final report port waratah expansion t4

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F I N A L R E P O R T

Port Waratah Expansion T4

Review of Economic Analysis

Prepared for NSW Planning Assessment Commission

November 2014

THE CENTRE FOR INTERNATIONAL ECONOMICS www.TheCIE.com.au

COMMERCIAL IN CONFIDENCE

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Port Waratah Expansion T4 iii

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Contents

Abbreviations 1

Summary 2

Findings 2

1 Introduction 8

Scope of CIE review 10

2 Cost Benefit Analysis 11

Articulating the proposal that the CBA will evaluate 12

Establishing the Baseline 13

Quantifying and valuing the changes 21

Generating the future stream of benefits and costs 23

Uncertainty and sensitivity analysis 25

Does the option deliver net benefits for society? 29

3 Regional economic impacts 34

4 Conclusion 36

A Summary of assumptions 38

BOXES, CHARTS AND TABLES

1.1 The Australia Institute Critique 9

1.2 Scope of review 10

2.1 Key steps in a CBA 11

2.2 Projected world coal consumption, 2014 to 2030 16

2.3 Estimated recoverable coal reserves , NSW, 2011 17

2.4 Average export unit value ($A dollars per tonne, nominal), thermal and metallurgical coal 19

2.5 Net production benefits – Proponent’s estimate and sensitivity testing 24

2.6 Incremental Throughput via T4 (illustration) 28

A.1 Assumptions underpinning Proponent and Australia Institute’s modelling 38

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Port Waratah Expansion T4 1

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Abbreviations

ARTC Australian Rail Track Corporation

BREE Bureau of Resources and Energy Economics

CBA Cost Benefit Analysis

EIA US Energy Information Administration

EIS Environmental Impact Statement

EPA Environmental Protection Agency

FDF Fines Disposal Facility

IEA International Energy Agency

HDC Hunter Development Corporation

KIWEF Kooragang Island Waste Emplacement Facility

Mtpa Million tonnes per annum

NCIG Newcastle Coal Infrastructure Group

PAC Planning Assessment Commission

PEAR Preliminary Environmental Assessment Report (prepared by the NSW Department of Planning and Environment)

PWCS Port Waratah Coal Services

RTS Response to Submissions

TAI The Australia Institute

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2 Port Waratah Expansion T4

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Summary

Port Waratah Coal Services (PWCS) is seeking approval to construct and operate a coal export terminal on Kooragang Island in the Port of Newcastle (the Port). PWCS proposes to construct a terminal with a capacity of up to 70 Million tonnes of coal per annum (Mtpa) which has been downsized from the original 120 Mtpa proposal.1 The terminal is proposed to be constructed progressively in response to demand nominated by coal producers and commercial requirements, with the actual timing and scale of the development dependent on these factors.2 An economic analysis has been undertaken by the Proponent to support the case for the project. The CIE has been engaged by the Planning Assessment Commission (PAC) to review the robustness of the economic analysis undertaken by the Proponent.

Findings

Overview of approach

■ The economic benefits of the Terminal 4 Project (the Project) largely relate to bringing-forward coal mining production and coal export by removing capacity constraints at the Port.

■ The analysis uses a Cost Benefit Analysis (CBA) as the primary tools for assessing the merits of removing the capacity constraint. CBA is an appropriate tool to quantify the impacts and to account for trade-offs in judging the merits to society of the Project.

■ The Proponent also undertakes regional impact analysis (one study using ‘multiplier analysis’ and another study using an economy-wide model of the NSW economy). This is useful to describe the potential implications of the Project. It is not used to decide on whether society is better off by having the Project.

■ The Project is appropriately defined in the CBA to include projected mine and coal transport development driving the application for terminal approval rather than being restricted to the immediate cost and benefits of the terminal itself. The capital costs directly attributed to the Project include onsite rail infrastructure (excluding rail infrastructure that is the responsibility of the Australian Rail Track

1 There is scope to upscale the facility to 120 Mtpa at a later stage, although this has not been

explicitly modelled by the Proponent. Any proposal to upscale the facility at a later stage would be subject to a separate assessment process at that point in time.

2 PWCS (2014), Response to Submissions on Preferred Project, p.84, January.

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Corporation, ARTC), ground improvement and earthworks, material and equipment, labour and dredging costs.

■ The analysis does not explicitly consider externalities (e.g. incremental impacts of project –related increases in coal dust on human health) as a separate cost category. The Project costing does, however, incorporate any costs of meeting agreed standards for air pollution, on-site remediation and creation of offsets for defined local environmental externalities created by the Project.

■ Any externalities arising from increased production/transportation of coal are also excluded from the analysis. Under the Project, it is expected to bring forward the coal production which would otherwise have occurred in future years. The bringing-forward of coal production also have the effect of bringing forward any associated environmental/social externalities. These are not explicitly captured in the CBA. Instead, these are assumed to be dealt with through the mandatory environmental assessment of the individual mines, although the economic analysis of T4 recognises that there may be some ‘residual’ externalities.

■ The Proponent’s CBA, therefore, assumes that there is a robust mining assessment process and that, as part of the assessment process, there is a separate CBA which considers whether the benefits of the additional mining activity outweighs any environmental/social costs.

■ Ideally a CBA should seek to capture the full impact on welfare of a defined project. However, given the range of uncertainties involved, it is reasonable to assume that the mining assessment process is the best time to assess the benefits and costs of the specific mines, at which point there will be detailed information required of any environmental/social impacts and the extent to which these can be adequately mitigated.

■ The difficulty of accurately anticipating and estimating the monetary cost equivalent of residual/unaddressed future externalities in a project of this kind has led to the adoption of the so-called ‘ threshold’ approach. The principal net economic benefits of the project are defined and estimated. The question then facing decision makers is as follows. ‘Given net economic benefits of the size estimated, would any unaddressed externalities be likely to exceed this in the costs they impose on the community?’ The use of the ‘threshold’ analysis is a valid approach in the context of the uncertainties. However, it does require the decision maker to rely, to a greater extent, on judgement regarding the extent to which the benefits from the Project would outweigh any potential future adverse social/environmental impacts.

Key assumptions and sensitivities in the modelling

■ The economic benefits of the Project are defined in terms of the present value of the discounted stream of future net benefits. These benefits are measured in terms of net production benefits of the terminal construction and operation and the related coal production export process facilitated by the additional terminal capacity. They principally consist of returns to shareholders and the incremental

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royalties and corporate income tax received by the NSW and Australian governments respectively.

■ The source of net benefit depends critically on the additional volumes of coal that can be exported earlier in time as a result of the additional terminal capacity. In a present value framework, earlier net benefits mean higher overall present value.

■ These volumes are ultimately limited on the supply side by the assumed regional reserves of coal that would be available for extraction for export purposes. Based on current available data, the more optimistic scenarios modelled by the Proponent appear to require coal reserves that exceed latest available government estimates of such reserves. On this basis, the most conservative scenario (scenario 1) modelled by the Proponent is likely to the most robust basis on which to conduct the CBA.

■ The CBA assumes export prices of A$200 per tonne for metallurgical coal and A$100 per tonne for thermal coal. It also assumes that 80 per cent of the coal throughput is thermal coal and 20 per cent metallurgical coal. Coal export prices are volatile and have fallen since the Proponent’s original analysis. The most recent independent coal price estimates available were published by the Bureau of Resources and Energy Economics (BREE) in September 2014. BREE projects prices for thermal coal to be close to A$98 a tonne (in 2014 dollar terms) by 2019 and A$148 per tonne for metallurgical coal. This implies that the Proponent’s assumption for metallurgical coal is on the high side. However, recent data also suggests that between 85-90 per cent of coal through the Port of Newcastle is thermal coal. This implies that the Proponent’s overall weighted average price for coal is reasonable.

■ There is uncertainty regarding a range of parameters used to model the benefits and costs of the Project. The quantum of benefits are sensitive to both coal price and mining costs, as well as highly sensitive to future throughput volumes and the timing of throughput-driven demand for incremental terminal capacity.

■ The economic modelling imposes a range of exogenous shocks to the model. There is no formal modelling of the link between future prices, the production costs of the mines and the future throughput/capacity demand. Instead, arbitrary assumptions link these critical variables. The Proponent recognises these limitations on its modelling. Publicly accessible information is not available on the ‘cost curve’ of additional mining activity. However, most reports suggest that future mining activity is likely to continue to show increased unit costs which limit the profitability of future mines. This would limit the continued growth in coal production and exports from the Port.

■ The Proponent seeks to address the risks and uncertainties regarding a number of parameters by undertaking sensitivity analysis of a range of parameters. This includes imposing a possible 50 percent increase in the assumed costs of export coal supply relative to the value adopted as ‘central’ in the CBA. It also includes provision for a much slower uptake of the additional T4 terminal capacity.

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■ These effects together substantially reduce the modelled net production benefits. For example, the net production benefits are around $33 billion (in present values) for the most optimistic original scenario modelled for the 70 Mtpa facility. However, under the Proponent’s most pessimistic assumption considered in sensitivity analysis (as at July 2014), the royalties and company tax would still generate an additional $1.2 billion (in present value terms).

■ Recent behaviour of coal shipments through PWCS facilities (109 million tonnes in 2013 according to PWCS annual report compared to a nameplate capacity of 145 million tonnes) shows that there is still some ‘headroom’ to accommodate an increase in shipments in the short term. An export growth rate twice that experienced over the decade 2002 to 2012 would be required to exhaust existing capacity by 2018.

■ A revised ‘first shipment’ date of around 2023- 2025 emerges under further sensitivity testing for the Proponent under conservative assumptions about the growth in demand for terminal capacity conducted in response to criticism by the Australia Institute. This is a similar date under ‘extrapolation of trend’ forecasting of export growth underpinning alternative modelling by The Australia Institute. However, while extrapolation of trend growth of 3 Mtpa as employed by the Institute would not see the additional capacity fully utilised until after 2045, the most conservative scenario considered under sensitivity analysis for the Proponent would see full utilisation by 2036.

■ Current forecasts of rail freight capacity presented by the Australian Rail Track Corporation (in July 2014) also indicate that current ‘contracted’ volumes of coal at the Port is below 200 Mtpa until at least 2023. This implies that the existing capacity of the Port of 211 Mtpa is sufficient to meet current contracted volumes over this period. While a sudden increase in demand for export coal could trigger ‘immediate need’ to commence T4 construction, recent coal price behaviour, if extrapolated, suggests that trigger is some way off and the rationale for seeking approval is precautionary, providing the Proponent with an option to construct the terminal at some point in the future if market conditions are suitable.

■ Under conservative, but not unreasonable, assumptions about medium term coal export prices and the marginal costs of mining, the incentive to bring forward mining development and export shipments would be muted. By definition, minimum net economic benefits (largely the net present value of royalties) remain positive, but are greatly reduced compared to modelled results for the Project. This in turn implies a significantly reduced threshold test for assessment of external environmental and social costs. The environmental and social costs would also be significantly reduced where less coal is mined and transported to the Port.

■ The Response to Submissions provided on behalf of PWCS rejects the Australia Institute contention, based on its modelling, that the Project is likely to be unprofitable, based on ‘more realistic’ price and throughput assumptions. The rejection is based on the fact that the trigger for the project is ship-or-pay contracts from mines that would have to be in place for commencement. While acknowledging that such contracts substantially reduce risk to PWCS and

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underpin expected profits, we note that they do not completely remove the risk, after commencement, of default and indefinite deferral or abandonment.

■ The Project would be constructed on a Kooragang Island site, a significant part of which comprises old landfills which are under government-required Closure Plans which embody required remediation. If the Project proceeds, remediation plans would be modified to integrate with construction. If construction is significantly delayed then it is not clear how this proposed integration and overall remediation would be affected.

Conclusions

■ The general approach taken to construct the CBA is reasonable, although there are gaps which require information to be gained ‘outside’ the analysis. In our view, the assumptions adopted for the scenarios modelled by the Proponent are likely to present an optimistic view of the likely benefits to society arising from the Project.

■ The results are highly dependent on the assumptions regarding the throughput volumes and timing of the throughput. These factors are not known with certainty and are volatile, as evidenced by recent events from China which flag the introduction of import tariffs on coal entering China. Nevertheless, even under the Proponent’s most pessimistic assumptions (undertaken as part of the sensitivity analysis) the Project still generates around $1 billion (in present value terms) in additional royalties and company tax. Although not quantified, the potential environmental/social impacts under these more conservative assumptions would also be reduced, given that the Project is bringing forward a smaller volume of coal.

■ Even under the most pessimistic assumptions modelled by the Proponent, the Project is (marginally) profitable and, by definition, yields net public benefits in the form of incremental (present value) royalties, since it involves accelerated coal extraction.

■ If, in contrast, coal exports continue to expand by only 3 Mtpa in line with their historical average, as modelled by The Australia Institute, then under comparable price and cost assumptions the Project would be unprofitable but would still yield royalty benefits in excess of $500m. The additional capacity would not be required until 2025 and would not be fully utilised until 2047.

■ Under the Australian Rail Track Corporation’s 2014-2023 Hunter Valley Corridor Capacity Strategy, based on current contracted volumes, the Project would not be needed until after 2023.

■ The Proponent recognises the potential volatility in a range of key factors that would impact on the throughput volume and timing of the throughput. Therefore, from the Proponent’s perspective the rationale for the Project approval is precautionary. This would provide the Proponent with the flexibility to respond when the throughput is required.

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■ In this context, a key question is, if the Project is approved but the construction is deferred, and possibly abandoned, because of future revised price and volume expectations, what are the public welfare consequences?

■ Delay necessarily reduces the present value of calculated net benefits from the Project. But if all the relevant ‘ holding costs’ are private costs, then, provided approval of the Project were granted on the basis that satisfied the ‘threshold test’, a sterilisation or abandonment should be irrelevant. Consequent private losses from this outcome would be irrelevant from a public CBA test perspective.

■ If, however, deferral of construction would mean that there is also postponement of measures to address ongoing adverse environmental outcomes then deferral may lower the present value of ‘ variable’ external costs ( e.g. air pollution) but raise the present value of ‘fixed’ environmental externalities (e.g. site remediation). This would need to be considered under the obligations for all parties under the Closure Plans for the landfill site components of the terminal site.

■ A potential rationale for delaying the approval of the Project is if new information is likely to arise in the near future that would allow a more complete CBA to be conducted to account for potential environmental/social impacts (e.g. new information on the health impacts of coal dust emissions). If such new information relates to impacts at mining sites then this would best be dealt with at the point of the assessment of a mine. However, if the new information relates to say, the impacts of coal dust via the transportation of coal or at the T4 site itself, then there would be greater justification to delay the Project pending this new information. At this point in time we are unaware of any new information that would result in a significant public benefit for delaying the Project.

■ There may also be options for staging any future construction or modifying the existing design so as to reduce environmental/social impacts arising from the T4 site. Where these options exist they should also be considered as part of the assessment of the merits of the Project from a public welfare perspective.

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1 Introduction

Port Waratah Coal Services (PWCS) is seeking approval to construct and operate a coal export terminal with a capacity of up to 70 Million tonnes of coal per annum (Mtpa) on Kooragang Island in the Port of Newcastle (the Port). The Project (known as the Terminal 4 project) includes rail and coal- receiving infrastructure, coal stockpile pads and associated stacking and reclaiming machinery, wharf and berth infrastructure, coal conveyors, feeders and transfer stations and associated infrastructure. The proposal also includes development of three biodiversity offset sites located at Ellalong Lagoon, Brundee Swamp Nature Reserve and habitat restoration and creation works at Tomago.

The rationale for the Project is to remove expected future capacity constraints at the Port. This is based on the Proponent’s assumption that world demand for coal will continue to grow strongly and, even with the proposed upgrades to the Hunter Valley coal rail corridor, there will be capacity constraints at the Port of Newcastle. The removal of the capacity constraints is expected to bring forward coal production which would otherwise be deferred.

In putting forward its project for approval PWCS identified capacity shortfalls at its Carrington Coal Terminal and Kooragang Coal Terminal in Newcastle by 2015. It argued that this

……has triggered a contractual obligation for Port Waratah Coal Services Limited under the Australian Competition and Consumer Commission endorsed Capacity Framework arrangements for the construction and operation of a new coal export terminal. (Gillespie Economics 2012, p.1).

Where a capacity shortfall is predicted which cannot be accommodated by further expansion of its existing coal export terminals, the Capacity Framework Arrangements include a contractual obligation for PWCS to build a new terminal, within four years of the capacity shortfall being formally acknowledged. Producers serviced by PWCS have estimated that their requirements for port capacity in four years time (2015) will exceed the approved capacity for KCT and CCT of 145 Mtpa. (Gillespie Economics 2012, p.9).

PWCS originally proposed to construct a 120 Mtpa coal export terminal. This was subsequently downsized to a 70 Mtpa terminal. The Proponent has undertaken separate economic analysis, in January 2013, in support of the smaller terminal. In May 2013, the Proponent announced that through a contractual handback process the requirement for the Terminal 4 project has been un-triggered.3

The former Minister for Planning and Infrastructure directed the PAC to carry out a full review of the Proposal. The PAC will determine the application under delegation from the Minister for Planning. The Department of Planning and Environment has prepared a 3 ARTC (2014), 2014-2023 Hunter Valley Corridor Capacity Strategy, July, p.7.

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Preliminary Environmental Assessment Report as a submission to the PAC which presents the Department’s current position on the public record.

The PAC will make a preliminary decision on its views regarding the project. This may include conditional or unconditional support for the project, delay subject to additional information or rejection. The economic analysis undertaken is only one factor that will assist the PAC in its decisions.

There has been opposition to the Proponent’s economic analysis used to justify the Project, in particular by the Australia Institute (TAI). It’s key criticisms are summarised in Box 1.1. Appendix A.1 provides an overview of the key assumptions in the Proponent’s economic modelling as well as TAI’s assumptions.

1.1 The Australia Institute Critique

TAI has provided a critique of the economic assessment of the modified T4 proposal undertaken by Gillespie Economics. TAI has questioned key assumptions underpinning the CBA and economic impact analysis and has provided alternative results for a CBA based on what it considers more realistic assumptions.

TAI’s main criticisms4 of the Gillespie CBA for the Preferred Project Report are that: ■ Future throughput modelled for the terminal assumes growth rates in coal export

demand and supporting mining activity that do not reflect recent experience or likely future demands for terminal capacity

■ These future demands are likely to be much weaker than modelled given evidence on future global coal demand – and demand for Australian exports – and the ability of mines in the catchment area of the terminal to profitably supply the coal volumes implied, given evidence on coal production costs and coal prices.

■ Time horizons for the scenarios modelled are too long and therefore distort the net present value gains from the earlier export of increased coal volumes that would be enabled by the construction of T4.

TAI argues that this combination of influences cause the present value of net production benefits and of the royalties and taxes components to be significantly overstated.

According to TAI, the emergence of weaker-than- modelled demands that has led to the downsizing of the original 120 Mtpa proposal raises significant doubt about the financial viability of the terminal investment. These weaker demand conditions undermine the private rationale for its construction. TAI argues that project approval would not be followed by the project proceeding.

Other criticisms offered by TAI include specific points of difference on the calculation of royalties and tax benefits – the two major public benefits of the project - and on the failure to explicitly value external costs associated with the project. While identifying likely specific adverse health, native vegetation and biodiversity and GHG concerns, TAI does not attempt any such evaluation of its own of these wider social and environmental costs.

4 These criticisms are contained in the TAI submission of November 2013 and a final submission

in August 2014.

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Scope of CIE review

The CIE has been engaged by the PAC to review the economic analysis undertaken by PWCS in support of the terminal and associated works. The economic analysis was undertaken by Gillespie Economics as part of the original Environmental Impact Statement (EIS). This includes a Cost Benefit Analysis (CBA) and regional economic impact analysis. Subsequent to the original EIS documentation, additional economic analysis undertaken by Gillespie Economics as well as economy-wide modelling by the Victoria University has been undertaken. The scope of our review includes the subsequent economic modelling undertaken.

Key steps in the review are listed in the box below.

1.2 Scope of review

■ Consider the appropriate basis for considering economic impacts. In particular, this will address the extent to which the review should focus solely on the CBA or also consider the regional economic impacts.

■ Review the framework for analysis developed by the project Proponent. This would include the ‘base case’ that underlies the analysis and against which the project is then compared, the methodology applied, the inclusiveness of the costs and benefits examined and the appropriate treatment of risk and uncertainty.

■ Review the key assumptions made within the methodology used. For example, the changes in coal exports, costs and revenues for the Proponent, discount rates, royalty rates and payments and other taxation payments.

■ Consider the extent to which conclusions are robust to alternative assumptions about growth and the timing of the project.

For this review, we have drawn from a range of documents including:

■ Gillespie Economics (2012), Port Waratah Coal Services Terminal 4 Project – Economic Assessment, February

■ Gillespie Economics (2013), Port Waratah Coal Services Terminal 4 Project – Economic Assessment of Modified Design, January

■ The Australia Institute (2013), Terminal 4 Project, Submission to the preferred project report, November.

■ The Australia Institute (2014), Expert Report – prepared for T4 PAC hearing, August

■ NSW Planning and Environment (2014), Secretary’s Preliminary Environmental Assessment Report, June.

Other information from external sources have also been used to test the plausibility of assumptions used in the modelling. We have also relied on information presented in the Excel spreadsheets provided by Gillespie Economics (including additional sensitivity testing conducted) and from TAI.

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2 Cost Benefit Analysis

There are two components of the economic analysis undertaken in relation to the Project: ■ an assessment of the economic efficiency of the Project via a CBA; and

■ an economic impact assessment targeting the overall regional and state potential gains in economic welfare as measured by regional and state indicators –employment, gross state and regional product.

Our main focus has been on reviewing the CBA, given its role in justifying whether approving the Project is beneficial to the Australian society. In this chapter we review the CBA, while the impact analysis is reviewed in the next chapter. The key steps in a CBA are presented in the box below.

2.1 Key steps in a CBA

■ Articulating the decision that the CBA is seeking to evaluate. For example, in relation to expansion of Port Waratah, the decision relates primarily to whether the specific project has net benefits. The way in which the CBA is framed and the information requirements will differ depending on the decision being evaluated.

■ Establishing the reference case (or ‘base case’) against which to assess the potential socioeconomic and environmental impacts of changes. One possible base case is no investment to alleviate capacity constraints in the absence of the Project.

■ Quantifying the changes from the base case resulting from the possible scenarios being considered. This will focus on the incremental changes to economic welfare resulting from the decision. The changes may be known with certainty or could also be defined in probabilistic terms. The quantification should focus on key changes that will be utilised in the valuation stage.

■ Placing values on the changes and aggregating these values in a consistent manner to assess the outcomes.

■ Generating the Net Present Value (NPV) of the future net benefits stream, using an appropriate discount rate, and deciding on the Decision Rule on which to assess the different options. The best decision rule is to choose the scenario that has the highest net benefits.

■ Undertaking sensitivity analysis on a key range of variables, given the uncertainties related to specific benefits and costs, especially the monetisation of quantified environmental/social impacts.

■ Deciding on which option is better for society. Where different alternatives to the base case exist a choice amongst the options is required to be made. In practice, additional information, aside from the CBA results, may also be utilised when deciding on the preferred option.

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Articulating the proposal that the CBA will evaluate

Definition of the Project for purposes of assigning benefits and costs

For purposes of the economic assessment conducted on behalf of the Proponent the Project has been defined to include not just the terminal construction and operation but the related expansion in mining investment activity that is argued to be the driver for the terminal construction and the immediate beneficiary of the additional export capacity provided. Additional rail infrastructure costs are also necessary to facilitate access to the incremental port capacity. The cost of the Project to the Proponent is estimated to be around $4.8 billion and includes, for example, rail infrastructure around the Kooragang Coal terminal and realignment of rail tracks at the arrival on to the island to accommodate Newcastle Coal Infrastructure Group’s (NCIG) tracks. These works are summarised in the Secretary’s Preliminary Environmental Assessment Report.5The $4.8 billion does not include the costs borne by the ARTC of further rail infrastructure upgrades between the mines and the Port. Such costs are incorporated separately in the economic modelling as part of the more general mining and transport costs.

In its original proposal for the 120 Mtpa facility, the construction was proposed to take place in “nominally three stages over an estimated 10 years, in response to increases in demand for additional coal export capacity”.6 There was explicit staging of the construction of the terminal. The construction of the 70 Mtpa facility is also envisaged to be constructed in stages, although there are no formal stages indicated.7

Current dimensions of the Project as evaluated

The project subject to economic evaluation is now one which, if proceeded with, would add 70 Mtpa or approximately 33 percent to the existing coal export capacity at the port (of approximately 211 Mtpa). From a CBA perspective, the benefits conferred by the Project are described as the net production benefits that arise from bringing forward coal production that would otherwise be delayed due to capacity constraints. These benefits include profits to coal mining companies/shareholders, local mining communities (via contributions to community infrastructure), royalties to the NSW Government and company tax revenue to the Commonwealth Government.

The net production benefits and specific economic impacts attributable have been assessed on behalf of the Proponent on the presumption that the Project is eventually built in response to affirmed ship or pay contracts and other indicators of forward demand by exporting mines. That is, the net benefits are conditional on the Project being constructed (at some point in the future) and relieving a capacity constraint that arises in 5 NSW Planning and Environment (2014), Secretary’s Preliminary Environmental Assessment Report,

June, p.5.

6 PWCS (2013), Response to Submissions and Preferred Project Report, Main Report Volume 1, September, p.24.

7 NSW Planning and Environment (2014), Secretary’s Preliminary Environmental Assessment Report, June, p.5.

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the future. If future market conditions are not expected to be favourable then the Project would not be constructed.

The construction of the Project will have direct environmental implications at the site as well as via its role in facilitating additional coal mining and transportation activity.

■ The economic analysis adequately describes the Project from a CBA perspective, although the potential environmental/social impacts arising further up the supply chain are largely ignored. In this respect, the analysis provides a ‘threshold’ with which any environmental/social impacts need to be compared. Some costs to mitigate potential environmental and social impacts have been incorporated as part of the Project costs.

Establishing the Baseline

The baseline for the Project is described in the original economic assessment report (Gillespie 2012, p.8). The report describes the existing coal export infrastructure at the Port of Newcastle which includes two coal export terminals, one operated by PWCS and the other by NCIG.

These terminals have been expanded over the past decade in response to the increased coal exports through the Port of Newcastle. Without the Project, total export capacity at the Port is 211 Mtpa (taking account of current approvals). Three alternative scenarios are provided of the volume and timing of the throughput via the T4. Some of the key assumptions underpinning the analysis are discussed below.

The economic gains from the Project, as modelled, depend critically on the assumption that, given approval, there will be a point where existing terminal capacity is fully taken up, that a T4 expansion will occur with coal shipped from it within 4 years of existing full capacity and that coal supply will be sufficient to fill that extra capacity until recoverable reserves are exhausted.

Three alternative scenarios relating to throughput via the Project are presented. In these scenarios the Project is assumed to be fully utilised in 2021. The scenarios include:

■ Scenario 1: bringing forward coal mining and export (of 1 172 Mt) to the 2017-2035 period which otherwise would have occurred from 2036-2041.

■ Scenario 2: bringing forward coal mining and export (of 2 852 Mt) to the 2017-2059 period which otherwise would have occurred from 2060-2073.

■ Scenario 3: allowing increased coal mining and export over the period 2017-2050 with the cessation of coal production and export in 2050.8

For these scenarios to be a credible future path, a number of conditions must be satisfied. Modelling for the Proponent postulates:

■ sufficient coal reserves to support operations of the T4 project for long enough to allow substantial ‘bring forward’ of volumes mined and shipped.

8 PWCS (2013), Economic Assessment of Modified Design, Appendix S, January, p.10,

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■ mining costs and coal prices (and therefore, implicitly, underlying world coal demand) that combine to generate sustained profit incentives to mine and ship these quantities.

Demand for coal

The immediate need for approving the Project hinges on the future coal export demand through the Port which then triggers the provisions under the Capacity Framework Arrangements.9 This, in turn, is dependent on future world demand for coal as well as future coal prices. These future factors are not known with certainty. This is evidenced by the fact that PWCS revised the Project which reduced the maximum coal throughput capacity from 120 Mtpa to 70 Mtpa. However, the Project’s design allows for future expansion to achieve a nominal capacity of 120 Mtpa, if required (Gillespie Economics 2013, p.4)10 Further, the Project would only be undertaken by the Proponent if market conditions at the time were favourable.

This is consistent with the fact, as noted earlier, that following the contractual handback process the requirement for the Project has been ‘un-triggered’. For its 2014-2023 Hunter Valley Corridor Capacity Strategy, the ARTC noted that:

There is a prospect of modest increases in terminal capacity in advance of T4. At this stage there is no certainty around the scope and timing of such incremental enhancements, or the timing of construction of T4. For the purposes of this Strategy it has been assumed that incremental capacity would be available to meet 2017 prospective11 volume and that T4 would start to ramp up in 2019. (p.7)

The CBA does not explicitly seek to model coal demand into the future. Rather it implicitly assumes that there is sufficient global demand for Australian coal into the future to fully utilise the additional terminal capacity.

Recent data on the demand for Australian coal supports the view that there will be a sustained increase in demand into the future. In regards to metallurgical coal, for example, BREE (2014, p.43) notes that:

China’s imports of metallurgical coal are projected to increase at an average annual rate of 2.7 per cent to 103 million tonnes in 2019, underpinned by increased steel production. While China is by far the world’s largest producer of metallurgical coal, domestic output is typically higher cost and lower quality than imported coal.

India’s plans to expand steel production capacity to support growing steel-use as investment in infrastructure increases are expected to take time to implement. India has some metallurgical

9 The Arrangements regulate the process of capacity allocation at the Port of Newcastle and

were approved by the Australian Competition and Consumer Commission (ACCC) in December 2009. They include, amongst other things, expansion arrangements at the port to facilitate usage of terminal capacity. There are certain agreed triggers and processes for determining whether and when expansions of the PWCS coal loading terminals are required (including the construction of a new terminal where necessary).

10 Any future increase in capacity would be subject to a future assessment and approval.

11 Prospective volumes refer to those volumes that are associated with projects that are moving forward but not yet at a stage where producers wish to commit to a contract.

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coal production, but is likely to rely mostly on imports to meet growing demand over the medium term. India’s imports of metallurgical coal are projected to increase steadily to 46 million tonnes in 2019.

Imports into the European Union and South Korea are projected to increase to 45 million tonnes and 33 million tonnes by 2019, respectively while Japan’s imports are projected to decline to 52 million tonnes.12

There is considerable uncertainty around the extent to which coal will continue to increase as the world’s energy requirements grow. Over the past decade, coal has ‘met nearly half of the rise in global energy demand’ and grew faster even than total renewables.13 However, overall energy demand and the role of coal-fired electricity in the energy mix depends heavily on the greenhouse gas emissions policy decisions made by countries, particularly India and China, which account for almost three quarters of projected non-OECD coal demand growth.

The US Energy Information Administration (EIA) released the International Energy Outlook 2013 projections, which make projections for coal use to 2040. The EIA projects that:

■ non-OECD coal demand will grow, with China and India accounting for around three quarters of this growth.

– China’s consumption of coal is expected to peak around 2035, but China will remain the world’s largest consumer and importer of coal 14

– India’s coal consumption will continue to rise, surpassing the United States as the second largest consumer of coal after 2030. 15

■ OECD coal use would decline, reflecting the impact of fuel market fundamentals and environmental regulations that support a shift to natural gas and renewables, particularly in the OECD Americas and OECD Europe regions.16

The US EIA projects that world coal consumption rises at an average rate of 1.3 per cent each year, including 1.8 per cent growth, on average, across non-OECD countries which more than compensates for the small (0.2 per cent) decline in consumption across OECD countries.17 The US EIA’s historical data on world coal consumption for 1980-2010 and projections for 2011 to 2032 are shown in chart 2.2.

12 BREE (2014), Resources and Energy Quarterly, September 2014, p.45.

13 International Energy Agency, 2012. World Energy Outlook 2012.

14 United States Energy Information Administration (EIA), 2013. International Energy Outlook, ‘Coal’ July 25 2013.

15 Ibid.

16 Ibid.

17 The US EIA projections assume that the carbon price that was introduced on July 1, 2012, which has since been repealed, and would support the reduction in reliance on coal fired electricity generation from 63 per cent in 2010 to 39 per cent in 2040.

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2.2 Projected world coal consumption, 2014 to 2030

Note: While not explicitly stated the text in the document implies that the data includes both thermal and mettalurgical coal.

Data source: US EIA, International Energy Outlook 2013, July, p. 67.

The growth is expected to come from China and India, with China’s share of consumption expected to grow from around 47 per cent (current levels) to 57 per cent by 2025 and decline to 55 per cent in 2030 as a result of the introduction of policies and regulations that encourage the use of cleaner energy sources particularly natural gas.18

■ While there is uncertainty regarding the world demand for coal, we believe that it reasonable to assume a continued rise in demand over the next 30 or so years.

Supply of coal

While there is expected to be a continued growth in the demand for coal, this does not automatically translate into an increase export of coal through the Port.

Coal reserves

The Proponent’s modelling of throughput (under scenarios 1, 2 and 3) recognises that the additional throughput of coal cannot exceed the total coal reserves available for export.

Under the Scenario 1, 7.6 billion tonnes of reserve are available and 15.1 billion tonnes under Scenarios 2 and 3. The figures for Scenario 1 are sourced from ‘recoverable reserves in NSW 30 June 2008’ (excluding the Southern Coalfields and Oaklands). The reserves for Scenarios 2 and 3 assume an increase in reserves of 2 times those available as at 30 June 2008. In all scenarios it is assumed that 80 per cent of reserves are available for export in the future, although the basis for this assumption is not clear.

TAI, citing NSW Trade and Investment figures, have interpreted the total resource stocks assumptions used in the CBA as follows (p.12)

18 United States Energy Information Administration (EIA), 2013. International Energy Outlook,

‘Coal’ July 25 2013.

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Current and proposed projects that would utilise the PWCS facility have measured, indicated and inferred reserves of around 16 billion tonnes. It seems likely that Gillespie Economics have based their scenarios on the assumption that either all or half of NSW currently recoverable coal resources will be extracted and exported.

In its alternative estimates of the value of the project, TAI have not used alternative estimates of the likely resource base. Instead, citing NSW Treasury guidelines, TAI have conducted their alternative analysis imposing an arbitrary 30 year time horizon (from 2014) for calculating the net present value of the project.

The PWCS Response to Submissions on the Preferred Project (p.85) has rejected TAI’s criticism of the use of alternative recoverable reserves as a misinterpretation. PWCS defend the scenario approach on the grounds that it accommodates the inherent uncertainty around the ‘fixed supply of coal in NSW’. PWCS add that (p.85)

‘The recoverable resource figures quoted by TAI are limited to existing projects and ignore the fact that the total recoverable coal resource is considerably greater than just the existing projects.’

More recent data on coal reserves is available since the Proponent’s original CBA. Table 2.3 shows the estimated recoverable coal reserves in NSW at June 2011.

2.3 Estimated recoverable coal reserves , NSW, 2011

Reserves

Mt

Hunter 9 454

Western 4 507

Gunnedah 2 055

Oaklands 1 280

Southern 435

Newcastle 386

Gloucester 75

Total 18 192

Source: NSW Trade and Investment, 2013. 2013 New South Wales coal industry profile.

Of these, all except the Southern and Oaklands coalfields are relevant catchment areas for the Port of Newcastle with a combined estimated reserve of approximately 16.5 billion tonnes.19

The Proponent’s analysis assumes that approximately 80 per cent of the reserves would be available for export. Data for the period 2009 to 2011 indicates that around 55 per cent of the raw coal from the relevant coalfields is exported via the Port of Newcastle.20 This takes account of the fact that coal is also used in the domestic market. This suggests a relevant saleable coal stock constraint of around 9 billion tonnes.

19 NSW Trade and Investment, 2013, 2013 New South Wales coal industry profile, p150.

20 NSW Trade and Investment, 2013, 2013 New South Wales coal industry profile, p8 and p149.

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The amount of throughput assumed to occur under Scenario 1 (over the period 2011 to 2041) was 6.4 billion tonnes, 13.2 billion tonnes under Scenario 2 (over the period 2011 to 2073) and 10.7 billion tonnes under Scenario 3 (over the period 2011 to 2050). On this basis, the Proponent’s throughput assumption for Scenario 1 is likely to be most realistic. We recognise the amount of coal reserves is not static and can increase over time due, for example, to exploration activity. However, for the purposes of modelling the economic benefits arising from the Project, we believe that it is most appropriate to use the current knowledge of reserves available.

■ Based on current available information on coal reserves in NSW, the assumed throughput under Scenario 1 is likely to be the most robust for the purposes of undertaking the CBA.

Price forecasts

Gillespie Economics acknowledges the significant uncertainty around future coal prices. However, in the CBA supporting the Preferred Project Report the central forecasts of coal export prices for thermal and metallurgical coal type used in the earlier analysis for the larger terminal have been retained. In the analysis the CBA assumes export prices of A$200 per tonne for metallurgical coal and A$100 per tonne for thermal coal. It also assumes that 80 per cent of the coal throughput is thermal coal and 20 per cent metallurgical coal. The export price is assumed to be constant throughout the evaluation period.

In its original analysis the Proponent cites export price data from ABARE in March 2011 as the basis for its assumptions. In its Response to Submissions (RTS) the Proponent has cited 2013 NAB forecasts of US $100 per tonne for thermal coal in 2015, at an assumed exchange rate of 0.8, equating to a price of A$125 per tonne.

In its original analysis a weighted average price of A$120 per tonne is employed, however, a lower price of A$107 is used in further sensitivity testing in response to criticisms.

TAI, in contrast, point to World Bank, IMF and Rio Tinto forecasts of declining thermal prices between 2016 and 2025, with the latter price lying in the US $71-$78 range (A$81 to A$89 at current exchange rates). In its alternative CBA the Institute used a constant weighted average (77 percent thermal) of metallurgical and thermal coal price of A$104 per tonne over the 30 year evaluation period for each of its three scenarios.

Both demand for Australian coal and export revenues are based on coal prices set in US dollars and are sensitive to exchange rates. Over the past 15 years the A$ has ranged from below US$ 0.50 to above US$1.10. While movements of this order of magnitude may not be experienced over the next 15 years they cannot be ruled out over the horizon adopted for the Gillespie Economics analysis. Neither Gillespie Economics nor TAI apply exchange rates outside the 80c to 90c range, thereby excluding the long run average rate of 75c from consideration.

Since the Proponent undertook its original analysis, there has been significant changes in prices. As the Reserve Bank of Australia noted in 2013,

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The Newcastle spot price for thermal coal has declined over the past two years, with a particularly sharp fall in the first half of 2012, broadly in line with falls in other global benchmark prices for traded thermal coal. Falls in global thermal coal prices reflected both subdued demand for thermal coal from importing countries and an increase in the volume of traded coal. The Newcastle spot price for thermal coal is now noticeably below the 2012 annual contract price, which is likely to lead to lower contract prices in 2013.21

More recent data is available from the Australia Government of its expected future export prices for coal. Chart 2.4 presents the export prices for coal over the past two decades. Prices for coal exports have risen significantly since the early-to-mid 2000s, particularly in 2008-09, as a result of tight supply conditions and increased demand. However, as noted above, prices eased considerably in 2012-13, particularly for metallurgical coal.

2.4 Average export unit value ($A dollars per tonne, nominal), thermal and metallurgical coal

Note: The ‘Average unit export value’ takes account of the different quality of coal.

Data source: Table 25 Prices of mineral commodities in BREE (2013), Resource and Energy Statistics 2013. http://bree.gov.au/files/files//publications/res/annual_res_2013.pdf

In September 2014, the Bureau of Resource and Energy Economics (BREE) forecast thermal coal prices to be, on average, US$86 per tonne up to 2019 and US$130 per tonne for high quality coking coal.22 Based on a current exchange rate of 0.88 this equates to A$98 per tonne for thermal coal and A$148 per tonne for metallurgical coal. The BREE forecasts are the most current independent forecasts available and, on this basis, should be utilised as the basis of the CBA. There are significant uncertainties regarding coal prices beyond 2019, particularly arising from policy changes in the United Stated and China. In the absence of robust independent coal price forecasts that account for the emerging issues beyond 2019, the BREE projections in 2019 should be assumed in future years in the CBA modelling.

21 http://www.rba.gov.au/publications/smp/2013/feb/html/box-a.html 22 BREE (2014), Resources and Energy Quarterly, September, chapter 4.

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Further, as noted above, the Proponent also assumes that 80 per cent of the coal throughput is thermal coal and 20 per cent metallurgical coal. However, recent data of the coal exports from the Port indicate that closer to 85-90 per cent of exports are thermal coal. Utilising these shares and the BREE price forecasts results in weighted average coal prices that are broadly consistent with that used in the Proponent’s modelling.

■ While export coal prices are highly volatile, the most current data available would suggest that the Proponent’s assumed export prices for metallurgical coal are marginally above current market expectations. However, on balance, the Proponent’s weighted average price assumption is reasonable.

Profitability of mines

Coal production in NSW has the potential to increase, overall, in the longer term as a result of the development of new projects and the expansion of a number of existing projects, particularly for coal.23 The outlook is positive due to reasonable geological prospectivity, infrastructure connectivity and proximity to ports, access to advanced technology and the availability of a skilled workforce.24

In the medium term, however, profitability levels face downward pressure due to high operating costs and the downwards fluctuation in commodity prices. The International Energy Agency (IEA) notes that Australian coal production is subject to some uncertainty, particularly in terms of its capacity to limit cost escalations, which will be necessary to increase export volumes in order to compete with other relatively high-cost competitors such as the United States and Russia.25

BREE has also highlighted the challenges of mine profitability in the near future. It notes that,

Many metallurgical coal operations are unprofitable at prevailing prices. As a result, some companies have opted to reduce or close capacity or change their product mix to produce more thermal coal.26

In regards to thermal coal BREE noted that at current spot prices (around US$73 per tonne),

Many producers are unprofitable, which is expected to support further cost-cutting measures and signals the risk of more mine closures or production curtailments over the remainder of the year.27

Other factors such as productivity levels, reflecting a range of factors from the availability of skilled labour to mining approvals processes, are likely to play a more significant role in determining actual production levels.

23 NSW Trade and Investment, 2013: 2013 New South Wales minerals industry profile.

24 Ibid. p 43.

25 International Energy Agency, 2013. Coal medium-term market report 2013: Market trends and projections to 2018. p 99.

26 BREE (2014), Resource and Energy Quarterly, September, p.41.

27 Ibid. p.45.

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The Proponent’s analysis does not explicitly seek to understand the potential profitability of new mines. It uses an assumption regarding the average costs of mining which have been criticised by the TAI as being too low. There is no robust publicly available data available that would allow us to test the assumptions used by the Proponent in relation to the cost of mining.

■ There are concerns regarding the future profitability of mines which will continue unless there are significant increases in coal export prices or lower cost of production of future mines. There is insufficient information that is readily available to allow us to assess the Proponent’s assumptions regarding the average cost of production.

Quantifying and valuing the changes

As a result of the introduction of the Project, there are a number of changes that arise. These relate primarily to ‘unlocking’ future bottlenecks that would allow the coal to be exported from the Port. This may also have social and environmental impacts but these aren’t quantified.

Bringing forward coal production and export

The main role of the Project is to ‘un-block’ future supply chain bottlenecks at the Port which would facilitate an increase in export of coal through the Port. The quantum and timing of any relief of constraints are based on arbitrary assumptions in the modelling. As noted above, for modelling purposes, the Proponent has assumed that the first coal shipped via the T4 will occur in 2017 and, by 2021, the terminal will at full capacity. Limited evidence is provided to justify the rate at which coal can be mined and exported over this period. As noted earlier, there are three scenarios presented on bringing forward coal mining and export based on alternative assumptions regarding the total coal reserves available for extraction. That is, it allows the coal reserves to be extracted at a faster rate than would have been possible without the Project. Under scenario 1, there are fewer reserves available for extraction (compared to scenarios 2 and 3) and, therefore, the reserves are depleted over a shorter period of time. Under scenario 3, the Project allows coal to be mined and exported for a defined period (up to 2050). We believe that scenario 1 presents a more realistic picture of the reserves available for export through the Port.

The incremental net benefit from allowing the coal reserves to be mined and exported at a faster rate is evaluated in a seemingly conventional fashion if the base case is assumed to be one where the Port’s ‘current’ export capacity of 211 Mtpa is a binding constraint at the outset of the evaluation period, and remains a binding constraint on exports and production for export over the period for which future costs and benefits are considered. This would mean that, without the Project, coal exports from the existing port facilities would have reached the nominal maximum throughput and throughput would persist at that level indefinitely, even though there would be a latent demand from mines to export greater quantities at a faster rate.

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Net production benefits

Given a prediction of future throughput (demand for terminal capacity) the prospective gains from the Project would then be measured as the present value of the future stream of annual net benefits from being able to ship an additional 70 Mtpa over and above the constrained volumes. The 70 Mtpa capacity would reflect the sustained incremental demand being expressed by miners through their willingness to commit to ship- or- pay contracts. This allows the analysis to avoid ‘forecasting’ future demand for the incremental capacity.

However, this approach requires both the binding constraint assumption and the determination of what ‘project life’ to assign to the investment in the Project and in the mines. That is, what is the appropriate time horizon over which to assess future costs and benefits flowing from the Project?

The answer provided by Gillespie Economics depends, in part, on assumptions about both ■ the level of economic coal reserves which determine the upper bound on future

throughput of the port; and

■ the rate of throughput itself.

From the perspective of the CBA, Gillespie Economics uses the net productions benefits which includes:

■ Profits from coal mining companies distributed to their shareholders

■ Mining contributions to community infrastructure

■ NSW Government royalties

■ Company tax payments to the Commonwealth government.

There has been some debate regarding the extent to which the profits distributed to shareholders should be included in the analysis, given that mining companies may be foreign owned and, therefore, repatriated out of Australia. Therefore, as a ‘minimum’, it is reasonable to assume that royalties and company tax payments form part of the benefits stream to the community.

Royalties

The royalties stream was based on the following assumption:

weighted royalty costs were estimated to be A$8/tonne based on the proportion of underground and open cut mining in the Hunter, Gunnedah and Newcastle Coalfields and royalties charged at 7.2% of revenue for underground mines and 8.2% for open cut mines.28

TAI have raised concerns regarding the royalty rates and, in particular, the incorporation of deductions. The Proponent argues that it has misinterpreted how deductions are applied to royalties.

28 Gillespie Economics (2012), Port Waratah Coal Services Terminal 4 Project – Economic Assessment,

February, p.14.

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Using a weighted average price of coal of A$120 per tonne gives a royalty of $9.84 per tonne. The Proponent’s modelling also assumes that approximately 83 per cent of the coal is derived from open cut mines and the remainder from underground mines. Data for 2009-10 for the relevant coalfields suggest that the share of open-cut mines is closer to 70 per cent.29

■ This suggests that the Proponent’s estimates of royalties are likely to be on the higher side.

Company tax rate

The Proponent’s modelling estimates the company tax payable based on a corporate tax rate of 30 per cent to the estimated gross profit of the Project. TAI has criticised this assumption on the basis that the ‘effective’ tax rate is likely to be less given the availability of tax exemptions and depreciation allowances. TAI recommend the use of a company tax rate of 13.9 per cent of gross profit.

The Proponent agrees that the effective tax rate may be lower than the statutory rate but argue that this is dealt with through sensitivity analysis relating to the revenue estimates.

■ While we recognise that the effective tax rate will be less than the statutory rate, there is no readily available information for us to estimate an alternative rate. This suggests that the central case presented by the Proponent overstates these benefits.

Generating the future stream of benefits and costs

The evaluation time horizons

It is common practice to assign a project life for purposes of discounting future benefits that spans major future anticipated impacts on the cost or benefit streams, while recognising that at anything but very low discount rates, distant values of costs and benefits will have little impact on the present value of net benefits. This is the approach recommended and adopted by TAI in alternative benefit-cost modelling of the project,

The analysis in the CBA for the original proposal, and retained for the modified project, specifies the time horizon upfront.30 For Scenario 1, for example, two relevant time horizons are established – 2041 without the project and 2036 with it. The present values of net benefits is then established by discounting those values for the longer period for the base case and the shorter period with T4. The difference between the net present value of the two cashflow streams is the assessed economic value of the Project. It measures the benefits of being able to bring forward the extraction and export of coal reserves that would otherwise have been drawn down at a slower rate simply because of constrained terminal capacity.

29 NSW Trade and Investment, 2013. 2013 New South Wales coal industry profile, p.14-15.

30 The time horizons used in the original proposal for the 120 Mtpa facility are different to those used in the revised analysis for the 70 Mtpa facility.

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This approach is repeated for two alternative scenarios under different assumptions about the evaluation timeframe and, therefore, the volume of throughput via T4 over the period.

The Proponent does not offer any evidence to suggest that the increased rate at which coal can or will be extracted and transported to the Port is plausible. While we have no evidence to the contrary, the assumptions employed do require a significant increase in coal production and transport to the Port beyond that experienced historically.

Further, as noted earlier, the throughput for Scenario 1 is likely to be most realistic given the current knowledge of coal reserves. For this scenario the evaluation period used in the economic modelling is 30 years (2011 to 2041). This is on the basis that the Project commences its first shipment in 2017.

If, however, the Project is assumed to commence at a later date such as that presented in the Proponent’s sensitivity analysis or the TAI’s analysis, then the evaluation timeframe should also be increased. For example, if the Project was assumed to commence operating in 2030 then it would be appropriate to extend the evaluation period to, say, 2050. If an arbitrary cut-off point of, say, 30 years is used on all scenarios then this could significantly distort the analysis.

■ The time horizon utilised for the analysis should take account of the commencement date of the Project and the horizon for the assumed benefits. The 30 year horizon utilised in scenario 1, for example, is appropriate for the evaluation of that scenario.

Net production benefits estimates

The net production benefits based on the 70 Mtpa facility is presented in the following table.

2.5 Net production benefits – Proponent’s estimate and sensitivity testing

Scenario 1 Scenario 2 Scenario 3

Present Value $ billion



Net production benefits

■ Royalties 2 5 5

■ Company tax 4 8 9

■ Other (profits accrued to mining company and shareholders, local community contribution) 7 18 19

Total 13 31 33

Source: Gillespie Economics (2013), PWCS Terminal 4 Project, Economic Assessment of Modified Design, January, p.10.

As noted earlier, we believe that scenario 1 is more realistic (compared to the other scenarios) based on current information on coal reserves. Further, the use of the statutory company tax rate is likely to overestimate the revenues from company tax rates. The net

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production benefits for scenario 1, presented above, should therefore be considered to be an upper limit on the expected net benefits arising from the Project. One of the sensitivity examples, discussed below, is likely to be a more accurate representation of the expected net benefits from the Project.

Environmental and social impacts

The environmental impacts, in part, arise at the site itself. They also arise from the transportation of coal and from the production of the mines. Under the Proponent’s proposed modelling approach, the Project simply brings forward the coal production that would otherwise have been delayed. Therefore, in simplistic terms, it brings forward any environmental costs that could arise. This, of course, ignores any cumulative impacts that could arise from a faster rate of extraction.

By assumption, the Proponent’s analysis assumes that any potential social/environmental impacts that arise from coal mining are dealt with at the mine assessment stage in the future. The Proponent also recognises that there may be some residual environmental impact at the mining stage but the benefits from the mine (if approved) would outweigh these costs.

■ Given the significant uncertainties regarding estimating the potential environmental and social impacts arising from future mining activity, it is reasonable to assume that these impacts would be best considered at the mine assessment process at which point more robust information on potential impacts would be available.

Uncertainty and sensitivity analysis

The Proponent has undertaken a range of sensitivity analysis in the original analysis for the 70 Mtpa facility as well as following criticisms raised in the submissions.

Additional analysis

In response to criticisms about over optimistic coal price and coal cost scenarios, and to the timing of the project. Gillespie Economics has subjected the Project to further sensitivity testing (as at July 2014) which has imposed more adverse cost and price and royalty rate assumptions, along with delayed start and slower uptake of capacity, and reported their cumulative impact on production NPV and the present value of royalties and taxes. This includes:

■ Sensitivity Scenario 1A construction occurs 2016 to 2019, with first shipments 2020 and ramp up to full capacity throughput over 5 years.

■ Sensitivity Scenario 1B construction occurs 2020 to 2023, with first shipment 2024 and ramp over 10 years (i.e. T4 throughput would not reach 70Mtpa until 2035).

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Under these modified scenarios, total throughput are the same. That is, the same total amount is ultimately shipped through T4 as previously modelled for Scenario 1, namely 1172 Mt.

The combined effect of delayed commencement of the project, a lower coal price –higher cost scenario and slower uptake of T4 constructed capacity reduces the present value of the project’s net production benefits and the related modelled royalties which are revenue based by factors of 90 percent and 50 percent respectively under the least favourable assumptions.

The more conservative assumptions that have been made by Gillespie Economics allow for lower but stable31 average coal prices and higher but stable average production costs, and later start dates for the project. However, none of these effects has been accompanied by simulations of a lower total incremental throughput volume than that assumed in the most conservative scenario underlying the original CBA. In other words, sensitivity analysis has been conducted which allows for a (much) more conservative profit margin to miners than that assumed originally, but with no impact of this on the total throughput of exports through the terminal32. There is no feedback by way of a coal industry export supply response. However, the scenario which incorporates a 10 year take up period could be interpreted as a proxy for a modified supply response.

The combined effects of later start and slower ramp-up to capacity throughput are shown to have a very significant effect in themselves on discounted net benefits. Without imposing more restrictive cost and price assumptions, the slower timetable represented by Sensitivity scenario 1B reduces the NPV of production benefits by 40 percent and the NPV of royalties and company tax by 48 percent.

In both the revised CBA and the Response to Submissions (RTS) there has been rejection of the criticisms of TAI that the project is not financially viable and therefore unable to deliver net benefits because it will not be built. Rather, the Proponent asserts that the Project will only be built if is commercially viable. This in turn seems to imply that, if it is built, it will have been constructed on the basis of forward-looking ship or pay contracts and other measures that lock in revenues and reduce any risk to PWCS to acceptable levels. For the CBA modelling purposes this has been equated to throughput levels (and related royalties and tax revenues) that imply full uptake of the incremental capacity provided by the Project.

We note that, whilst future contracted volumes under ship or pay contracts may provide sufficient revenue certainty for PWCS to proceed with the 70 Mtpa expansion at some future date, they do not necessarily translate to throughput certainty and sustained capacity uptake. It would therefore be prudent to subject the CBA modelling to a further sensitivity test to accommodate some degree of future excess capacity due to a failure to

31 The sensitivity analysis reported in the PPR Appendix S does not include any results for a

downward trending average coal price. Neither does the additional sensitivity testing supplied by Gillespie Economics in response to criticism.

32 The incremental throughput of 1172mt is retained throughout this further sensitivity testing by Gillespie Economics.

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sustain initial uptakes33. It is true that if demands from miners emerge that result in ship-or- pay contracts that provide PWCS with satisfactory risk-adjusted expected profits consistent with a 70 Mtpa expansion, these presumably reflect expected profitability in exports of this volume by miners. But, over time, these expectations may not be validated.

Substantial revisions of shippers’ demand for terminal space have already occurred, as demonstrated by the downsizing of the project from 120 Mtpa to 70mtpa capacity. This is also reflected in the ARTC’s Hunter Valley Corridor Capacity Strategy reports which indicate a reduction in contracted volumes between 2012 and 2014.

Staging of the Project

As noted earlier, in its original proposal for the 120 Mtpa facility, the construction was proposed to take place in nominally three stages over an estimated 10 years.34 There was explicit staging of the construction of the terminal. While the 70 Mtpa facility is also envisaged to be progressively constructed in stages in response to demand, there are no formal stages indicated.35

While the Proponent has not undertaken specific modelling to illustrate the impacts of staging on the estimated net production benefits from the Project, they have undertaken additional sensitivity analysis that provides an illustration of how the results change under alternative assumptions on the timing and throughput via the Project. Chart 2.6 presents the throughput assumed under Scenario 1 and an alternative sensitivity scenario of assumed throughput where coal export from the T4 commences in 2022 and progressively reaches full capacity by 2039.

33 It is true that TAI have modelled net benefits under much more conservative throughput

assumptions than Gillespie Economics with resulting large reductions in NPV outcomes. However, these results also embody the use of a different time horizon which has its own impact.

34 Gillespie Economics (2012), Port Waratah Coal Services Terminal 4 Project – Economic Assessment, February, p.9.

35 NSW Planning and Environment (2014), Secretary’s Preliminary Environmental Assessment Report, June, p.5.

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2.6 Incremental Throughput via T4 (illustration)

Data source: Gillespie Economics Excel spreadsheets.

Under this alternative sensitivity scenario, the full capital expenditure associated with T4 is incurred by 2022. This alternative case still results in net production benefits of $1.3 billion (in present value terms using a 7 per cent discount rate).36 This compares to $13 billion net production benefits for Scenario 1. The key driver of this difference in net production benefits is due to alternative assumptions regarding the throughput, rather than being due to delaying the capital expenditure.

This can be illustrated further by changing the capital expenditure profile in the sensitivity scenario. For example, in this sensitivity scenario, there is $1.8 billion of capital expenditure scheduled in 2021 and 2022. If this is, instead, delayed until 2029 and 2030, then it would only increase the net production benefits from $1.3 billion to around $1.7 billion (in present value terms). From the perspective of the CBA, there are losses to society from staging the Project if there is current demand for the 70 Mtpa facility. However, if the demand for the 70 Mtpa facility is not required immediately, there may be gains to society from staging the Project. For example, where there are significant cumulative local air pollution impacts arising from the full construction of the Project and these could be substantially reduced via staging the construction, then there would potentially be significant gains to society.

There could potentially be gains to society from staging the construction of the Project. In these circumstances further information should be sort to understand the scope for staging the Project.

Sensitivity analysis results and the threshold approach to the CBA

The results reported show that under the most conservative assumptions employed by Gillespie Economics the ‘minimum’ net benefits to Australian in the form of royalties and taxes have a present value of at least $1 billion. This compares with an estimated NPV of $3.2 billion under the assumptions employed originally for the Preferred Project 36 This compares to around $13 billion net production benefits under Scenario 1.

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Report (PPR). The largest impact on net production benefits comes through the simulated effect of an increase in mining production costs from $60 per tonne, as originally assumed, to $90 per tonne. Royalties, however, remain relatively stable under these sensitivity tests as there are no simulations of lower future coal prices37 which, if realised, would depress revenues and royalties38.

Sensitivity testing which assumes less favourable cost and price scenarios, but no impact on total throughput, raises the risk that the public net benefits apparently generated will not outweigh the associated (albeit unquantified) environmental and social externalities. In contrast, a scenario which embodies less favourable future coal prices and costs, but also assumes that these will be accompanied eventually by an adverse coal supply and throughput response, will also mean lower throughput-related externalities. So although the monetised net benefits of the project will be reduced so will the relevant ‘reasonableness test’ hurdle.

■ Lower bound net production benefits of approximately $1 billion in present value terms provides a threshold against which any potential ‘residual’ environmental impacts from additional coal mining, transportation and site specific issues can be compared..

Does the option deliver net benefits for society?

As discussed in both the original component of the EA proposal and in Appendix S of the PPR, the economic efficiency gains identified as flowing from the Project are based around the incremental effects by way of net production benefits from the enabled expansion in mining and export activity. The component costs included in the measurement task are the dollar values of the capital and operating costs of the altered mining, coal transport and export activity. Related non- market environmental and social costs, which are arguably more difficult to estimate are not included. Instead, a threshold approach is adopted.

Under this approach, decision makers are provided with the estimated present value of market- related costs and benefits and are required to weigh up the likelihood that any net benefits so estimated would outweigh the present value of corresponding adverse environmental or social costs. The latter may typically have been identified and even quantified in physical terms but have not been assigned dollar values. The modelled net economic benefits then provide a threshold against which identifiable (but not readily monetised) net environmental and social costs can be compared.

37 Other than the sensitivity test of a once- and- for- all downward adjustment to the metallurgical

coal price, which has a minor impact on the average price and resulting revenues, royalties and taxes.

38 By definition, while the NPV of production, which has a profit component as well as the associated taxes and royalties, can be negative under adverse assumptions, the NPV of royalties and taxes themselves will never fall below zero.

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In the case of the Project the resulting net production benefits comprise private and public benefits are identified by the Proponents (Appendix S p.9) as being distributed to stakeholders as follows: ■ Coal mining companies and their shareholders (some of whom are Australian)

■ Local mining communities in the form of contributions to community infrastructure

■ The NSW Government via royalties

■ The Commonwealth Government in the form of company tax.

Under a wide range assumptions the Project delivers positive net production benefits, although the quantum can vary significantly ($1 billion to $33 billion) depending on the assumptions used.

To the extent that the Project is profitable then investors in this incremental capacity will also be beneficiaries. We note that while the last two items above are identifiable public benefits flowing from the project, and are individually quantified in the CBA, the purported benefits to local communities are not separately estimated. Royalties and company tax are correctly represented as the minimum net public benefits under this approach, given that the project proceeds. Even if the Project is operated unprofitably, incremental mining will generate incremental royalties, so this component will always be positive provided the terminal services some increased coal extraction for export.

The relevance of financial viability

The CBA is directed at establishing the likely quantifiable economic gains of project adoption from a public perspective. As such, it is not essential that a project be able to demonstrate private financial viability for it to be judged economically efficient. However, if under plausible scenarios, financial viability (positive production NPV) is sufficiently uncertain, this may be of relevance in assessing the incremental net benefits of project approval as opposed to postponement of approval.

Project approval confers a valuable option on the Proponent. A relevant question is what, if any, corresponding public costs arise that will be incurred if approval is granted but the option is not exercised/deferred indefinitely. The CBA as constructed is designed to demonstrate the net economic benefits if that option is exercised. Sensitivity testing by Gillespie Economics has demonstrated how net benefits respond to more conservative assumptions that result in significant deferral but eventual construction and realisation of planned capacity throughput. By contrast, the modelling by TAI, under its most conservative assumptions on throughput, correspond to a project where exercising the option to construct would have been a commercial mistake.

Applying a threshold test approach: fixed v variable external costs and site remediation risks

If the option to build is deferred, and possibly eventually abandoned, because of future revised price and volume expectations, but all the relevant ‘holding costs’ are private costs, then, provided approval of the project were granted on the basis that satisfied the

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threshold test, a sterilisation or abandonment should be irrelevant. Consequent private losses from this outcome would be irrelevant from a public CBA test point of view. Furthermore, deferral would also mean that those adverse environmental externalities that vary with the volume and timing of mining, handling and shipping of the coal itself would have lower present value costs.

If, however, deferral would mean that there is also postponement of measures to address ongoing adverse environmental outcomes then deferral may lower the present value of ‘variable’ external costs but raise the present value of ‘fixed’ environmental externalities.

A substantial part of the proposed site lies on three licensed landfill areas. The contaminated nature of the site itself therefore imposes ongoing environmental risks. These, and the costs of managing them, may to some extent be reflected in the opportunity costs of the land incorporated in the CBA modelling as they presumably reflect the limited site rental for alternative uses of the site in its current state.

One component, Kooragang Island Waste Emplacement Facility (KIWEF) is owned by the Hunter Development Corporation, and is managed under an Environmental Protection Licence Surrender Notice, held by HDC. A Landfill Closure Plan has been developed for this site component. The two other components sites, Delta EMD and Fines Disposal Facility (FDF) owned by PWCS are managed under two separate Environmental Protection Licenses held by PWCS. A Landfill Closure Plan has also been developed for the Delta landfill. (A Closure Plan does not yet exist for the FDF.) Site capping is an element of these individual Closure Plans.

According to the PEAR (p44)

A Landfill Closure Plan generally provides for the stabilisation of the landfill, suitably manages any remnant human health or environmental risks and provides for future beneficial use of the site.

It can be assumed that both owners, PWCS and HDC, would be obligated to carry through the existing Closure Plans in the absence of the Project. This obligation with respect to the HDC-owned site component is clear. It is contained in the EPA Licence Notice to Surrender which refers to the KIWEF, which stipulates that capping and closure works for two T4 site components be completed by the end of 2014 and mid 2017 respectively. (PEAR p54) The effectiveness of this remediation would therefore be part of the environmental ‘base case’ (i.e. the outcomes without construction of T4).

Further, the PEAR (p54) reports that…

Should the Proposal not be approved a Landfill Closure Plan would be prepared for the Fines Disposal Facility only. The Proponent would implement closure and capping plans for the Fines Disposal Facility and Delta EMD sites, as the landholder. Closure and capping of all other areas would be the responsibility of …Hunter Development Corporation

The time constraints on the capping and remediation responsibilities for the PWCS-owned site components are not clear.

In its response to submissions PWCS has developed, as part of its proposal, a Remediation Action Plan. This, in part, integrates the three individual Closure Plans and integrates them with the construction of the project. It is designed to manage any

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shortcomings that individual capping strategies might face as a result of construction and loads.

The view expressed in the PEAR (p47) is that

…overall, the proposed management of contamination would result in a positive contribution to the environment and human health compared to the current situation and reduces the risk of offsite contamination.

It is unclear when the Remediation Action Plan, with its integrating features would commence, given project approval. It integrates remediation with construction39. If construction is deferred what aspects of the integrated plan would satisfactorily replace the existing closure plans? Unless the Project is implemented with commencement immediate upon approval, as an upgrading of the existing Closure Plans, there must be some uncertainty over ongoing contamination risks.

Approval, followed by significant deferral occasioned by weak coal export demand leaves some uncertainty over the timing and extent of capping and remediation of the two PWCS-owned site components. There is a need for clarification of how delayed commencement of construction might impact on remediation planning implementation and outcomes.

In the event of deferral it appears that there would be additional costs incurred with the need to temporarily cap and remediate the HDC sites by the dates specified above and to repeat this with permanent work when and if the Project goes ahead but with construction starting later than planned in the PPR. However, only the incremental costs incurred in permanent capping and remediation of the HDC site are relevant.

Deferral may mean doing both temporary capping work and later repeating this with permanent work on the two PWCS sites. It is not clear how these costs have been addressed in the CBA modelling, particularly as some of the sensitivity tests involve both delayed starts and slowed development of the 70 Mtpa capacity. As presented by Gillespie Economics, the capital works costs of the Project do not have a specific site capping and remediation component that would be sensitive to deferral of the Project.

In balancing the modelled economic gains against perceived environmental risks, decision making authorities would need to consider whether the reduced present value of net production benefits that accompanies delayed implementation is also likely to be accompanied by delayed site remediation vis a vis a project rejection scenario.

The project is designed so that it may be constructed in stages. This accommodates the ‘slow uptake of capacity’ scenarios that are contained in both the Gillespie Economics sensitivity analysis and TAI modelling. It would be instructive to know how the Remediation Action Plan would be implemented in these circumstances and what this would imply for the contamination status of the individual landfill component sites. These considerations may be relevant to the conditions of approval.

39 This stands in contrast to the draft requirement for the establishment of biodiversity offsets site

requirement at Tomago which is required to start before construction can commence.

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New information

The value to PWCS of having the Project approved upfront is that it would have it in its back pocket just in case coal export demand increases again. It the Project is delayed PWCS would lose this option.

The public may, however, gain from a delay if there is ‘new’ information (that is material and would alter the decision to approve the Project now). That is, in the case of uncertainty there is some value in delaying the decision where the additional time will help to clarify any uncertainties. One case, for example, is where there is additional research being undertaken to clarify the potential human health impacts of coal dust. The most recent report on this issue was undertaken by the ARTC and reviewed by the NSW Office of Coal Seam Gas. We are not aware of any likely new information that would arise in the near future.

Further, there is prospect for new information to arise in the future regarding, for example, the potential environmental and social impacts of mining. However, this information would be taken account of at the future point of assessment of the mine. Therefore, from the perspective of assessing the impact of the Project, new information regarding the impacts at the site or from the transportation of the coal to the site would be most relevant.

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3 Regional economic impacts

As part of its analysis, the Proponent also presents information on the potential regional economic impacts. The original analysis of regional impacts was undertaken using multiplier analysis while, in response to criticisms, the Proponent subsequently commissioned more sophisticated Computable General Equilibrium (CGE) modelling.

Given this, our focus has been on the review of the CBA rather than the regional impact analysis. Nevertheless, for completeness, we present offer some comments on this analysis.

CBA of the Project provides bottom line results which, even when subjected to relatively unfavourable sensitivity analysis, appear to support the approval of the Project on economic efficiency grounds. Setting aside the question of environmental and social impacts excluded from explicit monetisation, net production benefits are positive in all scenarios examined by the Proponent’s analyst.

That is, when compared with the base case of ‘no project’ there is an enhancement of economic welfare as measured by the sum of incremental consumer and producer surplus generated by the project-related investments. CBA is accepted as one means of quantifying project or policy-related economic welfare gains narrowly and explicitly defined to be measured in this way. These gains are approximated in the CBA analysis by the ‘net production benefits’, discussed above, which include government tax and royalty receipts as well as the private surplus, over and above the resource costs attributable to the project.

The CBA results are the product of partial equilibrium analysis. As such, they do not take account of flow-on to other activities through possible price and wage effects of the project on other markets (either in the local region, state wide or nationally). The larger the project, the potentially more significant are these effects. CGE models explicitly capture these effects through interrelated systems of demand and supply equations for multiple sectors/industries.

CBA and CGE have different strengths and weaknesses in assisting policy decisions.40 They are best used as complementary forms of analysis for evaluation of a given project rather than as alternatives. The capacity of CGE modelling to explicitly capture inter-industry effects, and inter jurisdictional effects when based on regional, state and national disaggregated models of the economy, cannot be replicated through CBA. However, CGE is limited in its ability to accurately represent highly disaggregated sectors in the absence of purpose built sub-models. Further, CGE modelling results for measures like

40 Forsyth, P (2014) Using CBA and CGE in Investment and Policy Evaluation: A Synthesis, Submission

DR117 to the Productivity Commission Public Infrastructure public inquiry.

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Gross Domestic Product (GDP) and Gross State Product (GSP) should not be used to infer welfare gains.

What is the equivalent measure of economic welfare change that should be used in comparing CGE results with CBA results? While CGE modelling is used as a form of economic impact analysis to trace the effects of, in this case, an investment shock in transport and coal mining, on local employment, output, capital stocks and real wages, these are not in themselves measures of economic welfare broadly comparable to the bottom line of CBA analysis.41 While resulting (gains in) GDP, GSP and regional equivalents are frequently presented as analogous to the welfare gains of CBA, they do not net out resource costs and are not suitable comparitors.

A closer equivalent measure that can be derived from CGE modelling is consumption (public and private). The net present value of the ‘above forecast’ change aggregate private and public consumption, adjusted for any consequent deterioration in net foreign debt over the project life, is a general measure of welfare gain that can be used.

In keeping with increasingly accepted practice, the Proponents have supplemented the CBA with results of general equilibrium modelling. The modelling by the Glyn Wittwer of the Centre for Policy Studies Victoria University, is based on broadly the same project specification assumptions underlying the CBA.42 As such it adopts the same investment capacity and cost assumptions, export coal prices and broadly similar timing assumptions for construction and ramp up as the CBA.43 The model employed is the dynamic version of the well documented TERM model of the Centre, which is widely acknowledged as incorporating best practice principles in CGE modelling.

The modelling supports the welfare findings of the central CBA analysis. (No CGE sensitivity analysis is performed.) Wittwer reports (p12)

Welfare is calculated at the national level as the net present value of the year on year deviations in private and public consumption at the national level, minus the real discounted change in net foreign debt in the final year of the simulations (year 2035).

The result is a $21bn gain based on assumptions consistent with Scenario 1 in the CBA.

The other economic impact results of note, presented as deviations from the model’s ‘without project’ forecast, include a Newcastle regional employment impact which spikes during the construction phase, declines to below forecast on completion, rebounds and converges to forecast at the end of the evaluation period. This is a reflection of the sticky labour market assumptions embodied in the model which predicts significant increase in real wages over the life of the project.

41 See for example Abelson, P (2011) Evaluating Major Events and Avoiding the Mercantelist

Fallacy, Economic Papers 30 1 48-59.

42 There are some slight differences as noted by Deloitte Access Economics in its review of the CGE modelling commission by the Proponent (letter dated 18 September 2014).

43 The CGE modelling postulates a 6 year construction period and a further 4 year ramp up to full capacity throughput for the expanded facility, which is reached in year 2021. The final year of the modelling is 2035. The CGE modelling is consistent with Scenario 1 in the CGE modelling.

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4 Conclusion

The CIE has been engaged by the PAC to review the economic analysis undertaken by PWCS in support of the Project. The general approach taken to construct the CBA is reasonable, although it only provides a partial analysis due to the exclusion of a range of potential future social/environmental impacts arising from the mining and transportation of coal to the Port. In this sense, the decision maker needs to also consider other information ‘outside’ the CBA to judge the merits of the Project.

The CBA focuses on the net production benefits arising from the Project and estimates these to be between $13 billion (scenario 1) to $33 billion (scenario 3) in present value terms over the life of the Project. Based on our analysis the assumptions underpinning scenario 1 are more realistic than the other scenarios originally presented, although scenario 1 is also likely to represent a high side estimate of the potential gains from the Project.

Following its original analysis, the Proponent also undertook sensitivity analysis based around scenario 1, in response to concerns raised in submissions. Even with its most pessimistic assumptions the Proponent’s still generates net production benefits of just over $1 billion (in present value terms). The results of this additional analysis recognise that there is significant uncertainty regarding, in particular, the future demand for coal and throughput via the Project. Nevertheless, despite the pessimistic assumptions the Project does deliver gains to society as long as it is alleviating some future constraint at the Port.

As noted above, the focus of the CBA on net production benefits excludes the potential social/environmental impacts resulting from future coal mining activities. The Proponent’s analysis assumes that any potential social/environmental impacts that arise from coal mining are dealt with at the mine assessment stage in the future. Given the significant uncertainties regarding estimating the potential social/environmental impacts arising from future mining activity, it is reasonable to assume that these impacts would be best considered at the mine assessment process at which point more robust information on potential impacts would be available.

There are also a range of more localised impacts associated with the Project. Some of these are explicitly included in the CBA, such as the costs associated with the purchase of offsets for defined local environmental externalities arising from the Project. There may also be potential to manage other externalities (e.g. localised air pollution) through the staging of the construction of the Project. This issue could be considered further in order to assess the potential gains to society from staging the construction. Staging can also be advantageous for the Proponent where there is uncertainty regarding the future throughput via the Project.

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A further issue for consideration is the implication for the environmental remediation of the site if the Project is approved but the Proponent chooses to defer the construction of the facility. This would need to be considered under the obligations for all parties under the Closure Plans for the landfill site components of the terminal site.

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A Summary of assumptions

A.1 Assumptions underpinning Proponent and Australia Institute’s modelling

Gillespie Australia Institute

Timeline analysed ■ In revised analysis (in January 2013 documentation), assumes construction occurs from 2012-2017, with first coal shipped from T4 in 2017 with full capacity reached by 2021. These assumptions are used for modelling purposes and whether the Proponent would choose to construct the Project would depend on prevailing market conditions.

■ Timeframe varies between scenarios (scenario 1 – 2041, scenario 2 – 2073, scenario 3 – 2050), based on assumptions regarding exploitable reserves

■ Scenario analysis conducted subsequent to January 2013 report incorporates alternative timing to above

■ Three alternative scenarios provided:

– Low –3 year construction commencing in 2039, first coal shipped in 2039, full capacity of T4 not reached in analysis period

– Mid – 3 year construction commencing in 2026, first coal shipped in 2026, full capacity reached in 2047

– High – 3 year construction commencing in 2026, first coal shipped in 2026, full capacity reached in 2030

■ For all scenarios, the analysis period on which present values are calculated is 30 years (up to 2042)

Throughput estimate ■ Rate of extraction is arbitrarily imposed, the Project being fully utilised by 2021. Total throughput cannot exceed recoverable coal reserves in NSW, utilising known reserves (as at 30 June 2008) of which 80% are assumed to be recoverable

■ Assumes that there are currently ‘binding’ capacity constraints at the Terminal that will be relieved by the Project from 2017 onward.

■ Based on historical (2002-2012) rate of growth of throughput of approximately 3.2% per annum.

Benefits included ■ Company profit and return to shareholders,

■ Royalties to the NSW Government

■ Company tax revenue to Commonwealth Government

■ Company profit – estimates that 90% of mines in the Hunter are foreign owned and profits are expatriated.

■ Royalties but difference in assumptions noted below

■ Company tax but difference in assumptions noted below

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Gillespie Australia Institute

Costs included ■ Capital costs of the Project include those at the Terminal as well as coal transport development costs at the site, including around Kooragang Coal Terminal). It excludes rail costs managed by the ARTC and reflected in the Hunter Valley Corridor Capacity Strategy. Also includes some costs of road access upgrades.

■ Includes additional cost of meeting agreed standards for air pollution (at the time which the analysis was conducted), biodiversity offset costs and costs of land remediation and ground improvements.

Same capital costs included, although different assumptions on timing of this expenditure (noted above).

Inclusion of ‘upstream’ environmental/social impacts

■ No. These are impacts arising from bringing forward coal production. Assumed to be incorporated through mandatory environmental impact assessment of individual mines. Recognition that there may be some ‘residual’ impacts not captured by EIS process.

No. AI argues that the offsets policy should not be assumed to work perfectly.

Share of thermal/metalurgical coal throughput at the Port

■ 80% thermal coal, 20% metallurgical

■ 80% thermal coal, 20% metallurgical

Coal prices ■ Metalurgical - A$200/tonne

■ Thermal A$100/tonne

■ Metalurgical - A$118/tonne

■ Thermal A$100/tonne

Costs of mining ■ Average cost per tonne of A$60 (includes royalty, rail and port charges)

■ Average cost per tonne of A$90 (includes royalty, rail and port charges)

Royalty rates ■ Royalty rate of 7.2% for open cut and 8.2% for underground mines

■ 83% open cut, 17% underground

■ Royalty rate of 7% for open cut and 8.2% for underground mines

■ 80% open cut, 20% underground

■ Allowable deductions of $3.5/tonne

Company tax rate ■ 30% of profit ■ Effective tax rate of 13% on gross operating surplus

Discount rate (real) ■ 7% used as the central case, 4% and 10% used as sensitivity analysis

■ 7% real

PV of monetised impacts ■ $13b to $33b in January 2013 analysis

■ Subsequent sensitivity analysis generates as low as $1b

■ -$780m to $4.9b

Source: CIE

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THE CENTRE FOR INTERNATIONAL ECONOMICS www.TheCIE.com.au

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final report port waratah expansion t4

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