of Amended Development Application

FINANCIAL VIABILITY Theeconomicassessmentestimatesnetproductionbenefitof$585millioninpresentvalueterms.Thissuggeststhattheprojecthasastrongfinancialcase,asurprisingconclusiongiventhatmanycoalprojectsarebeingdelayedorabandonedinNSWandbeyond.Manycoalcompaniesareinfinancialdistress,withseveralfilingforbankruptcyprotectionintheUSA,includingformermajorcompanyPeabodyEnergy.ExistingcoalminesarebeingtradedatpeppercornpricesinAustraliaandsharesinoperatingminescanbeboughtcheaply.Itishighlyunlikelyinthisenvironmentthatacompanywouldinvestinanew,deep undergroundgreenfieldsthermalcoalmine,particularlyonewithsomuchpoliticalandenvironmentalcontroversysurroundingit.

Thekeyreasontheeconomicassessmentoverestimatesthefinancialviabilityoftheprojectisitslowfigureforoperatingcosts.GillespieEconomicsestimateannualaverageoperatingcostsat$192million(p32),beforeroyalties.Averageannualproductionisestimatedat3.974mtpa(p33).Thisequatestoanaveragecostofproductionof$48pertonne.

GillespieEconomicsassumeacoalpriceofjustunder$100pertonne,discussedfurtherbelow.Assumingmostoftheproject’scoalisliableforaroyaltyrateof7%,thisadds$7tothepertonnecostofproduction,atotalof$55.

TocomparethistoothercoalminesinAustraliaandinternationally,itneedstobeconvertedtoUSdollars.AtcurrentexchangeratesthisisUSD$42pertonne,oratGillespieEconomics’favouredexchangerate,USD$39.6pertonne.

ThiswouldmeantheWallarah2projectisoneofthecheapestminestooperateintheworld,andcertainlycheaperthanalmosteverymineinQueensland.ThiscanbeseeninachartrecentlyreleasedbytheQueenslandResourceCouncil,basedonanalysisbyWoodMacKenzie,analystsfavouredbyGillespieEconomics:


Figure1:Thermalcoalcostcurve

Source:QueenslandResourceCouncil(2015)Stateofthesector.37

Figure1showsthatthereareveryfewminesintheworldthatcanproduceat$US40pertonne.UnfortunatelythischartdoesnotshowNSWmines,onlyQueenslandminesindarkblue.AlmostnoneofQueensland’scoalminescanproduceatthecostsclaimedbytheproponentsofWallarah2andGillespieEconomics.

GiventhatWallarahisarelativelysmall,fairlydeepundergroundmine,anditwouldinvolvemininginasensitivearea,itisnotcredibletosuggestthatitwillbeabletooperateatanaveragecostamongthecheapestintheworld.Itseemslikelythatitsaveragecostswouldbewellaboveworldaverages,whichwouldlikelymaketheprojectunviableatcurrent,oratGillespieEconomics’,coalprices.GillespieEconomicssensitivityanalysisdoesnottestthesensitivityofnetproductionbenefitstoachangeinoperatingcosts.

COAL PRICES GillespieEconomicsuseacoalpriceofAUD$100pertonne,substantiallyabovethecurrentAUDpriceof$88pertonne,andfarabovethelongtermTreasuryforecastofaround$80pertonne:

37https://www.qrc.org.au/ dbase upl/State%20of%20the%20Sector DecQtr15.pdf

Figure2FederalTreasury,Australianthermalcoalrealunitexportpriceforecast

Source:Bullen,J.,Kouparitsas,M.&Krolikowski,M.,2014.Long-runforecastsofAustralia’stermsoftrade,PublishedbyTheTreasury,CommonwealthofAustralia.Availableat:http://www.treasury.gov.au/~/media/Treasury/PublicationsandMedia/Publications/2014/LongrunforecastsofAustralia’stermsoftrade/Documents/PDF/long_run_tot.ashx.

GillespieEconomicsclaimthat“forecasts”(p34 35)fromtheInternationalEnergyAgency(IEA)supporttheiruseofhighercoalpricesandthattheseincludeconsiderationofnewclimatepolicies.However,theIEAdoesnotmake“forecasts”atall,asitmakesclear:

The[IEA’smodelling]resultshowever,donotconstituteaforecast.Newpolicies,asyetunformulated,willcertainlybeadoptedoverthecourseofthenexttwenty fiveyears.Indeed,onepurposeinprojectingthefutureistodemonstratetheneedfortheiradoption.38

IftheIEA’smodellingofcoalpricesweretobetreatedasforecasts,theywouldnotbeverygoodones.Considertheprice‘forecasts’fromtheIEA’s2011WorldEnergyOutlook,shownintheFigure3below:

38IEA2015,WorldEnergyOutlook2015,p34


Figure32011WorldEnergyOutlookaverageOECDsteamcoalimportpricebyscenario

Source:IEA2011,WorldEnergyOutlook,p363

InFigure3above,wehaveaddedaredspotatapproximatelywherecurrentcoalpricesare.WeseethatnoneoftheIEA’sscenarios‘forecast’thatsuchanoutcomewaspossible.TheIEA’scurrentcoalpricescenariosalsoseemoptimistic.

GillespieEconomicsalsofailtoconductsensitivitytestingaroundthecoalpriceonnetproductionbenefits,givingdecisionmakersnounderstandingofthefinancialoutlookfortheproject.Thisisinappropriategiventhecurrentuncertaintyaroundcoalmarketsandtheviabilityofmanycoalprojects.

Decisionmakersshouldbeawarethattheprojectisunlikelytobefinanciallyviablecurrentlyorintheforeseeablefuture.Ifapproved,itisunlikelytoproceedasplanned.Inouropinion,thecurrentapprovalisbeingpursuednotbecausetheprojectisprofitable,butforcorporatestrategicreasons,suchas:

• Bankingapprovalforpotentialfuturedevelopment.

• Approvalwouldaddtothesalevalueoftheproject.

• Lackofapprovalwouldresultinanassetwritedown,withimplicationsforcompanybalancesheetsandthecareersofthepeopleresponsible.

Theongoinguncertaintyovertheprojectimposescostsonthecommunity.Peoplelivingwiththeuncertaintyofapotentialcoalprojectimpactingontheirpropertyvalue,businessplansandwatersourcesexperienceserioussocial,financialand

psychologicalcosts,nottomentiontheamountoftimetheongoingassessmentprocessrequiresofthem.Theprojectshouldberejectedonthisbasis.

TRANSMISSION LINES Theprojectliesunderhighvoltagetransmissionlines,asnotedintheEIS.AsubmissionfromtheDivisionofResourcesandEnergy(DRE)notes:

Theinfrastructureownerhasindicateditmaynotbefeasibletounderminethetwotowersinquestion,basedonthesubsidencepredictionsandcurrenttechnology.Ifcoalbarriersarerequiredtoprotectthetowersduetotheirlocationasubstantialvolumeofcoalwouldneedtobesterilised.Theamountofcoalsterilisedbybarriersnecessarytoprotectthetowersinquestionmaysignificantlyexceedtheproponent’sestimateintheEIS.Itfollowsthattheviabilityofasignificantproportionoftheproposedminelayoutmaybequestionable.39

WhiletheDREnotesthatthisoccurslateintheproject’slife,thisisstillimportantforthefinancialviabilityoftheprojectandpotentialtimingofcommencement.GillespieEconomics’assessmentgivesnounderstandingofhowthisissuecouldaffecttheviabilityoftheprojectoritspotentialnetbenefittotheNSWcommunity.Sensitivityanalysisshouldbeconductedtoassesswhatvolumesofcoalmightbeaffected,thetimingofanysterilisationandhowthisaffectstheviabilityoftheproject.Potentialcoststoinfrastructureowners,governmentsandpowerusersshouldalsobeconsidered.

WATER ISSUES ThepotentialeffectsoftheWallarah2projectonwaterresourceshavebeenhugelycontroversial.Itisinappropriatefortheeconomicassessmenttoincludenodetailedconsiderationoftheseimpactsandtoassumethatallimpactswillbeoffsetbymitigationmeasures.Basedoncommunitysubmissions,itisclearthatthereispotentialforconsiderablecoststothecommunityfromimpactsonwatersupply,streammorphology,groundwater,flooding,biodiversityandwaterbalance.ThesecostswouldbeentirelybornebytheNSWcommunity.Byfailingtoassessthesecostsitislikelytheeconomicassessmentunderstatesthecostsoftheproject.

39DRE(2016)Wallarah2CoalProjectEnvironmentalImpactStatementReview,https://majorprojects.affinitylive.com/public/ec0397d0b0c9b19da71b298e32ac5fe6/DRE.pdf


OTHER INDUSTRIES AND LANDHOLDERS AkeypartofcontroversyaroundtheWallarah2projecthasbeenitspotentialimpactsonlandownedbytheDarkinjungLocalAboriginalLandCouncilandthevariousdevelopmentsexistingandplannedforthisarea.TheeconomicassessmentincludesnoconsiderationofcoststhatmightbeimposedontheDarkinjungineitherthecostbenefitanalysisorthelocaleffectsanalysis.Thismayservetoheavilyunderstatethecostsoftheprojectatalocallevel.

COMPANY TAX Theeconomicassessmentclaimsthat$220millioninpresentvaluecompanytaxwillbepaidbytheproponents,overhalftheestimatedbenefittoAustralia.ThereisnotransparencyaroundGillespieEconomics’calculationofthisfigure.Giventhecomplexitiesinvolvedincompanytaxpayments,particularlywithlargecompanieswithoffshoreentities,thisisinappropriateandalmostcertainlyservestooverestimatethebenefitsoftheproject.Miningcompanieshaveahugearrayofwaystominimisecompanytaxpaymentsandthiscalculationshouldbeshownindetail.

NON-MARKET VALUE OF EMPLOYMENT Itisimportanttounderstandswhatthisvalueis.Itreferstoanamountofmoneythatthecommunitywouldbewillingtopaytoensurethatotherpeoplehavejobsinacoalmine,overandabovethewagesthatthemineworkersreceive.Thisvalueassumesthatmembersofthepublicderivebenefitfromknowingsomeoneelseisworkinginacoalmineandtheyarewillingtopayforthatbenefit.

Thatthepubliciswillingtopaytosubsidisesomeemploymentisnotentirelysurprising.WeregularlysubsidiseIndigenousemploymentandemploymentinindustriessuchascarmanufacturing–situations,peopleandindustrieswhichforvariousreasonsthepublicmayvalue.Whetherthisvalueexistsforacoalmineinsensitivecatchmentareasisdebatable.

WhatisnotdebatableisthatsocialvalueofunemploymentisheavilyoverstatedintheassessmentoftheWallarah2project.Theassessmentassumes$186millionpresentvalueofthisexternalbenefit,some$620,000perjob.Itseemshighlyunlikelythatthepublicwouldbewillingtopaysuchalargesumforemploymentinawellpaidindustryandonethattendstoattractcontroversyarounditsenvironmentalimpacts.Bycomparison,Fordwasreceivingasubsidyofaround$2800perjobperyearuntil

recently,asubsidythatattractedsearingcriticismfrommanyeconomistsandpoliticians.

INPUT-OUTPUT ANALYSIS The“SupplementaryLocalEffectsAnalysis”isbasedonthoroughlydiscreditedinputoutputmodelling.IthasbeenheavilycriticisedbythePAC,includinginrelationtotheWallarah2project.TheLandandEnvironmentCourtdismissedthismodellingas“inadequate”.40

TheLandandEnvironmentCourt’scriticismwastakenonboardbyanothercoalcompany,Yancoal.Theyhadsubmittedaninput outputstudybythesameauthorsastheearlierWarkworthassessmentforinitialplanningapproval.41FacedwithmoreseriousscrutinyintheLandandEnvironmentCourt,YancoaldiscardedtheirinputoutputmodelandcommissionedaGEmodellingexercisefromwell knownconsultantsACILAllen.

ACILAllen’sanalysisfoundthattheAshtonprojectwouldresultinachangeinemploymentofjusttwojobsmorethandirectemploymentintheproject.DirectorofACILAllen,JeromeFahrer,saidtotheLandandEnvironmentCourt:

[In]theWarkworthcaseinput/outputmodellingwascriticisedbythechiefjudgeand...forgoodreason.Input/outputmodellingisfineforsomepurposesbutit’snotthebesttechnique…forthiskindofpurpose[evaluatingacoalmine].Thereasonisthatinput/outputmodellingtakesnoaccountofthefactthattherearelimitedproductiveresources[intheeconomy]principallypeopletobeemployed.Soitalwaysmakestheamountofoutput,income,jobs,biggerthanwouldlikelybethecase,unlessyou’reintheGreatDepression,oraverydeeprecession.42

GillespieEconomicscontinuetodefendinputoutputmodellingandtheyareentitledtotheiropinion.WenotethattheyarecontradictednotonlybytheirconsultingpeersatACILAllenandbythebenchoftheLandandEnvironmentCourt,butalsobyrecent

40Preston,B.(2013).JudgementonBulgaMilbrodaleProgressAssociationIncvMinisterforPlanningandInfrastructureandWarkworthMiningLimited.JudgementintheLandandEnvironmentCourt,NewSouthWales.Retrievedfromhttp://www.edo.org.au/edonsw/site/pdf/casesum/Warkworth_judgment.pdf

41HVRF.(2009).AshtoncoalEISAppendix17:SocialandEconomicEnvironment.PreparedforWellsEnvironmentalServicesonbehalfofAshtonCoalOperation

42SeecourttranscriptsofHunterEnvironmentLobbyIncvMinisterforPlanningandInfrastructureintheLandandEnvironmentCourtofNSW,page546.


PlanningandAssessmentCommissiondecisions,theABS43,theProductivityCommission44andmanyothereconomists.

CONCLUSION TheWallarah2projectisunlikelytobefinanciallyviable.Itscostshavebeenunderestimatedanditsbenefitsoverestimatedintheeconomicassessmentoftheamendedproject,asinthetwopreviousiterations.Evenifapproved,itisunlikelytoproceedasplannedanddeliveranybenefitsofroyaltiesorjobstotheNSWcommunity.

Theongoinguncertaintyovertheprojectimposescostsonthecommunity.Peoplelivingwiththeuncertaintyofapotentialcoalprojectimpactingontheirpropertyvalue,businessplansandwatersourcesexperienceserioussocial,financialandpsychologicalcosts,nottomentiontheamountoftimetheongoingassessmentprocessrequiresofthem.Theprojectshouldberejectedonthisbasis.

43ABS.(2011).1367.0-StateandTerritoryStatisticalIndicators,2011-CountofBusinesses.AustralianBureauofStatisticswebsite.RetrievedFebruary13,2014,fromhttp://www.abs.gov.au/ausstats/[email protected]/Lookup/by+Subject/1367.0~2011~Main+Features~Count+of+Businesses~2.24

44Gretton,P.(2013).Oninput-outputtables:usesandabuses.StaffResearchNote,ProductivityCommission,Canberra.Retrievedfromhttp://www.pc.gov.au/__data/assets/pdf_file/0008/128294/input-output-tables.pdf