Part 1 of 2

BLUE WEDGES COALITION

SUBMISSION TO THE

CHANNEL DEEPENING

SUPPLEMENTARY ENVIRONMENTAL EFFECTS STATEMENT

MAY 2007

Chapter 9

Economics


Introduction

In spite of some scope within the SEES Terms of Reference the PoMC has utterly failed to properly examine the economic case for the project and its potential adverse economic effects

Whilst an economic analysis of the Port of Melbourne has been recently undertaken a corresponding economic analysis of the Bay is yet to be done. Until that has been undertaken the people of Victoria are unable to judge the economic worth of the channel deepening project against the economic worth of the Bay.

The SEES applies a limited and outmoded economic framework which is no longer applicable to 21st Century society. The costs of losing or damaging the range of environmental services presently provided by the Bay for free are not included in the economic modelling for the project.

We submit that a traditional cost benefit approach is not an appropriate tool with which to assess the viability of and need for a project such as channel deepening which involves imposing a traditional infrastructure project into a complex natural system.

After a brief analysis of the applicable SEES Terms of Reference and EES Panel recommendations, this chapter will asses and comment on the Economic analysis as undertaken by PoMC and the Department of Treasury and Finance commissioned PriceWaterhouse Coopers Economic analysis of the Port of Melbourne. This approach could be described as a traditional and limited view of the assessing turnover of the PoMC and the PoMC’s business plan for the future and its claim for the control of Port Phillip Bay.

The second half of this chapter, entitled 21st Century Economic Analysis will assess the project from a perspective more appropriate to the times in which we live. The assessment will take account of the services provided by the Bay and its natural assets, its direct and indirect contribution to the economy and the health and well being of the community – an enlightened and applicable way to assess how any large infrastructure project which aims to exploit natural capital affects that natural capital and the economy reliant on it. 

SEES Guidelines and EES Panel Report

The SEES does not meet all of the SEES Assessment Guidelines and does not address all the relevant recommendations from the Channel Deepening EES Panel Report.

The SEES fails to address the real economic case for the project as required by the Guidelines. It does not give an itemised breakdown in the costs of the project, thus rendering rigorous analysis of the economic case almost impossible.  


The S-EES Assessment Guidelines¹ state that their Economic Impact guidelines are derived from EES Panel Recommendations 3, 88, 100, 102 and 111, and that the core assumptions that underpin the economic assessment will need to be addressed. These include:

• Economic benefits and costs of relevant options, including dredging technologies, disposal of dredge material from the south of the Bay to Bass Strait (if relevant), as well as different dredged material ground options.
• Local, regional and state economic costs and benefits of the proposed dredging campaign (and channel operation) including short and long-term effects on other Bay resource users and ecosystem services (particularly where meaningful quantitative estimates are possible) such as:

• Eco-tourism industry (eg. dolphin and seal tours, Phillip Island Penguin Parade;
• Diving industry;
• Local businesses reliant upon coastal activities;
• Aquaculture and commercial fishing;
• Industrial businesses reliant upon the Bay’s water; and
• Other ecosystem services (eg. processing of nutrients, biodiversity).

• Consideration should also be given to the uncertainty or reliability associated with the economic forecasts and predictions.
• The SEES should provide an outline of project funding issues, insofar as they could affect the distribution or the magnitude of project benefits and costs (e.g. increased fees/costs per container).

The project benefit and costs have not adequately reflected the importance and influence of these factors, as we will discuss in the 21st Century Economics section of this chapter.

Port of Melbourne Corporation’s economic assessment
 
The PoMC’s economic assessment of the channel deepening project is limited by the Terms of Reference, the SEES Assessment guidelines and their vested interest as the proponent of the project.

Under present legislation, an Environmental Effects Statement is undertaken by the proponent. This means the entity who most wants the project to proceed is charged with the responsibility of developing the statement of expected environmental effect. This lop-sided state of affairs leaves the community with an EES or SEES which is little more than an extensive and expensive promotional brochure for the Corporation wishing to undertake the project. It is within that reality that we analyse the PoMC’s case for channel deepening.

The SEES makes numerous assumptions on the benefits over the 27 years of the project which gives a favourable benefit-cost ratio without including all the relevant costs.  These include compensation costs to other Bay users disadvantaged by the project should it go ahead, amelioration of adverse impacts and the costs of a considerable maintenance program.

Project expenditure

Estimated costs of this proposal since 2001.

The SEES reports project cost estimates of $626.6 million³ over the construction phase of the project. In contrast to the EES however the SEES fails to reveal what costs make up this total. At this late stage the budget is still not fixed:

“Following consideration of the SEES it is possible, should the project be approved, that the approved conditions result in additional project costs ... accordingly, all of these matters lead to a revised set of project costs for the purpose of the economic analysis.  This is not considered to be a fixed project budget, as this will be established subject to, and following, project approvals”⁴

At the very least, an alternative cost-benefit analysis using the upper limit of project costs should have been presented to the public.

In contrast, the EES provided a cost breakdown⁵, below which it should be noted the Panel considered should have been further itemised.

Dredging (based on final engineering design and including environmental management)	$240 m
Infrastructure upgrades	$110 m
Relocation of services	$160 m
Miscellaneous	$35 m
Total	$545 m

What are the real project costs?

We submit that the basic failure of the economic assessment is that potential economic benefits have been costed, whilst potential risk outcomes have not. This section will examine major aspects of the project which have either not been costed or have been inadequately assessed and costed.

Dredging

Dredging comprised around 40 per cent of the 2004 estimated costs. What amount has been allowed in the SEES for the dredging contract (Alliance) with Boskalis Australia?  The Alliance between PoMC and Boskalis originally signed some years ago was deemed by PoMC as commercial in confidence when requested by the EES Panel and numerous submitters.  However PoMC’s Part H submission to the Panel on 17 December 2004 included an overview of the Alliance agreement:

(Page 33) Alliance
7.29    An alliance agreement is a form of project delivery where the project proponent and contractors/consultants form a virtual organisation to deliver a project.  This form of collaborative arrangement overcomes a number of disadvantages of the more traditional forms of contracting to deliver a project.

7.30    Under the arrangement for this Project, the alliance relationship is based on a framework of co-operation and mutual adhesion by PoMC and Boskalis to agreed principles and outcomes particularly in relation to matters such as risk and risk sharing, quality, timing, cost and profit.  The alliance parties are also committed to producing outstanding and innovative results.  This is especially the case when it comes to meeting the environmental approvals.

7.31    As Boskalis has already been appointed, it has already spent significant time becoming familiar with local conditions, the development of the EES, and the panel process.  In this way, Boskalis is familiar with the environmental issues of concern to the community, and is actively working with PoMC, in the alliance, to develop dredging techniques that will achieve, or better, the set performance standards.  The Alliance agreement includes financial incentives which are paid for achieving performance indicators related to environmental compliance.

7.32    PoMC considers that the financial incentives are such that they will drive the Alliance to apply, or develop, world’s best practice dredging to complete the Project.

According to Part H, Boskalis was selected from other contractors.  The key point of difference ‘came down to the level of confidence that the selection panel placed in the methods proposed to deepen the Entrance’.

The alliance was signed in early 2004 so what relevance does the ‘original tender’ have to the work currently incorporated in the S-EES? We still do not know the terms and conditions, including clarification of the issues underlined above in Part H, and any penalties for time over-runs due to for example, algal blooms in the Yarra River, which would necessitate cessation of dredging to comply with the EMP and would mean additional costs.

Of particular concern is the reference to risk and risk sharing.  Does this mean that serious ecological problems associated with would be borne by the public of Victoria and not classified as project expenditure?

Infrastructure Cost

It is noted that the SEES allows for structural upgrades to berths at Appleton Dock, Swanson Dock (east and west), Holden Dock and Gellibrand Pier to stabilise the docks beside the deepened channels and enlargement of the swing basins at Swanson Dock and Gellibrand Pier.  What is not known is the estimated cost of these works in the project cost.

Over the short term the PoMC proposes to carry out capital investments in berths, wharves, cranes, yard storage and transport links to meet the port’s needs over the next 10-15 years, to meet the needs for proposed longer vessels and the amount for this work is also a cost against the project.  What amount has been included in the cost estimates?

It should be noted that Pieter Goldie, senior marine and coastal engineer, GHD in his channel and dredged material ground stability study risk assessment report for the EES stated that:

Berth Works

It is understood that the Port of Melbourne Corporation is planning to undertake maintenance works on various berth and other structures along the banks of the Yarra River including major works at Victoria Dock 22-24, Appleton Dock, Swanson Dock and elsewhere.  Implementation of these maintenance and upgrade works may have an influence on stability of the channel from excavations, piling operations and other construction activity.  Again, it is not possible to estimate the possible magnitude of destabilising influences of this type of work.

Assorted infrastructure and development projects along the river tend to modify the geometry and hence the behaviour of the river, with influences on flow and sediment movement, e.g. Docklands Project, Bolte Bridge, etc.

The Port of Melbourne Corporation Port Development Plan 2006-2035  (PDP) lists a 120 metre extension of Swanson Dock to ensure that the dock can cope with up to 3.2 million TEUs by 2015.  In total around $2 billion is to be spent on the redevelopment of the Port in the period to 2035.⁶ What portion of this cost is part of the current project costs, apart from that specified by PoMC to date?

The costs of relocating the Melbourne wholesale fruit and vegetable market to enable the enlargement of Swanson dock and provision of the necessary rail infrastructure is also unattributed. Reported cost $300M.

Services

It is noted that the utility services under the Yarra River and Port Phillip Bay will be protected in their current locations and/or decommissioned and rerouted,⁷ however and examination of correspondence with utility services suggests that commercial agreements may be required to facilitate this.

Melbourne Water (Letter 6 September 2006)

‘Melbourne Water agrees to these works being carried subject to the design certification and resolution of a commercial agreement between PoMC and Melbourne Water.

W.A.G. Pipeline Pty Ltd (Letter 25 September 2006)

‘... the resolution of a commercial agreement between PoMC and W.A.G’.

Gas Net Australia (Operations) Pty Ltd

Letter dated 25 September ‘the resolution of a commercial agreement between PoMC and Gas Net.’

Newport Power Station (Ecogen Energy Pty Ltd)

We note PoMC has recently promoted the idea that it is about to strike a deal with Ecogen.  ‘They would give us two hours notice of plant start up and, if we’re in the area, will cease dredging or move away’ says Mr Bradford, CEO, PoMC⁸  A subsequent statement by Ecogen’s General Manager John Edelsten made it clear that a deal was not quite a close as Mr. Bradford might wish⁹.

Whilst the PoMC might wish to portray that cessation of dredging for two hours prior to operation might guarantee reliable intake of cooling water at all times this fails to address the issue of suspended sediments which might remain in the water column fro several days some of which are contaminated and toxic. It seems a satisfactory economic arrangement to deal with that unfortunate outcome may not yet have been reached – and is therefore another potential and undisclosed cost - a contingent liability in the future?

How much extra cost would all these commercial agreements add to current costs and contingent liability?

Indirect Costs in SEES - Other Bay Users

The SEES does quantify some indirect costs for other Bay users (S-EES 3.31).

Risk Group	Economic Costs ($)
Commercial fishing	1.5 M
Recreational diving	4.1 M
Shipping delay	6.6 M
Blockage of channel	21 K
Total	12.2 M

These allowances are grossly undervalued and do not take into account the realities of a substantial downturn in revenue of these businesses due to the inability to relocate elsewhere or reduction in sales or size of catch.

Indirect Costs not included in SEES

The assertion that any financial losses should fall where they lie and not be included as a contingency item in the total cost of carrying out the CDP is unfair and unreasonable when we are expected to accept all the assumed benefits at face value.  A Mornington Peninsula lawyer is taking detailed instructions from Mornington Peninsula dive organisations and small business owners who fear their livelihoods will be casualties of the dredging project.  The total gross impact could be in the vicinity of $200M.

According to the PoMC however, activities relating to Bay users and businesses which are bay dependent have limited or no measurable economic cost.  We dispute this, and offer the following data:

Land based tourism

We contend that areas in both the south and north of the Bay would be directly affected by channel deepening, including popular St. Kilda, Port Melbourne and Williamstown foreshores, and the southern end of the Bay, the Mornington Peninsula, and to the west, Point Lonsdale and Queenscliff. 

Many businesses are highly dependent on tourism and a downturn in revenue could make considerable impact in the viability of the respective businesses, which include food and beverage, accommodation, petrol sales, and numerous specialist attractions.  In relation to the Mornington Peninsula alone SEES Specialist studies confirm annual figures of:

• over 2.5 million people visit the Bay for overnight stays
• over 900,000 people visit the Mornington Peninsula annually for day trips
• approximately $1.6 billion expenditure on Mornington Peninsula tourism
• when visiting Port Phillip Bay and the Peninsula, 82 per cent of people visit the beach. 

It is acknowledged that, should the program be approved the dredging in the south of the Bay will not take place for the period 18 December to 31 January.  This is only a fraction of the time that visitors stay on the Peninsula, either at their holiday homes, in camp sites along the foreshore.

The following plume maps confirm that turbidity will reach popular beaches in the north and south of the Bay, and even some ocean beaches, which will discourage visitation to the beaches.  This could result in a significant downturn in beach visits with subsequent loss of revenue to many businesses. 

The water quality and Bay health not only directly affect business operators but also the region’s reputation as a clean and safe place to visit.

 

 

 Note the northern Bay plume map is for a contaminated plume.

 



Recreational Fishing

VRFish-Victoria Recreational Fishing Peak Body recently announced¹⁰ that recreational fishing activity in Port Philip Bay alone generates around $1 billion annually, whilst even more recreational fishing related benefits are generated annually via the manufacturing sector. VRFish observes that the channel deepening project would only deliver $2.2 billion benefits to the Australian economy over 28 years. VRFish is deeply concerned about the threats posed by channel deepening.

Ecotourism

A small but successful business sector relies on the 100 or so bottle noised dolphins and the fur seal colony in the south of the Bay. Bottlenose dolphins in particular are under threat as their numbers are low, and their gene pool is specific to the Port Phillip Bay area. Loss of a small number of breeding females could mean the financial destruction of these specialist tour operators.

Social Costs – Amenity, Turbidity and Noise

The SEES acknowledges amenity will be affected.

“Airborne noise impacts on residents near to channels where dredging will occur, may result in adverse amenity.  However, apart from the pile-driving associated with navigations aids relocations, it is expected that air-borne noise from dredging will be at a relatively constant level and will constitute an intrusive noise source”¹¹.

These comments should be read in conjunction with the following comments:

Airborne Noise.  The area that is closest to residential areas is in the north bay channels and the Docklands precinct.  Basset Acoustics, noise assessment specialist for the S-EES, note that the areas most likely to be affected in the northern area of the project, are Williamstown and, to a lesser extent, Footscray and Port Melbourne¹².

Clearly many residents and property owners around Port Phillip Bay would suffer reduced amenity if the project was to proceed.  

Properties overlooking the Bay and the Yarra River areas carry some of the highest property values in the state.  Should there be any long-term damage to the environment of the Bay this would lead to decreased property values in the vicinity. Docklands, Williamstown, Port Melbourne and the whole of the southern Mornington Peninsula, including McCrae, Sorrento and Portsea might all experience property downturns if the project imposed adverse impacts on their region. Should these owners suffer a decrease in the value of their properties as a result of channel deepening it is inevitable that they will seek compensation.

The Port of Melbourne Corporation acknowledge that noise is a concern by noting in its Port Development Plan¹³ that a key issue is ‘buffering to protect the operation of the Appleton and Victoria Dock terminals, and the amenity of Docklands residential and commercial areas’.

Another set of potential costs that have not been included in the Cost/benefit analysis.

Cost/Benefit Analysis – or Benefit/Cost analysis as re-named by PoMC

What’s in and what’s out?

The public of Victoria should not be expected to accept the benefit/cost analysis of 3.3 when he real costs of the project are still in real terms not itemised and unknown. As outlined above, many costs in the economic case are excluded from the analysis, either by design or default giving a false benefit to cost ratio 

Although PoMC has removed the $114 million already spent on project costs from the analysis, we submit it must be included in total costs as it has been spent endeavouring to prove that the project is environmentally sound.  A considerable portion of the funds has been used in items such as the trial dredging, which the PoMC even argues has directly informed the project design.

Benefits based on assumptions

The PoMC’s case for channel deepening is based on a set of assumptions. By making relatively small changes to the costs whilst initially leaving the assumed benefits at $1.936 million, the ratio can turn the project from a ‘goer’ into a ‘maybe’. 

In the following, we have also made an assumption – our estimate of more realistic figures – which shows an entirely different benefit.


*    The $114M sunk costs to date including trial dredging is included in this amount.
**  The costs have very conservatively been assumed at $1000 million but most likely would be more.  However, even on this amount it equates to a net value benefit of just $7 million per annum.  No allowance has been made for funding.

The S-EES Benefit Cost Analysis states:

In estimating the distribution of project benefits, we have assumed that the cost recovery strategy will recover the costs of the project from the containers, dry bulk and liquid sections roughly a proportion to the benefits that accrue to each.  We have further assumed that the costs recovered from users include the costs expended prior to January 2007¹⁴.

Therefore, the sunk costs must be included in the project cost. This means the PoMC’s reported Cost-benefit ratio is already misleading.

Costs

Our costs have been assumed to be $1 billion due to realistic assumptions of costs per cubic metre, based on recent dredging projects at other Australian ports (Adelaide, Geraldton) and includes a contingency for additional cost estimates associated with dredging due to compliance with Environment Management Plan (EMP), and other potential costs such as reconstruction of shipping berths; extension of infrastructure to cater for trade growth; and maintenance dredging.

An analysis of dredging projects is at Attachment 9.1

 Our estimate still does not include compensation to businesses and individuals due to loss of income, business failures or property valuations as a result of the project.

Benefits

We predict a reduction on the benefits due to a smaller number of the larger ships coming to Melbourne, a reduction in the percentage increase in container traffic through a slow-down in the Australian economy and world trade with a reduction in the number of containers through the Port of Melbourne (as has already occurred over recent years) due to an increased throughput in Brisbane and Sydney. 

The following figures give an indication of trade fluctuations over the last financial year which, if continued, would render even our assumptions unachievable, let alone the PoMC’s and result in a negative cost-benefit analysis.

Containerised cargo

Port	Number of containers			Percentage increase
	2004/5	2005/6	Increase
Brisbane	726147	766278	+40131	5.5
Melbourne	1910441	1929925	+19484	1.02
Sydney	1375610	1445465	+69855	5.07

Source: Australian Government Department of Transport and Regional Services, Bureau of Transport and Regional Economics, WATERLINE, Issue No. 41, December 2006.

It is acknowledged that the above figure of 1.02 per cent growth for Melbourne is for one year only but it falls way short of the projected annual growth of 6.71 per cent whilst both Brisbane and Sydney produced sound results.

Scaremongering has no place in a cost-benefit analysis

The PoMC promotes any reduction in throughput at the Port of Melbourne as a disaster for the citizens of Victoria, when it may only be of consequence to the Corporation. We contend business will proceed as usual in Victoria whether or not we have 12 metre draught access or 14 metre draught access.
Statements such as:
“Costs would be borne by Victorian importers and exporters if failure to deepen the channels results in Melbourne being dropped from the itinerary of the modern deep-draught container ships, which are need to service Australia in the future.  Should this eventuate, it is estimated that the additional cost for shippers would rise from around $100 million per year in the early years to around $450 million per year in 2035” .

…….should be seen for what it is – a beat up.
Additional costs of $450 million distributes across the PoMC’s estimated 7 million containers in 2035 is equal to around $65 per container carrying on average in today’s terms $48000 worth of goods.  This is a miniscule 0.13 per cent. This is not going to have any appreciable affect on the transport costs of business by 2035.¹⁵

How deep do the channels need to be?

PoMC’s claim that 30% of ships currently cannot enter or leave the Port fully loaded also requires further analysis. Data in its own SEES in fact confirms quite a different scenario¹⁶.

• 1356 container vessels visited PoM in 2005-2006
• 361 (27 per cent) had a maximum design draught of over 11.6 metres…..BUT ONLY
• 17 took advantage of tide assistance on arrival
• 11 on departure

So, a little more than 2 per cent of total container ship visits used tide assistance, and although almost 30 per cent of ships were designed to draw more than 11.6 metres draught if required, only 2 per cent were required to.
PoMC is distorting the facts.

When asked at the House of Representative Standing Committee on Transport and Regional Services, 27 July 2005, how deep the channel would need to be for the larger cape-type vessels, Mr Bradford, CEO, PoMC replied:

“The immediate need for the port is for vessels up to 13 metres and 14 metres in a 30 year horizon is more than adequate.  Projections for vessels greater than 14 metres we would see as remote, but that would also require a change to the Melbourne facilities, because Swanson Dock with it width and length, would become an issue with bigger vessels”¹⁷

In contrast to Mr. Bradford, a representative of the Hapag-Lloyd Shipping Line states:

“Strongly of the view that the projected depth would not be sufficient, that in a few years the same questions will arise about 14 metre draught vessels”¹⁸

It would appear that the PoMC in carrying out the project would not meet the needs of the shipping industry and the project is only a short-term fix.

What ships will be coming and how will their size affect the cost/benefit analysis?

Using PoMC’s own data, around 73 per cent of vessels coming to Melbourne at 2020 are expected to be under the maximum size¹⁹. Hence the $1577 million in assumed benefits is considerably reduced.
PoMC makes some predictions as follows:
“The benefits of the project are very heavily biased towards the later years of the evaluation period:  in these years not only is the volume of the cargo larger but the

---