Wallarah 2 Coal Project

The Wallarah 2 Coal Project is a proposed coal mine project being promoted by Korea Resources Corp / Sojitz Corp. The mine is located north-west of Wyong in New South Wales.

The project was initially expected to be commissioned in 2013 and produce 5 million tonnes per annum of thermal coal. At the time estimated cost of the project was $700 million and projected to employ 300 people when operating. However, the mine proposal was rejected in 2011 by the then Labor government following strong community opposition.

Rejection
In 2011 the Wallarah 2 mine was rejected by former Planning Minister Tony Kelly weeks before Labor lost power in March that year. Environmental concerns regarding the impact on water quality were the reasons for the rejection, although in response, Wallarah 2 general manager, Kerry Heywood stated that “water was not an issue in the previous determination”.

2013 Developments
Plans for the Wallarah 2 mine were resubmitted with the NSW Government in January 2012. The consortium behind the project is led by the government-owned Korea Resources Corporation (KoRes). KoRes lodged a development application in October 2012. Craig Thomson, the controversial former Labor member, now Independent member for Dobell, put forward a private members bill to stop the export of license of KoRes in 2013. The bill was rejected by then Prime Minister Julia Gillard on the grounds that the use of federal environmental law would be more appropriate.

Economic Assessment
Economic assessment of the Wallarah 2 project was undertaken as part of its environmental impact statement (EIS). The assessment was written Gillespie Economics on behalf of environmental consultants, Hansen Bailey. The assessment consisted of a cost benefit analysis (CBA) and input-output model. This assessment was reviewed by public interest economics group, Economists at Large, in a submission to the EIS.

The CBA came to the conclusion that the total net production benefits will result in $671M. A minimum of $346M of these benefits will accrue to Australia. The net production benefits of $671M will be distributed amongst the following stakeholders:


 * Wyong Areas Coal Joint Venture (WACJV) will receive $325M in form of after tax profits
 * The Commonwealth Government will receive $139M in form of any company tax
 * The NSW Government will receive $207M via royalties
 * Local community will benefit of voluntary contributions

According to the input-output analysis the contribution to the NSW economy is estimated to make up the following:


 * $900M in annual direct and indirect output
 * $507M in annual direct and indirect regional value added
 * $154M in annual direct and indirect household income
 * 1,711 direct and indirect jobs

Review of Economic Assessment
A review of the economic impact assessment was undertaken by Economists at Large in June 2013. Economists at Large suggested the economic assessment overstated the economic case for the project and criticized a lack of transparency around key calculations. They claim that without confidence in these results it is impossible for decision makers to make an informed assessment of this project. The following points were criticised by Economists at Large:

Calculations of royalties and Commonwealth taxes
In the benefit cost analysis by Gillespie Economics, the royalties to NSW consist of $207M. The analysis doesn’t contain a discussion what royalty rate has been applied in this calculation. NSW coal royalties vary depending on the type of mining and the depth of operation. The tax revenue of $139M seems to be calculated with a tax rate of 30%. While a corporate tax of 30% is theoretically faced by companies, it is more likely that mining companies in Australia face a tax rate between 13.9% and 17%. Applying this tax rate would overstate the value of the project by $75M.

Production
An indicative production schedule is not contained in either the economic appendix or in the main body of the EIS. Without this information it is difficult to calculate the royalty and tax revenue and to understand the viability of the project.

Price
The assessment is based on a Newcastle benchmark coal price of $AUD99/t. But without the specifications of the coal it is difficult to assess the price that may be received for it. This should be considered by decision makers.

Costs
The capital, mining and processing costs seem unrealistically low. Assuming that the project produced 4mtpa of saleable coal, this implies costs to free on board in Newcastle of $48/t. Normally NWS coal mines have cash costs per tonne of between $55-80/t. This price affects the commonwealth tax payments, which are based on income rather than the production volume.

Wider economic considerations
Economists at Large were critical of the inclusion in some calculations of the CBA of a social value of employment. The inclusion of a social value of employment “would overstate the extent of proposal benefits”. Furthermore the external costs due to environmental impacts on water supplies, air quality, amenity and local traffic were not taken into account. Ignoring these external costs overstates the project value, especially to the local residents who are affected by the negative environmental impacts.

Use of input-output modeling
The use of the input-output modeling for economic impact assessment and the emphasis placed on its results by Gillespie Economics and Hansen Bailey creates a misleading impression of the importance of the project according to Economists at Large. Neither the Australian Bureau of Statistics nor the NSW Treasury encourages input-output analysis to estimate economic costs and benefits because of assumptions which result in an exaggeration of the project value.

Conclusion
The current assessment is not suitable for decision making in its current form. The assumption and discussion of royalties and tax rates is crucial if the project has to be justified and must be explained and discussed in a comprehensible way. In addition the inclusion to social benefits of employment and misleading use of input-output modelling need to be revised before decision makers can use the assessment.

Project website
Website: http://www.wallarah.com.au/index.html

Related SourceWatch articles

 * Australia and coal
 * New South Wales and coal

External resources
Economists at Large

External articles

 * Ian Kirkwood, "Call to stop $1billion Wallarah 2 mine", Newcastle herald, October 19, 2011.
 * "MP vows there will be no coal mining under his watch", Central Coast Express advocate, June 15, 2012.