Cause and effect

THE shortcomings of Queensland’s mining export infrastructure are easy targets for criticism, but there is nothing more fundamental to their resolution than the continuing commitment of all the stakeholders. Queensland Resources Council chief executive Michael Roche speaks

Queensland Resources Council chief executive Michael Roche delivered the following speech at Rydges Southbank, Brisbane on 20 February 2008:

In acknowledging the presence of a number of distinguished guests and presenters, I also wish to acknowledge the original inhabitants of the land upon which we meet today.

I’ll begin my comments today by clarifying the message that I bring.

My message is this: The shortcomings of Queensland’s mining export infrastructure are easy targets for criticism, but there is nothing more fundamental to their resolution than the continuing commitment of all the stakeholders.

That includes industry, both public and private service providers, and all levels of government.

The point is that the scale and scope of the challenges arising from exponential demand growth for Australia’s mineral and energy commodities are unprecedented.

And they have implications for every Australian.

Never before have we been presented with the opportunity to support double-digit economic growth in the world’s two most populous nations.

Between them, China and India represent more than one third of the world’s population, and let there be no mistaking their governments’ determination to vastly improve their long-term economic outlooks.

This so-called ‘growth supercycle’ is considered by many independent experts to be an event with potentially decades of ongoing financial, economic and budgetary value for Queensland and Australia.

In the national interest of maximising the value from this once in a lifetime opportunity, what I want to leave you with is the argument for new approaches to a new vision for the resources sector, involving and embracing every Australian.

As many would be aware, the Queensland Resources Council is the peak representative organisation in this state for almost 150 companies with interests in exploration, mining, minerals processing and energy production.

The QRC is the resource sector’s key policy-making body in Queensland, working with all levels of government, interest groups and the broader community. Our work on behalf of members is about ensuring that Queensland’s resources are developed safely, profitably and competitively, and in a socially and environmentally sustainable way.

The resources sector lies at the heart of the Queensland economy. Minerals and energy production provides the incomes, the jobs, the government revenues and infrastructure services that anchor the state’s unique quality of life.

Three simple statistics testify to this role:

First, the annual value of Queensland’s minerals and energy production surged through the 25 billion dollar barrier in 2007, and depending on whose statistical analyses you subscribe to, 30 billion dollars worth is not beyond expectations this year, monsoonal rain notwithstanding.

As a consequence of the commodity demand growth that heralded the start of the 21st century, the resources sector now represents more than 15% of the Queensland economy.

Thirdly — and of increasing importance from Weipa to Coolangatta — the resources sector is now responsible for the employment of one in every eight Queenslanders.

Queensland’s resources sector is uniquely positioned in the global economic order to actively grow and develop for the lasting benefit of present and future generations.

Alternatively, without a sizeable injection of visionary policy from governments, its potential can be squandered….surrendered to other suppliers with perhaps fewer concerns about workforce safety and effective environmental management.

The extent and longevity of the opportunities on offer to Queensland and Australia will hinge on the capabilities of our export infrastructure.

Last year, infrastructure bottlenecks along Queensland’s Goonyella coal chain cost the industry more than 1.2 billion dollars in lost sales and demurrage charges.

This was one of the key findings of Stephen O’Donnell’s independent review of the Goonyella system, jointly funded by the QRC and the state government. It was highly successful in pinpointing concisely the full extent of the chain’s deficiencies and laying out its prospects in a language everyone could understand.

Sadly, there’s every expectation that the Goonyella chain will continue to under-perform in 2008 as the result of constraints associated with expansion programs at Dalrymple Bay Coal Terminal and the Jilalan rail yard. The consequences of recent heavy rain and floods across the Bowen Basin will be measured in hundreds of millions of dollars. Unfortunately, there’s just not enough ‘catch-up’ capacity across the supply chain to make up for lost production at the most severely affected mines.

However, if you can cope with references to lights at the end of a tunnel, Stephen O’Donnell’s report provided a valuable wake-up call for Queensland industry stakeholders. It also highlighted enormous gaps in information that would persist today if not for the value of straight answers to straight questions.

In our view, the O’Donnell Review is a template for national infrastructure audits that were promised some years ago by the Council of Australian Governments, but never eventuated.

In QRC’s pre-budget submission to Federal Treasurer Wayne Swan, we have asked that he give immediate effect to the Rudd Government’s election policy to have these audits undertaken as a national priority.

For those of you unfamiliar with the findings from the O’Donnell Review, there were three major recommendations, which I am pleased to report, are all in motion. QR has ordered an additional half billion dollars worth of new rolling stock to service the Goonyella chain, as well as embarking upon a business improvement program.

The state government is to be congratulated for recognising the urgent need for additional rolling stock and initiating this response as soon as the O’Donnell Review was received.

The third recommendation — the appointment by the Goonyella coal producers of a Coal Chain Coordinator — has come to pass with respected businessman and former senior public servant Ross Dunning taking on the job of coordinating operations in the interests of maximising coal exports.

Just last week Ross held his first meeting with the 13 members of the Dalrymple Bay Coal Chain Board, which comprises the CEOs of the eight coal producers together with executive managers from QR’s track and freight business, the port operators and owners.

We wish him well.

Ladies and gentlemen — export infrastructure is not inherently sexy — rail tracks, ports, locomotives and ship loaders aren’t glamorous — but if they let you down, we all pay dearly.

Every tonne of coal that’s not exported, costs the Queensland budget around $6-$8 depending on how far it’s railed and at what price it is sold.

If export infrastructure is constrained, everyone misses out — right through to the average Queenslander who is — for the most part — blissfully unaware that our industries have been saving him or her around a thousand dollars a year in taxes.

On the other side of the coin, our export customers won’t wait. They will look to buy their coal from someone else if they are not confident in our reliability as a supplier. Export infrastructure failings means that we are literally exporting jobs, royalties and economic activity to competitors.

The management cliché “by failing to plan, you are planning to fail” sounds glib, but it’s spot-on for export infrastructure.

If there is not an agreed plan that describes how export capacity can be expanded; if each participant in the supply chain doesn’t have a clear picture of their role in that expansion; then the results will always be acrimony, inefficiency and lost opportunity.

In this era of global opportunity, we need a new approach. In the early days of the Queensland mining industry, governments were an active partner in fostering growth.

Governments invested in infrastructure ahead of demand, confident that by creating commercial opportunity, sufficient resource activity would occur to allow them to recoup their investment.

It was less high risk than it seemed. Governments did not invest willy-nilly. When they did, the growth dividend was undeniable.

For example, less than five years after a start to production at Mount Isa in the 1920s, the government-owned railway arrived to haul this mineral wealth more than 1,000 km to the coast.

In hindsight, a staggering feat of bold imagination and engineering construction.

Nowadays, resource companies can spend a full five years trying to get a simple price agreed for the use of an existing rail track, which in many cases has already been paid for by industry.

Nowadays, minerals from north and North West Queensland operations are being loaded onto trucks and driven to the coast because QR’s prices can’t compete with road transport.

Clearly, that’s not a sensible outcome. It’s bad for the region, it’s bad for other road users and it’s bad for prospective new resource operations.

Clearly, something has changed to make it commercial reality. Let’s look at prices.

In years gone by, governments took investment risk in return for handsome rewards. Government monopolies were shameless in their exercise of monopoly power.

You paid according to Treasury’s assessment of your capacity to pay. You had no idea what others were paying, nor the terms and conditions that governed how the system operated.

The advent of competition policy focused attention on the deadweight costs of this monopoly power. Gradually, government monopolies were reined in. Prices started to bear some resemblance to costs. Regulatory oversight started to drive down prices towards efficient levels.

In Queensland, the establishment of the Queensland Competition Authority provided a countervailing balance to government monopolies. Suddenly, price increases needed to be justified in economic terms.

Industry was quick to take up the benefits of lower prices, greater transparency and some confidence that each resource company was paying their fair share. The monopolies were paid a price based on the assumption that they were efficient. Clearly many were not, and are still not efficient.

The result was further pressure on their margins. Many of these government-owned corporations barely covered costs, although in some cases, Byzantine accounting systems meant that losses were often not revealed until long after the fact.

Pressures on management to reform and tighten margins are a good commercial discipline for a company competing in a static market. However, commodity industries are far from static. Year-on-year compound growth in the Queensland resources sector has averaged between four and five percent for decades.

That should have been met by a program of investment from government-owned corporations in the form of larger ports, more rail tracks and thousands more rail wagons — plus the power and water to service this growth.

Competition policy also saw governments redefine what it meant to be “commercial”. Somehow it became translated into meaning “maximise returns without risk”. Under this paradigm, governments (and their corporate manifestations) would only invest in fully underwritten infrastructure.

So as long as industry signed take-or-pay contracts, governments would continue to build. Such a narrow definition of “commercial” has real costs. Consider the recent pipeline linking the constantly over-flowing Burdekin Falls Dam with Moranbah.

Additional capacity — at marginal cost — should have been locked in at the planning stage of this pipeline. That could have given new industries, growing communities and even future mining operations almost instant access to water.

Sadly, the pipeline was built solely to meet the needs of companies willing to take or pay. From the outside, that seems like a clear failure to plan. How will future water demand in the region be met? Will the pipeline have to be duplicated some time in the future because we lacked the vision for forward-looking capacity?

In recent times, it has become accepted practice for western governments to assert their economic credentials through budgetary accountability.

This is typified by minimising public debt, the sale of public assets and transferring investment opportunity and risk — for example, finance and infrastructure — to the private sector. Having established these credentials, it’s the QRC’s view that both the Queensland and Federal Governments need to become more than brokers and business case assessors.

Where are the public assets of the future to come from, if not from calculated, bold and visionary investments by governments of the day? To deliver this outcome, governments could reduce their role in areas of traditional infrastructure investment.

In Queensland, electricity generation and rail freight are cases in point.

The state government has shown some preparedness to do just this through QR’s appointment of private sector directors to its Chair and Board and the exploration of opportunities with potential private sector partners for its freight business.

By seriously questioning government-owned corporations’ roles in massive scale infrastructure investments and providing services that the private sector could deliver more efficiently, the government could step out and lead in areas of market failure that continue to restrain Queensland’s growth.

In this respect, there is no more obvious and continuing example of this dilemma than in North West Queensland, where transport and energy services are in dire need of new investment.

The Queensland Government, in concert with the Federal Government, industry and the private investment sector, should be prepared to comfortably shoulder more risk for leading investments.

Prudent investments can establish long-term investment frameworks for private sector operations, while earning direct and indirect returns to the state. No other stakeholder can effectively play this role for Queensland. An explicit industry development role could begin by sharing at least some of the initial investment risk in key commercial infrastructure projects.

Government shouldering this investment risk should not imply a corresponding role in ownership or management of the asset. Rather, governments have a role in facilitating investment on the basis of a ‘pure user-pays’ approach, rather than a ‘first user-pays’ approach.

The distinction is that the first users — essentially industry pioneers — should not be expected to pay an excessive cost to access the infrastructure. Nor should they face a price that capitalises the full cost of the infrastructure over their term of initial use rather than the asset’s full economic life. This ‘first mover’ disadvantage is not in the interests of the state’s economic development.

The state’s role should be to cover the asset’s long-term tail, providing the infrastructure developer — in most cases a government-owned corporation — with certainty of return on the investment until subsequent users are in a position to sign contracts and assume this risk.

The state could then recover its share of investment risk from future users, rather than the current situation whereby first users are expected to underwrite commercial infrastructure projects and subsequent users enjoy the benefits of decreasing costs to scale.

Addressing investment timing decisions is of paramount importance in enabling a sustainable competitive advantage for Queensland. In addition, by smoothing the path for expansions or new operators — the resulting increase in production would also generate a larger base of royalty revenues to the State.

Using the mineral wealth of the North West Minerals Province again as an example, this region has the potential to drive economic activity in the northern half of the state for decades.

The QRC was pleased to welcome the government’s recognition of this potential with the release of a five-year infrastructure plan for the Northern Economic Triangle. Development in the North West continues to be hampered by a mismatch between the investment horizons that shape the demand and supply for infrastructure services in the region.

The demand for infrastructure services comes from mining and minerals processing projects, typically established on the basis of an 8 to 10 year economic lifespan. In direct contrast, many key infrastructure services — including rail and energy — are costed on the basis of 30 to 50 year investment timeframes.

These services are typically provided by government-owned corporations (GOCs) who have the low-risk mandate that I spoke about earlier, and which effectively limits their scope to an explicit industrial development role.

This investment mismatch means that to secure an expansion of infrastructure, the GOC supplier is required to capitalise the expense of new infrastructure over the much shorter mine life. In turn, this dramatically increases the unit infrastructure costs and provides a much greater investment threshold for the start-up of new operations or expansions.

The mismatch in investment horizons, by serving to front-load the cost of infrastructure, increases the cost of starting new mine operations in the region. These higher costs not only deter new start ups but also reduce the time that an ore body continues to be profitable.

On another mismatch issue, in June 2007, the Townsville Port Authority finalised a complex master planning process to map out future expansion paths. In December that year and quite independently, QR Network Access released a draft rail master plan for the Mount Isa to Townsville line.

It’s obvious to us that there is a pressing need for careful coordination of all these worthwhile initiatives. Working independently does not ensure maximum synergies and linkages between all of these disparate planning processes. The focus should be about providing low-cost and reliable transport services to service the inland mineral province and to foster continuing export growth.

Sitting across both processes was the Federal AusLink corridor study which reported in mid-2007 and painted a fairly pessimistic view of the region’s prospects. This dour appraisal of the region’s growth is unlikely to attract AusLink funding. QRC is keen to work with the Queensland Government to ensure that AusLink decision makers have a more accurate picture of the regional growth dynamics.

AusLink-funded upgrades to the Mount Isa-Townsville rail corridor is a means of ensuring that a world-class minerals province is serviced by a world-class rail service. QRC has a firm view that the AusLink processes provide the ideal circuit-breaker for the investment horizon mismatch, which has constrained the development of the North West Minerals Province.

In particular, industry is looking for the government to have a plan for competitive energy pricing in the north and north-west to support its mining and minerals processing potential.

The Premier’s commitment late last year to identifying a practical solution to energy supply for the state’s North West within six months has created the right conditions for detailed examination of a proposal to link the region to the National Electricity Market.

The availability of competitively-priced and reliable energy is paramount to the future of the North West Queensland Minerals Province. Fuels to support electricity generation in the region are limited to a single gas supplier. Alternatively, diesel is used on site. Neither option is cost effective.

While the region remains unconnected to the National Electricity Market, energy prices in Mount Isa are routinely 2-3 times higher than coastal regions connected to the national network. Of greater concern than the price of energy in the North West is its availability.

The region’s aging generation plant is close to capacity, which means poorer reliability. Expansions in capacity require substantial upfront investment by the region’s sole generator.

Here again, the mismatch in investment time horizons come into play.

And while it stays in play, fewer companies will be encouraged to explore for minerals against the vain hope of getting mineral discoveries into production.

As emphasised earlier, QRC is looking for some new thinking in relation to government-owned infrastructure providers.

Industry is not convinced that a vertically integrated QR has been successful.

While QRC has welcomed QR Chair John Prescott’s formation of separate business units, industry concerns remain over the efficacy of the remaining, so-called “Chinese walls”.

With ports, there is a concern that available Board and management expertise is being spread across too many separate GOCs. SunWater is another example of where responsiveness to commercial issues is consistently cited by QRC members as lagging.

Like many of their GOC counterparts who are still grappling with the transition to commercial operations, SunWater’s cumbersome negotiating process starts from an extreme risk-averse position.

Finally, the Dalrymple Bay Coal Terminal privatisation is also not without justifiable criticism, with perhaps the strongest version coming from former Premier Peter Beattie, who is reported to have described it as his government’s greatest mistake.

It is the QRC’s view that the state [Queensland] government needs to engage more actively with industry in examining options for transitioning governance of government-owned infrastructure to a more professional and sustainable footing.

We are not looking to debate the merits of public ownership — but rather promote the most efficient management of these major assets. Perhaps government-owned energy generators making their way in the highly competitive National Electricity Market should be sharing lessons learned.

Queensland has an historic opportunity to secure long-term growth through government leadership.

Strategic planning and a willingness to cover the tail-end of risks on long-life assets are central to realising this opportunity. So in conclusion, what does industry want?

First, industry wants infrastructure that’s reliable. Our trading reputation is based on reliability.

Second, it wants to know how prices are determined, who is exposed to what risks and what the realistic constraints on system capacities are. Greater transparency will result is better outcomes for all stakeholders.

Because of its exposure to global markets, industry needs the flexibility to be able to trade, swap and exchange infrastructure.

It favours competition, and in that respect, has wholeheartedly welcomed the announcement by Pacific National of their intention to compete with QR for the state’s lucrative coal haulage contracts in the Bowen Basin.

And finally, industry wants infrastructure service providers to be responsive to their customers’ needs — now and into what we see as an exciting and rewarding future.

Thank you.

N Michael Roche

Chief Executive

Queensland Resources Council

07 3295 9560

lynleyp@qrc.org.au

www.qrc.org.au

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