31 Jul 2013

How Bulga Burst Mining's Economic Bubble

By Rod Campbell

Rio Tinto lost the Warkworth mine case because its economic claims were overblown. Rod Campbell, an economist who advised the community of Bulga, explains how they got  it wrong

On Monday, NSW Resources Minister Chris Hartcher, released draft amendments to planning legislation with the stated aim of “promoting the development of significant mineral resources”. The “significance” of the resource is to be judged primarily by its “economic benefit, both to the State and the region in which the resource is proposed to be carried out”.

These amendments are widely seen as a response to the Warkworth case; the David-and-Goliath-style victory by the community of Bulga against Rio Tinto’s Warkworth coal mine extension in the Hunter Valley. In April, the NSW Land and Environment Court overturned the approval of the project, stating:

[Environmental and social] matters must be balanced against the economic benefits and positive social impacts in the broader area and region, which are substantial. In my view, balancing all relevant matters, the preferable decision is to disapprove of the carrying out of the Project.

Having lost one fight, the Goliaths of Rio, the mining industry and the NSW Government are now seeking to change the rules to ensure it does not happen again. But it is ironic that they have called for a focus on economic benefits of resource projects, as it was Rio’s exaggerated claims of the mine’s economic importance that contributed to Chief Judge Preston’s decision (pdf):

I am not satisfied that the economic analyses provided on behalf of Warkworth support the conclusion urged by both Warkworth and the Minister, namely that the economic benefits of the Project outweigh the environmental, social and other costs.

In fact, this case had an unprecedented focus on the economics of the mine. The court heard evidence from no less than six different economists, including the mine’s consultants – Rob Gillespie from Gillespie Economics, Professor Jeff Bennett from ANU and Dr Andrew Searles from the Hunter Valley Research Foundation. The Bulga community had its own economists: Dr Richard Denniss from the Australia Institute, Professor John Quiggin from University of Queensland and myself, from Economists at Large.

The three economic reports that had been part of the mine’s original application were subject to close scrutiny and found to be lacking.

First was a cost benefit analysis (CBA). CBA is generally considered the most important form of economic analysis for project assessment as it seeks to estimate the changes in economic welfare – ie does the project make society better off?

The original CBA claimed the project would bring $1.9 billion in “net community benefits” to the people of NSW. The court heard however, that this analysis was flawed. In fact, the vast majority of the benefits of the mine would accrue not to the people of NSW, but to overseas shareholders. In court the mine’s consultants conceded that from a NSW perspective the benefits were actually around half a billion dollars — still, as Preston CJ noted, a “substantial” benefit, but only a quarter of what was originally claimed.

Second was a “choice modelling” study, which attempted to place monetary values on the environmental and social impacts of the mine. Choice models rely on a multiple choice questionnaire given to members of the public. After reading some background material respondents select their preferred combinations of environmental, social and financial variables and with some sophisticated mathematics analysts attempt to place a value on the variables.

The Warkworth choice model estimated the values that the NSW public places on endangered vegetation ($460,000/ha), “highly significant” Indigenous sites ($33 million per site), displacement of rural families ($38 million per family) and mining jobs ($31,400 each job per year).

Most projects do not attempt such a study, which can be expensive and time consuming. The proponents deserve credit for commissioning it and attempting to incorporate these values into their assessment.

Unfortunately the study was not carried out in a way that provided useful results. The judge found that “the information provided to survey respondents was not … sufficiently accurate to enable them to make informed and meaningful choices.”

Furthermore, the multiple choice options presented to respondents included no option for “no mine”. They were forced to place a value on aspects of the mine that they may not have actually held.

Finally, the court examined an input-output model of the project’s economic impacts. The mine’s economists used this model to predict the project would create 44,000 “direct and indirect” jobs. That’s a job for every man, woman and child in a town like Port Macquarie or Shepparton purely because of this project.

The assumptions behind the model which led to this estimate included a definition of “job” that lasted for only one year and an assumption that there was an unlimited supply of skilled labour ready to work on this project without taking people away from other industries. The judge found that this data was “deficient”.

So does the minister really want a closer focus on the economics of mining projects? If so, he will be disappointed to find that the flaws found in the Warkworth economic assessment are common. For example, consultants to Xstrata’s nearby Bulga mine, Economic Consulting Services, recently made exactly the same mistakes – including foreign profits in NSW benefits and using an input output study to exaggerate employment estimates.

Serious scrutiny of the economics of many major mining projects shows that proponents' claims are routinely overstated. Royalties to state governments are important, but other benefits largely accrue elsewhere. Mining is a minor employer in direct job numbers and claims of “indirect” and “downstream” jobs rarely withstand review. If the minister wants to ensure significant projects go ahead, he might want to change his definition of “significant” – again.

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