The Australia Institute made written and in-person submissions to the Planning Assessment Commission on Shenhua’s Watermark coal project in June 2014.

The economic and agricultural assessment in the Environmental Impact Statement (EIS) for the Watermark project is flawed. It is based on biased modelling techniques and ignores the risks the project presents to the region’s agricultural industry. The financial benefits of the project have been overstated and costs understated. The project will not return a net economic benefit to the New South Wales Community.

Flawed modelling

Input Output modelling was used to give a biased impression of the project’s economic impacts. This type of modelling has been rejected by recent Planning Assessment Commission reviews as well as the NSW Treasury, the Australian Bureau of Statistics and the Productivity Commission. Key flaws in the model include:

• Assumptions of unlimited water, labour and land
• Assumption of fixed prices
• No consideration of agricultural impacts

The results of this modelling are unreliable as they are certain to overstate positive impacts.

Impacts on agriculture ignored

Both the economic assessment and the Agricultural Impact Assessment assume there will be no impacts on agriculture outside of the project area and its biodiversity offset area. All agricultural impacts are assumed to be costed in through acquisition of the land for the project. Expert opinion and submissions from local stakeholders reject this position, particularly in relation to impacts on water resources. Expert review has concluded that the EIS groundwater assessment is unreliable.

Agricultural data in the EIS is outdated. It was collected in 2005-06, predating major water reforms. These reforms reduced groundwater entitlements in the area by 67 per cent, driving huge investment in water efficiency and wider agricultural reform. The EIS fails to incorporate these recent changes in its assessment and as a result:

• Does not consider the risks of the project to the $1 billion of investments the region’s 249 irrigation businesses have made in irrigation infrastructure and capital equipment.
• Does not consider the reduced land values of groundwater dependent properties.
• Does not consider the increased returns of irrigation as a result of this investment. Irrigation increases regional income by approximately $40 million per year.
• Does not consider the reductions in spending in the wider economy that would come with impacts to irrigation.  Irrigation boosts spending by around $25 million per year in the local economy.

Cost benefit analysis not credible

Key assumptions in the cost benefit analysis of the project are unrealistic:

• Coal prices used are 30 per cent above current levels and over 20 per cent above long term averages.
• No allowance for capital cost overruns are made – average cost overrun has been over 50 per cent in the last two years.
• Operating costs used are 20 per cent below Australian averages.

We have re-run the cost benefit analysis using more realistic assumptions, which results in a substantial reduction in project value, summarised below:

Sensitivity testing of financial net present value

Assumes 7 per cent discount rate over life of project and production schedule from EIS

Under these more realistic scenarios:

• The project will be unable to pay required royalties and remain viable
• No federal taxes would be paid

Coal industry presented in misleading way

The Department of Planning and Environment’s Environmental Assessment Report (EAR) overstates the economic importance of the coal industry in setting the context for the assessment. Contrary to widely held views:

• The NSW economy is focused on services – the coal industry contributes only 2-3 per cent of gross state product.
• Coal is not a large employer – less than 1 per cent of the NSW workforce works in the coal industry. The Liverpool Plains is similar, with only 2 percent.
• Coal royalties contribute only 2 per cent of NSW government revenues.
• Coal has been declining as a portion of domestic electricity generation and many analysts consider global markets to be declining.
• Creating long-lived coal projects works against climate change policy.

Watermark project will produce net economic loss to NSW

There is currently considerable controversy over the way economic assessment of coal projects is carried out in NSW following rejections of proponent’s claims by PACs and NSW courts. The Watermark EIS economic assessment has been prepared by the same consultancy responsible for most of these controversial assessments. 

Like those projects, the Watermark assessment understates the project’s costs and overstates its benefits.  The assessment does not make clear that any modest financial benefits of the project will largely flow to overseas owners, while the impacts on agriculture and the environment will be felt by the local community.  The project will not return a net benefit to the NSW community and should be rejected on this basis.