A few of us at Economists at Large have lived in China and we all learned the hard way that when someone gives you a high denomination bill, it’s a good idea to hold it up to the light and check the watermark, making sure that Mao is looking back at you from the right spot.  Similarly, when a major coal company, Chinese or otherwise, slips a government an economic assessment claiming to deliver $1.6b in economic benefits to the public, its a good idea to take a close look.

We did just that to Shenhua’s Watermark Coal Project economic assessment, on behalf of the Caroona Coal Action Group.  After a good look, we don’t think the Watermark (get it?) is quite right.  The summary is below and here’s a link to the full report. Ecolarge 2013 Watermark submission  Here’s the original assessment by Gillespie Economics.  Gillespie 2012 Watermark assessment.  And here’s a hat tip to where I got these images.

Summary

Does the Watermark look right to you?

The socio-economic assessment of the Watermark Coal Project is not suitable for decision making in its current form.  It fails to clearly demonstrate the economic benefits of the project to NSW and Australia, overstating the financial case for the project, while understating impacts on agriculture, environmental and health.  It is not clear that the project represents a net present benefit to the community.

Key issues that need to be considered include:

• The assessment relies on the proponent’s unsourced forecast of semisoft coking/PCI coal prices of AUD$142.  This is substantially above other analysts’ estimates.
• The assessment assumes the project will be able to sell 86% of its production into metallurgical coal markets.  Historically, much PCI coal is not able to be sold into metallurgical coal markets and is instead sold more cheaply as thermal coal.
• Royalty revenue is the most important benefit from the project for decision makers to consider.  The assessment seems to overstate royalty revenue in present terms by $82m.  The assessment’s royalty calculations are not transparent or adequately explained.
• Estimates of tax revenue in the assessment rely on high prices and theoretical company tax rates rather than the effective tax rates that mining companies in Australia face.  This serves to overstate the likely tax revenue by around $700m.
  

  I realise I’m pushing the joke here, but there aren’t enough cute girls on our site anyway.

We estimate the financial benefits to Australia of the project are around $541m.  The economic impact assessment and cost benefit analysis do not present an accurate picture of the negative impacts of the project that need to be considered and could well outweigh this financial benefit.  Negative impacts include:

• Impacts on agriculture due to increased cost and reduced availability of:
  • Labour
  • Water
  • Freight
  • Impact of air quality and coal dust
  • Impacts on external costs such as:
    • Ecology, including threatened species and ecosystems
    • Aboriginal heritage
    • Human health
    • Greenhouse gas emissions – particularly if production is eventually sold into thermal coal markets
    • The assessment includes a misleading value on the social benefit of employment which has been widely criticised and is not included in standard cost benefit analysis.

In conclusion, the Watermark project is not accurately presented in the economic assessment.  The economic case for the project has been overstated, while its social and environmental costs have been understated.  Without considerable revision it is not clear that the project represents a benefit to the NSW or Australian community and should therefore be rejected.