Big projects are destablising in the short term and have minimal impact in the long term, says economist.
By KIERAN FINNANE
“It’s that Territory mentality: if it’s a big thing with lots of cranes, then it’s really good for the economy. But it’s about as good for the economy as two high schools in the long run.”
Economist Rolf Gerritsen, research director at the Alice Springs campus of Charles Darwin University, is talking about the $20 billion INPEX gas project and its impact on the Territory economy. The Alice Springs News Online asked him whether it is the “game changer” from which “all Territorians” will “ultimately benefit” as Chief Minister Paul Henderson (pictured) would have us believe.
Professor Gerritsen pours cold water on that idea: “It’s the way we see economic development. We don’t see the university here, for example, employing an extra two people as economic development, but it is. They generate demand in the local community, a more sustainable kind of demand than these big projects.”
Mr Henderson told the audience of ABC TV’s Q&A in October that “this amazing investment” is going to “underpin our economy for the next 40 to 50 years”.
Not so, says Prof Gerritsen. “These big projects distort the economy. It’s such a small economy, Darwin’s basically a small regional city. You build an internationally significant project like this there, you’ve just completely restructured the economy while it’s being built and then afterwards it has a fairly minimal impact on the economy.”
Major projects will test resilience
This week Mr Henderson announced another “major milestone” in the project’s progress: a signing ceremony of the Sales Purchase Agreement for the gas, which he saw as “a vote of confidence in the Territory’s future in the resource sector”. The announcement came on the heels of the Treasurer Delia Lawrie’s Mid Year Report which touted the “resilience” of the Territory economy that sees us “well positioned to take advantage of the major projects on our horizon”.
Major projects will test that resilience, says Prof Gerritsen.
He explains why: “This is the same thing that happened with ConacoPhillips [operators of the existing Darwin LNG plant] but it will happen on a bigger scale. In the construction phase INPEX will be a very large employer. For 18 months it will denude the Darwin labour market.”
Shortly after ConacoPhillips had set up in Darwin Prof Gerritsen (pictured at left) surveyed business about its impact on recruitment and staffing: “The number of businesses in Winellie that had lost skilled tradesmen to Conaco because they were paid 50 grand more! Some firms had lost metal-workers and other skilled tradesmen who went to be cleaners at the construction site because of the money.”
Why is wages money no object for these big projects? It’s because they’re using borrowed capital, which seems counter-intuitive, but the point is to do what it takes to get as quickly as possible to the production phase.
“Up till now for all the preliminary works INPEX would be using their own money, their equity capital. But when they start building they’ll be going to the banks saying we want to borrow $x billion. No company wants to risk that amount alone, so they borrow. There’ll be a lead bank and a syndicate of banks, probably around 12. They’ll all contribute some of that money to spread the risk. But there’ll be very tight conditions on repayment because there’s no sovereign risk in Australia [ie, no risk that government action would cause an unforeseeable loss without legal remedy].
“They’ll have to repay within eight years and if they’re smart they’ll do it quicker. The money is also subject to very considerable exchange rate and interest rate pressures so they have to build as fast as they can. That creates a boom but it destructures the Darwin economy. It took Darwin about three years to recover from Conaco to the point where businesses got back to paying a reasonable wage and being able to attract and keep staff.”
Fly-in, fly-out workers will take money home
But won’t there be a lot of money burning a lot of holes in Darwin pockets? Not as much as you’d think.
Prof Gerritsen expects that a lot of INPEX jobs will go to ‘457’ workers from countries like the Philippines and to fly-in, fly-out workers from around Australia, all of whom will be taking most of their money home with them. Furthermore, when the construction phase finishes the big construction companies involved will “pinch the best labour”.
“They have got used to earning $160,000 instead of $105,000 and they’ll fly them in and out from Kalimantan or wherever. That’s basically what has happened in the Pilbara, with most workers flying in and out from Perth, but also Sydney and Melbourne. Darwin can’t suddenly import 2000 workers with families because there’s no housing for them.”
And big projects don’t do that kind of community building any longer, says Prof Gerritsen.
“Roxby Downs is the last town that a mining company will build in Australia. Construction phase costs are large and it’s best to knock them off quickly. Fly-in, fly-out increases your costs slightly but you write it off against company tax. So the Australian taxpayer is basically subsidising fly-in, fly-out operations. The gold mines in the Tanami are essentially fly-in, fly-out or drive-in, drive-out, coal mines in Queensland are mostly drive-in, drive-out.”
So, once the Darwin economy stabilises, what then?
“This plant will probably employ 150 workers in the long-term, that’s just not many jobs. Profits will go off-shore and most tax revenue will go to the Commonwealth Government, as it’s the Commonwealth that levies company tax. There’ll be a payroll tax benefit to the Territory but in terms of overall extra tax revenue for the Territory the effect will be minimal.”
The Chief Minister on Q&A cited royalties as the source of benefit “for all Territorians”, saying it would be the responsibility of government to disperse those payments “through the community in terms of better education, better housing, better health”.
Prof Gerritsen says there won’t be “huge amounts from royalties”.
“Our minerals royalties are profits-based – not volume or value-based, as for other states. So unless or until INPEX makes a big profit – which it won’t before they pay off the capital they borrow to build the plant – they will pay very little by way of royalties.”
Some benefit may arise if INPEX does a deal like ConacoPhillips did, funding the West Arnhem Land Fire Abatement project to offset their carbon emissions.This at least Prof Gerritsen describes as “a great project”.
“It’s the future for an Aboriginal economy in that part of the world, carbon trading is potentially a huge market for them.”
He expects that INPEX will also sponsor a lot of things, as a good corporate citizen, “but that’s $5000 here, and $15,000 there”.
So, after this reality check, what about NT Treasurer Delia Lawrie’s upbeat assessment of the economic outlook for the Territory? She claims the government’s historically high infrastructure spending – up from $885 million in 2008-09 to $1.7 billion in 2010-11 and an estimated $1.5 billion in 2011-12 – supported Territory jobs through the Global Financial Crisis and “positioned us for future growth”.
Next election will be ‘a great one to lose’
But Prof Gerritsen says the Territory’s level of debt, which is “going up quite dramatically”, is a concern.
“If I were Terry Mills I’d run dead in the next election, it’ll be a great one to lose. But politicians always think they can solve problems. They can’t because there’s a structural problem with our budget and we’ve made it worse.
“When the economy was going well from about 2004 to 2007 or 2008, they should have been running big surpluses and retiring their debt. But they weren’t, they were running small budgets actually at deficit because they were allowing debt to accumulate and spending money on being popular.
“Now they’re in a situation, because of the slowdown in the Australian economy, of GST receipts being down. Their forward estimates assumed that the GST revenue would keep going – though they’re not the only state government to have done that.”
Ms Lawrie’s Mid Year Report has GST revenue for the NT revised down by “some $60 million”, bringing the cumulative drop since the start of the Global Financial Crisis to $670 million.
Says Prof Gerritsen: “The Treasurer can talk about being Keynesian, spending more money and running a deficit, even a cash deficit, but in actual fact they’ve been running deficits for the last eight years so they really don’t have much room to move.
“If they really wanted to make a difference to the economy they’d have to run a huge deficit.”
While making no apology for their recent record infrastructure spending, the government is implementing a “gradual pullback”, says Ms Lawrie (pictured), ahead of the major projects starting next year.
But they “are not going to solve the Treasurer’s fiscal problems”, says Prof Gerritsen.
Is there a step by step strategy that would? Yes, he says – but it would involve pulling in Darwin’s and Palmerston’s belts.
“We’ve got to stop hiring public servants. We should have about 12,000 public servants in the Territory, but we’ve got about 18,000 – 3000 of them added since Labor came in.
“We need to reduce what I consider to be wasteful expenditure. Big cuts in the budget for recreation, for instance. There are things that people in Darwin expect, they want to see AFL games, each football code wants its own stadium and oval, it’s mad, you can’t afford that.
“But if a change were proposed, the electorates are small, you may only need 50 people to vote differently to knock off a sitting member. I don’t see how that will change.
“I see more Commonwealth intervention. Personally I think that’s a good thing because our prioities seem to be boat ramps and water gardens and there’s a strong urban bias.
“In Alice Springs when we take our kids to the new aquatic centre, we pay. When we go to Leanyer Water Park in Darwin we don’t pay. It’s owned by the Territory Government. And Palmerston, which is growing rapidly – it will soon have another seat – wants exactly the same thing, on the same terms, free and same level of facilities.”
But what about wealth creation, stimulating a more productive economy?
“Spending on basic infrastructure is what we need, on roads in the regions. Not on the sort of infrastructure that has cranes on the skyline, that’s generally inefficient. Like the Convention Centre – we subsidise it. We’re running a socialist economy!
“But we’re a democratic electorate so where the majority is, the government will keep spending money on dual carriageway boat ramps.”
Pictured: Top – Ross Engineering workshop in Alice Springs.
Recruiting staff, already a nightmare in Alice Springs, will become even more difficult when INPEX starts competing for skilled workers.
That’s the view of Neil Ross, from Ross Engineering. On the other hand, the giant project – if it gets its final approval – may offer business opportunities for firms in The Centre, the huge distance from Darwin notwithstanding.
Getting staff is likely to be even worse than when ConacoPhillips was hiring. Workers were expecting $150,000 to $200,000 and “you have to fly me back home every two weeks,” says Mr Ross. “We can’t afford that.”
He says it’s clear much INPEX work will go overseas but even “the crumbs” are a lot of money for Territory firms. Many Darwin companies are “putting themselves on hold” in expectation of work from the gas project.
Alice Springs will be sandwiched between two giant projects, with Olympic Dam to the south. But Mr Ross says he’s taking a “glass half full” approach, keeping an eye on opportunities in Darwin as it may become a supply base for offshore rigs.
Above left– Upgrading regional roads would be the kind of infrastructure spending that conributes to economic development for “all terrtorians”, says Prof Gerritsen. Here, a section of the Plenty Highway, photo from our archive.
Above right – The Alice Springs Aquatic Centre. Users pay to go there, while the Leanyer Water Park in Darwin is free – an example of the urban bias in the territory’s budget, says Prof Gerritsen.