ABN 59 050 486 952

Level 13 133 Mary St Brisbane Queensland 4000

T 07 3295 9560 F 07 3295 9570 E info@qrc.org.au

www.qrc.org.au
QRC
submission

Working together for a shared future





































Strong Choices for
Queensland
May 2014


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CONTENTS


EXECUTIVE SUMMARY ................................................................................................................................ 3

INTRODUCTION ........................................................................................................................................... 4
1. THE NEED FOR FISCAL REPAIR ........................................................................................................ 4
1.1 The state government debt is unsustainable and carries a high opportunity cost ................... 4
2.2 QRCs preferred policy options for retiring debt ........................................................................ 4

2. DIVESTMENTS MUST COME WITH PROTECTIONS FOR USERS ....................................................... 5
2.1 Users of the Gladstone Port, Port of Townsville and the Mount Isa-Townsville railway line
are highly vulnerable to a new owner misusing monopoly power ........................................................ 5

3. INCREASING TAXES WILL IMPACT UPON EMPLOYMENT AND INVESTMENT ................................. 6
3.1 Increasing royalties the most inefficient of all tax options ........................................................ 6
3.2 Resources companies have cut costs substantially but cost problems persist ........................ 6
3.3 A quarter of Queensland coal is being produced at a loss ......................................................... 7
3.4 The impact of high costs on new investment ...............................................................................
3.5 Governments commitment to the coal sector in September 2012 ......................................... 11
3.6 The difficulties confronting the metals sector ......................................................................... 11
3.7 The Queensland CSG/LNG sector is losing its global competitive position ............................ 13
3.8 Alumina and aluminium smelting and refining making negligible returns ............................ 14

4. REFORMS THAT ENCOURAGE INVESTMENT THE RIGHT COMPLEMENT TO ASSET SALES ......... 14
4.1 The importance of regulatory certainty in encouraging investment ...........................................
4.2 High taxes, labour, rail, energy, and regulatory (approval) costs can be addressed through
policy reform .............................................................................................................................................

5. CAPITAL RECYCLING AND PRODUCTIVITY ENHANCING INFRASTRUCTURE ............................... 17
5.1 The infrastructure requirements of the Queensland resources sector ......................................




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EXECUTIVE SUMMARY

The Queensland resources sector acknowledges the fiscal position of the Queensland Government
and the steps taken by it to identify and communicate the risks and challenges of an unsustainable
debt burden with industry and the community.

The state government has identified options to return the budget to surplus and to retire debt.
From a public interest perspective, increasing the array of inefficient state-based taxes such as
royalties is the least desirable option.

Up to date analysis for this submission by leading economic consulting firm Wood Mackenzie and
economic modellers Lawrence Consulting highlights the magnitude of the risks associated with any
increase in royalties.

Despite vigorous cost cutting by all coal mines, 25 percent of all coal currently produced in
Queensland is being done so at a loss (measured on an FOB cash cost basis) including half of all
thermal coal production. If these mines were to shut, the direct loss of coal company spending on
wages and goods and services purchases in Queensland would total $4.2 billion with a total loss to
Gross State Product exceeding $9.7 billion, or 3.2 percent of the entire Queensland economy. Over
60,000 jobs throughout Queensland would be lost. The loss of state government royalties would
amount to around $330 million a year.

One of every 10 tonnes of coal currently produced in Queensland is incurring a loss of more than $14
per tonne. These mines are at extreme risk of shutdown. This would see the loss of $1.8 billion of
spending power in the Queensland economy and the total loss to Gross State Product would exceed
$3.6 billion, or 1.2 per cent of the entire Queensland economy. Over 22,000 jobs across Queensland
would be lost. The loss of royalties would amount to $120 million a year.

Queensland copper and zinc producers are precariously positioned on their respective global cost
curves and in no shape to absorb a further royalty hit.

The CSG/LNG sector is already burdened by onerous and uncompetitive regulatory costs (mainly
complex and heavily conditioned approvals) and substantial increases in operating costs such as
drilling equipment, pipelines, roads, processing facilities and labour. Some $60 billion is being
invested by the sector in the reasonable expectation of royalty stability.

A further increase in the bauxite royalty rate, especially the rate on bauxite consumed domestically,
would add to the competitiveness concerns of the Queensland alumina refining industry.

Given the governments need for significant and prompt revenue flows to stabilise debt levels and
lower state borrowing costs, the QRC supports the governments proposal for selected sale or leasing
of assets, subject to appropriate regulatory and commercial safeguards being discussed with industry
and implemented prior to divestment.

To achieve structural improvements in the states finances, there is a need for higher revenue flows
now and into the future. Government reforms targeted at lowering costs, improving productivity and
encouraging new investment in the resources sector will lead to stronger flows of sector royalties to
the state.

Assuming improvements in cost structures and commodity prices, the resources sector can be
expected to continue to invest in new projects based on the strength of global demand fundamentals.



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With minerals and energy resources in Queensland tending to be more remote and deeper,
developers require more supporting infrastructure to reach market, and are forecasting lower returns
from new projects. Smaller and mid-tier resources companies struggle to finance the infrastructure
they require and capital is becoming increasingly mobile as alternative provinces open up globally.

INTRODUCTION

The Queensland Resources Council (QRC) is the peak representative body for the commercial
developers of Queenslands minerals and energy resources.

With a voluntary membership of more than 300 businesses with interests in the sustainable
development of minerals and energy resources in Queensland, the QRC enjoys 100 percent support
from the states coal producers, over 90 percent of metals production, the four major developers of
Queenslands export CSG/LNG industry and a large cohort of minerals and energy explorers.

The QRC marked its 10
th
anniversary in 2013 with a membership base now responsible for more than
430,000 direct and indirect jobs through $38 billion in wages and salaries and local purchases of
goods and services. The resources sector is now calculated as responsible directly and indirectly for
one in every four dollars of the Queensland economy and one in every five jobs.
1


Minerals and energy are the primary source of export income for Queensland. Today, the sector plays
a fundamental role in shaping Queenslands regional future by contributing to economic growth,
creating high-paying jobs, and supporting research and development, regional infrastructure, new
services and investment. The future growth trajectory of the Queensland resources sector will play a
crucial role in achievement of the Queensland Plans regionalisation objectives.

1 THE NEED FOR FISCAL REPAIR

1.1 The state government debt is unsustainable and carries a high opportunity cost

The Queensland resources sector acknowledges the fiscal position of the Queensland Government
and the steps taken by it to identify and communicate the risks and challenges to industry and the
community.

A $4 billion per annum interest bill carries high opportunity costs, including investment in essential
social and economic infrastructure throughout Queensland.

1.2 QRCs preferred policy options for retiring debt

From the material presented by government in its recent Economic and Fiscal Challenges and related
documents, Queenslands unique influencing factors include:

A need for significant additional revenues given projections that a BAU approach will see the
states debt increase to $121 billion by 2022-23.
A need for prompt revenues ($25-30 billion) to stabilise debt given the substantial opportunity
costs in servicing it and the imminent risk of further credit downgrade/s that will increase this
debt per dollar borrowed.

To this end, a program of asset sales with careful consideration to what is in the long term interests of
the state, and appropriate regulatory and commercial safeguards, is the most realistic policy option
given the need for significant and prompt revenue flows to stabilise debt levels. To maintain current

1
QRC/Lawrence Consulting analysis at www.queenslandeconomy.com.au


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standards of living, there is also an obvious need to inject higher revenues now and into the future.
Reforms that lower costs and encourage additional investment in the resources sector are strongly
encouraged in this context.

2 DIVESTMENTS MUST COME WITH PROTECTIONS FOR USERS

In response to the Queensland Commission of Audit finding that the commercial operations of
Gladstone Ports Corporation (GPC) and Port of Townsville (bundled with the Mount Isa-Townsville
railway line) should be offered for long term lease to private operators, we note that government is yet
to accept this recommendation, stating instead:

....the proposal is worthy of an open and transparent community debate to establish its
viability and to inform stakeholders of the costs and benefits involved.

The QRC supports the governments cautious approach and welcomes the opportunity for
engagement.

The QRC is strongly of a view that public interest must be defined by reference to the long term
impacts of government decisions. Consideration should be given to whether reforms strengthen the
partnership and alignment of interests between the state as the owner and custodian of the states
resources, and the producers whose role is to generate economic value from these resources.

Reforms should also promote responsive capacity development, competitive supply chains and global
competitiveness. Ideally, the sale proceeds should exceed the net present value of any future fiscal
revenues (including earnings, royalties, and taxation revenues) that are likely to be foregone as the
result of the sale.

2.1 Users of the Gladstone Port, Port of Townsville and Mount Isa-Townsville railway
line are highly vulnerable to a new owner misusing their monopoly power

Current and prospective resources company users of the Gladstone Port, Port of Townsville and the
Mount Isa-Townsville railway line have the following concerns:

Given limited port and rail alternatives, material pricing risk is introduced for current and
future users if a non-industry aligned owner attempts to extract unearned economic rents by
pricing on the basis of what the market may tolerate, as opposed to an appropriate rate of
return that also supports long-term growth of the resources sector.
Monopoly pricing is likely to negatively impact investment in current and future resources
projects and reinvestment in existing projects because higher infrastructure charges will
translate into higher operating costs and reduced global competitiveness. Further, the
transfer of profits from resources companies to the port and rail owners will reduce margins
and the value of companies equity. The risk profile is substantially increased because of
infrastructure pricing and access uncertainty.
It is material who becomes the owner and the operator. For example, pricing and
development risk is introduced if a monopoly owner in the supply chain were to own and
operate the port as certain rail expansions and resource projects could be favoured over
others. Generally speaking, resources sector companies have a preference to operate export
facilities, as this promotes operational efficiency and cost control.
Private investors may be more financially constrained than the state to undertake the projects
necessary to improve the capacity and efficiency of port operations. A private investor may not
take a long term view due to the strong incentives to earn high returns on already committed
capital. In this respect, the terms by which privatised export infrastructure is to be expanded
is of high importance when structuring and finalising a sale or lease arrangements.


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There are a variety of ways to address these risks, including reviewing and strengthening current
contracts between users and the Gladstone Ports Corporation (GPC), Port of Townsville and
Queensland Rail, and/or imposing a regulatory regime. The correct response depends on a number of
factors, outlined in Appendix One.

3 INCREASING TAXES WILL IMPACT UPON EMPLOYMENT AND INVESTMENT

3.1 Increasing royalties is the most inefficient of all tax options

Consistent with other like studies
2
, the 2009 Henry Tax Review calculated the burdens of Australian
taxes. On both measures (marginal and average excess burdens), royalties were the most
economically inefficient of Australian taxes with an average excess burden of 50 cents of consumer
welfare per dollar of revenue.

Put another way, for every dollar raised in royalties, 50 cents in welfare is lost elsewhere in the
economy due to the adverse impact on investment and consumption.

3.2 Resources companies have cut costs substantially, structural cost challenges persist

A valuable statistic is where resources companies sit on their respective global cost curves.

A global cost curve in this context refers to a graph of the production costs for all the mines or
companies in that particular industry. This curve allows an individual mine or resources operation to
see how its production costs relate to competitors. Cost curves are important in industries like
resources where most producers receive the same or similar prices for their products. Companies
will often refer to the quartile of the cost curve in which they sit. It is highly desirable for companies to
be in the lowest first (1
st
) quartile the 25 percent of the industry with the lowest costs.

The QRC surveyed the CEOs of full members (across all sectors) to divulge cash operating cost curve
information and ascertain where the same operations sat in 2008 and 2013. Of those surveyed in 2013,
19 companies responded with 25 operations in total. The exercise was repeated in March 2014, this
time with 21 companies and 30 operations in total. These operations were a mix of mining, minerals
processing, oil and gas production and other activities.

In 2008, and very positively, over 80 percent of operations sat in the 1
st
and 2
nd
quartiles meaning only
20 per cent were exposed to higher risks in the upper 3
rd
and 4
th
quartiles. In 2013, following a
sustained period of high prices and considerable competition for business inputs, the balance shifted
and only 40 percent of operations remained in the lower 1
st
and 2
nd
quartiles. This meant the majority
of producers were under serious competitive threat if they could not reduce their cost profiles.

In 2014, 30 percent of those high risk operations successfully reduced costs to fall back into quartiles
1 or 2 (total 70 percent) reflecting comparable cost profiles to the 2008 results (refer Chart 1). These
cost reductions have come in the main from considerable reductions in operating costs (i.e. letting go
of direct employees and contractors) and productivity gains.

These survey findings provide clear evidence that the resources sector is working hard to address cost
problems that emerged over the past half decade. Industry has not sat around waiting for others such
as government to come to the rescue. At the same time, industry believes all stakeholders have a
role to play in improving the competitiveness of the sector in increasingly difficult operating
environments.


2
Including GST Distribution Review (Greiner 2012)


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Chart 1: Queensland resource operations cost curve quartile comparison 2008-2013-2014





3.3 A quarter of Queenslands coal production is running at a loss

Queensland coal producers continue to experience their most difficult operating conditions in more
than a decade with low prices (exacerbated by the persistent strength of the $AU against the $US) and
comparative high costs despite the substantial cost management programs being pursued across all
companies. This situation poses a number of risks to the state, notably the real risk of more job losses
if taxes are raised.


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Chart 2: Global coal prices ($US/t)


Thermal coal

From a high of $AU122 per tonne in September 2011 (6,000kc NAR), thermal coal spot prices today are
around $AU73/t (refer Chart 2 above). Given predictions of continued moderate demand growth, but
continued oversupply (exacerbated by considerable new supply from mines committed during the high
price period), indications are that thermal coal prices may have reached their ebb in the current cycle
but price recovery is not expected to be strong.

Despite vigorous cost cutting, at current spot prices some 49 percent (30mt of 60mt) of the thermal
coal currently produced in Queensland is being produced at a loss (FOB cash cost basis refer Chart
3). Further, 20 percent (12mt of 60mt) of the thermal coal currently produced in Queensland is being
produced at a loss greater than $14 per tonne and must be at extreme risk of mine closure. Producers
are continuing to focus on lowering unit costs by producing more tonnes in servicing take-or-pay
contracts. However, we could see more mines close as companies decide that the superior option for
minimising losses is to cease operations.



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Chart 3: 2014 Seaborne thermal coal FOB cash cost curve


Metallurgical coal

From a high of more than $US300/t in September 2011 to a low of around $US113/t currently for top
premium metallurgical coal (refer Chart 2) and less for PCI and semi-soft brands these markets
continue to suffer from oversupply and weaker Chinese demand as it attempts to control steel
production overcapacity and adjust to slowing industrial growth.

As with the thermal coal analysis, despite vigorous cost cutting 14 percent (21mt of 150mt) of
metallurgical coal currently produced in Queensland is being produced at a loss (FOB cash cost
basis). Further, 5 percent (7mt of 150mt) of the metallurgical coal currently produced in Queensland is
being produced at a loss greater than $10/t, thereby risking shutdown (refer Chart 4).



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Chart 4: 2014 Seaborne metallurgical coal FOB cash cost curve



With prices for semi-soft and semi-hard and PCI brands around $US30/t lower than for prime product,
a number of these producers would not be recovering cash costs at current levels. Like thermal coal,
these producers will continue to focus on lowering unit costs by producing more tonnes and to service
take-or-pay contracts. Also of concern is that considerable new tonnes will enter the market over the
next period (a legacy of mines committed during the high price period).

The difficult decisions by Queensland coal companies to lay off in excess of 8,000 direct and contractor
workers over the past 12-18 months and vigorously pursue reductions in operational expenditures in
the Bowen and Surat Basins illustrates the pressures facing producers.

In summary

Despite vigorous cost cutting by all coal mines, 25 percent of all coal currently produced in
Queensland is being done so at a loss (measured on an FOB cash cost basis) including half of all
thermal coal production. Using economic modelling by Lawrence Consulting it can be concluded that
if these mines are forced to shut, the direct loss of coal company spending on wages and goods and
services purchased in the Queensland economy would total $4.2 billion and the total loss to Gross
State Product would exceed $9.7 billion, or 3.2 per cent of the entire Queensland economy. Over
60,000 jobs throughout Queensland would be lost. The loss of state government royalties would
amount to around $330 million a year.

One out of every 10 tonnes of coal currently produced in Queensland is incurring a loss of more than
$14 per tonne, and these mines are at extreme risk of shutdown. Shutdowns would result in the loss
of $1.8 billion of spending power in the Queensland economy and the total loss to Gross State Product
would exceed $3.6 billion, or 1.2 per cent of the entire Queensland economy. More than 22,000 jobs
across Queensland would be lost. The loss of royalties would amount to $120 million a year.




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3.4 Governments commitment to the coal sector in September 2012

In its 2008 budget the ALP state government introduced a tiered coal royalty rate regime with a new
rate of 10 percent applying above $A100 per tonne, and the then existing 7 per cent rate applying on
the portion of the coal price up to $A100 per tonne.

In its 2012 budget, the Newman Government lifted the 10 percent royalty rate to 12.5 percent for coal
valued above $100 per tonne and less than $150 per tonne, as well as an added marginal rate of 15
percent for prices above $AU150 a tonne. Regrettably, the failure to index this threshold means that
the real effective royalty rate increases year on year.

In his 2012 budget speech Treasurer Nicholls gave an unequivocal commitment to the coal sector
when he said:

To give certainty to industry the government will guarantee no change to the royalty rates for coal for
ten years from 1 October 2012.

The Treasurers commitment was reinforced by Deputy Premier Jeff Seeney on 11 September 2012:

Coal mining is critically important to Queensland and this guarantee to keep royalties unchanged for
the next decade allows companies to make investment decisions with total confidence.

The QRC also appreciates the clarifying statement from the Newman Government in explanatory notes
accompanying the Strong Choices survey:

The Queensland Government increased coal royalty rates in the 2012-13 Budget and has committed
to not changing the rates for 10 years. Increasing mining royalty rates at a time of lower commodity
prices may impact on the national and international competitiveness for Queensland mines and will
impact on jobs.

Increasing royalties may make resources companies less competitive on the world market.
Ultimately, these companies may choose to close some projects, and abandon the development of
others, affecting jobs and other investment in Queensland.

3.5 The difficulties confronting the metals sector

The Queensland metals sector continues to experience difficult market conditions with prices for
copper, gold, lead, zinc and silver lower than 12 months ago as global supply catches demand. It is a
sector also having difficulties reining in costs and finding productivity gains against the geological
challenge of deeper deposits.

Queensland copper and zinc producers are precariously positioned on their respective global cost
curves. Of five copper producers analysed, all sit in quartiles 3 and 4, meaning they are vulnerable to
being replaced by lower cost new mines (refer Chart 6). More favourably, the three Queensland zinc
mines that were analysed were positioned in quartiles 2 and 3 (refer Chart 7).

Queenslands North West Mineral Province (NWMP) has a reputation as one of the worlds most
prospective metals regions. The issue for NWMP is that a new generation of deep surface exploration
technologies must be deployed to aid major new discoveries. Furthermore, significant improvements
in hard infrastructure (e.g. water, rail, road and energy) and soft infrastructure (quality of social
amenity) are needed to encourage significant additional investment in exploration and development,
and to sustain local communities.



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Queensland copper and zinc producers are precariously positioned on their respective global cost
curves and in no shape to absorb a further royalty hit.

Chart 6: 2014 copper mine composite cost curve



Chart 7: 2014 zinc mine composite cost curve



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3.6 The Queensland CSG/LNG sector is losing its global competitive position

The CSG/LNG industry is continuing to progress its upstream and downstream activities with first gas
scheduled for export in the last quarter of 2014.

Drilling in the Surat and Bowen Basins has increased, complemented by the commissioning of
compressor stations, processing plants, water treatment systems and worker accommodation.
Downstream, construction of the liquefaction (LNG) plants on Curtis Island is progressing with
pipelines largely buried and subject to strength and integrity testing.

Community perceptions of the Queensland gas industry are improving as government and developers
more effectively communicate social and environmental impacts. Nearby communities are
experiencing the benefits of employment creation, social investment and landholder compensation
agreements. However, the industry is experiencing significant problems in converting gas resources
to reserves, given the substantial increase in regulatory (mainly complex and heavily conditioned
approvals) and operating costs (drilling equipment, pipelines, roads, processing facilities and labour).

Chart 8 shows that CSG and unconventional gas resources will become increasingly costly to develop.
Costs will increase as development and production moves from existing conventional and known
unconventional gas reserves to less certain resources (deeper and more distant from supporting
infrastructure). The current average cost of development for new unconventional and CSG gas is
already approaching $AU5/GJ (IES 2013) and will continue to rise.

Chart 8: Development costs for unconventional gas ($/GJ)



Perhaps indicative of cost concerns in Queensland and Australia, Arrow/Shell has deferred a final
investment decision on its proposed CSG-LNG project at Curtis Island. This is in order to seek
additional project value that reflects the existing high cost environment and the need for Australian
projects to innovate in order to successfully compete for scarce capital funding against global
opportunities.

Some $60 billion is being invested by the sector in the reasonable expectation of royalty stability.


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3.7 Alumina and aluminium smelting and refining making negligible returns

The QRC continues holds serious concerns about the commercial sustainability of the states refining
and smelting operations. A strong Australian dollar, softening prices and high energy costs are
weighing heavily on these industries. In this context, any state government policy changes that
increase costs (e.g. bauxite royalties, including the royalty for domestically consumed bauxite) would
represent a considerable risk to the ongoing viability of these operations.


4 REFORMS THAT ENCOURAGE INVESTMENT THE RIGHT COMPLEMENT TO ASSET SALES

4.1 Huge increases in costs which can be influenced by government regulation

While percentage allocations change according to the type of resource being extracted, the main
operational costs for a resource developer are taxes (including royalties), labour, transport (port and
rail charges), energy (gas, diesel and NEM electricity prices), general inputs (equipment, parts) and
regulatory compliance (local, state and federal government regulations and laws).

Almost without exception, governments play a part in influencing the costs of these inputs. Either
directly (e.g. influencing rail and electricity prices and setting new project conditions via regulatory
decisions) or indirectly (e.g. setting policies that influence how skills development occurs). Poor
policies can have a very large impact on the competiveness of the resources sector.

Analysis shows that average annual increases in these input costs have increased dramatically
between 2006 and 2014 and certainly much higher than the Consumer Price Index (CPI - refer Chart
9):

Coal royalties have increased 5 percent a year on average over the period (assuming an
average price of $AU162/t)
Electricity costs rose 12 percent a year
Rail costs rose between six and 19 percent a year
Labour costs rose 8 percent a year
The Australian dollar (against the $US) rose by 4 percent a year.

This covers a period of mainly price falls for coal and metals.

While increases in rail and electricity prices are a function of numerous complex regulatory and
commercial factors, governments must be vigilant and continue to pursue reforms to ensure that
these markets are delivering economically efficient and least cost outcomes.

When government owns the entities supplying the inputs (e.g. Queensland Rail, Ergon and Powerlink),
it is encouraged to take a long term view to ensure the long term competitiveness of Queensland
industry, despite the competing objective of maximising revenues and dividends for the state.


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Chart 9: Average per annum per cent increases (decreases) in resource sector costs and prices
between 2006 and 2014



4.2 Regulatory reform

A significant portion of development costs is regulatory associated mainly with exploration and
gaining necessary exploration and project approvals.

Resources development is subject to more regulatory requirements than all other industries. Meeting
regulatory imposts is a business cost and companies have a commercial incentive to keep them as
low as possible. Any unnecessary costs incurred in obtaining required regulatory approvals constitute
a cost burden that undermines development competiveness and the attractiveness of Queensland as a
place to invest. Regulatory efficiency is critical to the resources sector.

The proposed federal-state one-stop-shop model for environmental approvals is strongly supported
by the QRC. The accreditation of state planning systems under national environmental law to create a
single process covering both state and federal environmental assessment and approvals is welcome.
With its underpinning by a single set of conditions and a single set of biodiversity offsets, the one stop
shop promises to deliver significant cost savings for proponents while maintaining environmental
protections.

Furthermore, other reforms supported by the QRC include more discipline in determining the need for
regulation; more rigour in assessing options and whether a net public benefit exists; improving the
capability, capacity and competency of government agencies who regulate the sector; a greater focus
on outcomes based approaches; avoiding duplication among agencies; and greater use of central co-
ordinating and lead assessment agencies promises to deliver significant additional savings.

In Appendix Two this submission outlines the opportunities for reform in the areas of energy, rail
regulation, skills and OH&S.



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4.3 Taxation and royalties reform

The Queensland coal industry is very highly taxed by international comparison. The effect of recent
increases in coal royalties is significant.

The current Effective Taxation Rate (ETR) the combination of federal corporate taxes and
Queensland royalties is now 50 percent. This means Queensland coal miners are paying the highest
tax rate of all competing coal jurisdictions with the exception of Indonesia (50.6 per cent refer Chart
10). While paying slightly higher taxes, Indonesia has a much lower per unit extraction cost and a
freight cost advantage over Queensland.

Chart 10: Effective Tax Rate Comparison of competing coal jurisdictions (Typical Tier 2 Coking
Operation)


The QRC contends that to restore the coal industrys global competitiveness and Queenslands
attractiveness as an investment destination, the Queensland Government must index coal royalty
thresholds to maintain their real value; recognising that over time, more coal production will move
into the higher royalty thresholds.

The value destruction of not indexing the thresholds on project value is clear. For a typical tier 2
metallurgical coal project with a mine life of 40 years and a NPV of $267 million (without royalties), the
Queensland coal royalty regime (without indexation) reduces the NPV to just $36 million. This NPV
would double if thresholds were indexed.

In effect, indexation of the coal royalty thresholds doubles the NPV of a typical tier 2 metallurgical
coal project, making it twice as attractive.

QRC appreciates the work of the Resources Cabinet Committee (RCC) in developing measures to
lower industry costs and drive investment towards the minerals and energy sector but the reality is
that the 2012 coal royalty regime and its embedded rising effective royalty rates is harming
Queenslands chances of attracting new coal industry investment.


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5 CAPITAL RECYCLING AND PRODUCTIVITY ENHANCING INFRASTRUCTURE

The resources sector relies on a range of public and private infrastructure to deliver successful
projects, including transport (roads, ports, rail and airports), power (electricity and gas distribution,
and electricity transmission), water (water storage and distribution), telecommunications,
accommodation and social infrastructure (waste/water treatment plants, schools, healthcare,
childcare and recreation). Quality infrastructure, built and operated efficiently, can be a key driver of
the financial viability of resources projects, and in turn, employment and revenue growth.

The federal government recently gave the states a substantial financial incentive to sell assets and
recycle capital into new infrastructure as part of its effort to boost jobs and productivity.

The federal government will provide $5 billion over five years to 2018-19 to an Asset Recycling Fund
which will grant a state 15 percent of the assessed value of an asset being sold for capital recycling.

The possible sale of the Gladstone and Townsville Ports (including Mount Isa-Townsville rail line)
offers an opportunity for government to take advantage of the federal offer, and to recycle some of
these revenues (earned on the back of the sectors past contribution) back into productivity enhancing
infrastructure critical to the next wave of investment in resources projects.

Assuming improvements in cost structures and commodity prices, the resources sector can be
expected to continue to invest in new projects given the strength of the global demand fundamentals if
they (and governments) can meet the challenges of:

Resources being more remote and deeper
Projects requiring more supporting infrastructure to reach market
Lower returns from new projects
The inability of the smaller and mid-tier resources companies to finance the infrastructure
they require
Increasingly mobile capital as new mineral resources provinces are opened up globally
The necessary support, financial and non-financial (planning, streamlined approvals etc), to
build the next generation of enabling infrastructure.




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Appendix One: Detailed considerations re Gladstone and Townsville Ports, Mount Isa Railway

RG Tanna Coal Terminal

The RG Tanna Coal Terminal at Gladstone port is not subject to any current access regulation, with
key operating conditions outlined in Port Services and Coal Handling Agreements (PSAs and CSAs).
These agreements are currently subject to good faith collective negotiations between RG Tanna users
and the Gladstone Ports Corporation (GPC) to provide a high level of certainty in the terms and
conditions governing use of and access to the port. Completion of this is essential not only for industry
users but also for potential purchasers of the port should government decide to move down the
privatisation path.

We understand GPC has kept the government fully informed of the progress of these negotiations and
industry looks forward to their conclusion to provide a common and clear contractual platform for all
participants at the Port of Gladstone. It should be noted that through this process industry is
attempting to protect the status quo, and achieve balanced conditions and protections on par with
those enjoyed by users that access similar infrastructure on the eastern seaboard.

If industry does not achieve a level of comfort needed as part of these processes, there may be
grounds to pursue a regulatory regime. Regulation in this context means:

Independent oversight and control over prices (especially for existing leases that may expire
in the short term).
Access (especially security of access to landside facilities, wharves and the channel).
Ongoing performance incentives (especially in relation to maximising throughput that is,
ports must preserve their customer base and should resist diversifying if that will be to the
detriment of current users).
Effective, transparent and timely investment processes for capacity expansions including
adequate investment in the facility at the regulated rate of return.

Achieving these outcomes may entail, for example, the declaration of the Gladstone Port by the
relevant state minister and the implementation of compulsory undertakings by the Queensland
Competition Authority (QCA).

Furthermore, industry considers that government should sell the GPCs landlord role only and
transfer operations to the users of the port. This approach has the benefit of retaining the ports sale
value, while allowing users to control the quality and efficiency of technical processes.

Port of Townsville and Mount Isa-Townsville railway line

For users of these assets, protecting the status quo is not a satisfactory outcome, as monopolistic
pricing and inefficiencies are already defining and regrettable attributes.

The Mount Isa Rail Line (Rail Line) is currently the subject of a declaration made under s250 of the
Queensland Competition Authority Act 1997 (Qld) (QCA Act). The Rail Line is also subject to an access
undertaking applicable to Queensland Rail (QR), originally submitted by QR Network (as it was then) in
2008 and made applicable to QR in 2010 through a transfer notice under the Infrastructure Investment
(Asset Restructuring and Disposal) Act 2009 (Qld). This undertaking will expire on the earlier of 30
June 2014 and the approval by the QCA of a replacement access undertaking.

QR has proposed a new access undertaking, which is currently being considered by the QCA. Access
seekers and access holders have made submissions to the QCA opposing the proposed new
undertaking on grounds including:


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There is no requirement for QR to provide accurate KPI reporting on performance of the line
and no linkages between performance, capital spending on upgrade and pricing.
The inclusion of floor and ceiling rates is ineffective in assisting in price negotiation.

In the QRCs view, the proposed new undertaking is unlikely to be approved by the QCA. The regulatory
terms currently applying to the rail line are therefore uncertain. This will need to be resolved as part
of any divestment process.

The above rail services (i.e. haulage) utilising the rail line are provided by third parties. Above rail
services are not subject to regulation and are not covered by the QR access undertaking. This is
unlikely to change as part of any divestment process.

The port is not subject to any current access regulation and port charges are not specifically covered
in the lease/licence. Therefore, there is substantial risk that port charges (shipping charges, harbour
dues etc) will be increased without negotiation in the future and at the sole discretion of the Port
Authority or new owner.

The QRC believes the Rail Line should remain subject to regulation under the QCA Act but with
changes to facilitate much improved price and service visibility. This would require an amendment to
the QCA Act. It would also require a transfer of the relevant undertaking (as was done from QR
Network to QR in 2010 by transfer notice), plus an obligation to maintain an access undertaking in the
lease (as the case with the Dalrymple Bay Coal Terminal).

Alternatively, the port could be effectively regulated through relatively basic contractual provisions
contained in the lease or similar. QRC strongly supports an opportunity for users to achieve price
certainty in leases/licences before/if divestment occurs.

A key issue for industry will be on what terms the rail line and port (separately or together) are to be
expanded. There is established Queensland and interstate precedent for addressing future expansion
in the context of a privatisation or similar transaction. The contractual arrangements for the long-
term lease of Dalrymple Bay Coal Terminal (DBCT) to Brookfield (as it is now) have the effect of
committing the infrastructure owner to expansion, subject to conditions including sufficient user
funding. For DBCT, this obligation is contained in the applicable access undertaking. This reflects the
chosen approach to regulation of the asset.

There are other potential approaches, such as including expansion requirements within contractual
arrangements. Considerations may include the level of commitment expected in relation to
expansions (e.g. is it appropriate that it is tied to user funding or demand) and the degree to which
government wishes to retain control or an approval right in relation to expansions, if at all.

The conditions applying to future expansion of the rail line and the infrastructure collectively (if
integration proceeds) are complicated by the current applicability of the QR access undertaking to the
rail line. The current access undertaking requires QR to expand if it is satisfied that the expected
revenue will be greater than expected costs of the expansion. QRs draft replacement access
undertaking proposes conditions which are more favourable to QR in relation to expansions (including
that QR bear no cost or risk for an expansion).

Stakeholders have proposed the QCA reject these conditions and include conditions in the access
undertaking that are closer to those contained in the Aurizon Network access undertaking for the
Central Queensland coal rail network. This would include a requirement for QR to develop a user
funding framework to allow Rail Line users to require expansions or extensions to proceed as long as
they are user funded.




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Appendix Two: Reform Opportunities in Energy, Rail, Skills and OH&S

Energy reform

Energy costs in Queensland have doubled over the past 7 years (refer Chart 11).

Chart 11: Rising prices are unsustainable

Source: QLD Government, Department of Energy and Water Supply

It is estimated that approximately 50 percent of this increase is attributable to network costs
(distribution and transmission), 25 percent covers green costs (carbon tax and the Renewable Energy
Target in particular), and the balance is generation costs (refer Chart 12).


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Chart 12: Breakdown of price increases (Source: Qld Department of Energy and Water Supply)


The specific cause of rising network charges has been the substantial increase in capital programs
and operating costs. Firstly, costs have been increasing to meet overly deterministic reliability
standards set by the Queensland Government. Secondly, both Ergon Energy and Energex have
comparatively high overhead costs when benchmarked against other distribution network companies
with similar network densities and operating conditions.

Since reliability standards are set by government, the Australian Energy Regulator (AER) is legally
required to approve capital and operating expenditure that reasonably meet these standards. This has
limited the power of the AER to assess the prudence of such investments.

The Queensland Government Commission of Audit and the governments response to its
recommendations were released on 30 April 2013. In relation to energy sector network costs, the
report and subsequent work completed by an inter-departmental committee (IDC) found that savings
of $3.6 billion in capital expenditure over a five year period could be achieved through changes to
reliability standards. The report noted that the standards were overly prescriptive, resulted in over-
engineering and did not involve sound analysis justifying expenditure.

The report also identified a further $1.4 billion in operating cost savings over a five year period
through reduced overhead costs when benchmarked against other comparable distributors. A partial
merger of the two networks proposed by the government has been identified as generating $581
million in savings over the period 2015 to 2020.

The next five year determination for network costs will be set from 1 July 2015 to 30 June 2020.
Regulatory proposals on capital programs and operating costs will be submitted by the distributors in
October 2014. It is therefore critical that the IDCs reforms are reflected in this determination process.

While the Queensland Governments response to the IDCs findings was generally positive (including
the proposal to merge the network businesses), it appears that slow progress has been made to
ensure that savings will be identified and therefore reflected in the upcoming regulatory
determination.

For example, despite Minister McArdles media release of 16 April 2014 stating that new, less
prescriptive reliability standards will commence from 1 July 2014, the sector needs more clarity on


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the implementation of revised reliability standards, and assurances that proposed reforms to existing
standards will be reflected in the next determination.

Furthermore, the sector is seeking assurances that practical steps are being taken to merge the two
network businesses to achieve the forecast savings; that efforts to curtail operating expenditure are
occurring more generally; and costs savings will be passed on to network users through reduced
network tariffs and not returned to government in the form of dividends to be spent elsewhere, leaving
existing tariffs in place for the remainder of the determination period.

Rail regulation reform

The resources sector relies on six main rail systems to move its products to port.

These are the Newlands, Goonyella, Blackwater and Moura systems (Central Queensland Coal
Network), the Western System (Miles to Rosewood) and the Mount Isa=Townsville line.

While some competition for above rail services exists on CQCN, limited or no above rail competition
exists on the Western or Mount Isa systems. Enhancements to these lines, and more tonnages, would
in all likeliness encourage greater competition for above rail services and improved economic
efficiency.

These systems are currently the subject of a declaration made under s250 of the Queensland
Competition Authority Act 1997 (Qld) (QCA Act). The rail lines are also subject to access undertakings
applicable to QR (Western and Mount Isa Systems) and Aurizon Network (CQCN).
QR and Aurizon have proposed new access undertakings for all systems, which are currently being
considered by the QCA. Significantly, access seekers and access holders have made submissions to
the QCA opposing all the proposed new undertakings on a range of grounds.
In the QRCs view, all the proposed new undertakings are unlikely to be approved by the QCA, resulting
in an intensive, time consuming and costly process for all parties as highly technical submissions,
counter submissions, and determinations are formulated.
As is convention, industry typically pays for the costs of these processes by way of a legislated levy.
These costs are often exorbitant.
For example, the QRC estimates that the collective costs of Aurizon, QRC, and the QCA in working
through the details of the UT4 undertaking to date range from $15-20 million. The QRC would expect
another $5 million in costs before the process concludes by the end of 2014. As stated, all these costs
are borne by the coal industry.
Despite regulatory oversight, there remains little incentive for parties to engage in good faith
commercial negotiations ahead of a regulatory decision, and little incentive for parties to not
commence the process with an ambit undertaking. The most contentious areas of an undertaking
include the:
Weighted average cost of capital (WACC)
Expansion processes including user funding arrangements and what type and value of
expansion should occur at the WACC
An appropriate level of costs for maintenance, overheads and operations
Ring fencing (i.e. protections against conflicts of interest especially when the provider has
an incentive to favour certain expansions over others)
Tariffs are set at levels that promote an economically efficient level of use of assets, yet
provide a sufficient return that encourages reinvestment.


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The outcomes of rail tariff negotiations over the past eight years (and beyond for the CQCN and
Western Systems) is shown in Chart 13. Of note is that tariffs have increased by a minimum of
83 percent (Moura) and a maximum of 169 per cent for Blackwater. This is during a time of modest
expansions but higher tonnages (and therefore expected efficiency improvements) and lower costs of
capital.
The QRC is eager to discuss how tariff increases can be moderated (if not reduced) with providers and
the QCA via improved commercial negotiations whilst maintaining a rigorous regulatory framework to
incentivise fair outcomes.

Chart 13: Various system comparisons: actual and proposed below rail charges ($/t) and percentage
increases between 2006 and 2013


Skills and OH&S reforms

QRC commends the strong start on skills reform made by the Newman Government in its first term,
and further commends a reinvigorated and continuing VET reform agenda for its second term, driven
by the Strong Choices context. The challenge in the next term is to continue the momentum that
began when the Newman government boldly established the Queensland Skills and Training
Taskforce in June 2012.

The high labour costs experienced by industry in recent years were in part driven by a shortage of
appropriately skilled people and inadequate training places for resources sector skills compounded by
long lead times for training and a focus on completing qualifications to the exclusion of skills sets.

More entry and exit points based on skill sets supported by government funding in high priority skills
areas would see more people employable sooner for good jobs where a full qualification is simply
over-training at a cost to industry and government.



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The move to skill sets will be challenging for the VET system and many training providers will resist
the move as they are comfortable with being funded for the long-standing multi-year pathway to a
qualification outcome. Training places funded by government based on both full qualifications and
skill sets as identified by industry needs is essential to this reform.

Associated industrial reforms are still required; for example, national recognition of ticketed trades
such as electricians, between states and to make the TAFE system more productive and competitive.

More institutional pathways are needed to address skills in demand especially those which span
industries (e.g. diesel fitters, electrical trades, and instrument technicians).
The high wages in the resources sector have been driven by a shortage of skilled people, not a
shortage of people wanting to work in the sector. Fees charged for these courses and fee support
offered should reflect the demand in industry and the need to encourage individuals to invest in their
own training. Industry itself is not adverse to co-funded arrangements.

The training system still remains supply-side focused, rather than industry-demand focused. The
need to ensure the VET system became more industry driven was a key recommendation of the
Queensland Skills and Training Taskforce which was accepted by the Newman Government. The
efforts of the Ministerial Industry Commission (MIC) to drive improvements in this area are applauded.

The VET system is a confusing maze for individuals looking for entry into training for the resources
sector. People are still restrained by lack of information and access to relevant programs. This will
take time to turn around and needs both market and management stimulation to occur.

Further reforms to attract international training providers to Queensland, enhancing competition,
would also assist. In further opening up the training market there must be a continued emphasis on
strategies to ensure quality.

The MIC is in its first year of advising the Minister on redirection of training investment for priority
industries and jobs, and is advising on these matters. As an advisory body with a limited role, the
reform outcomes for VET that will contribute to reduced labour pressures are still dependent on
achieving more regulatory efficiencies, continuing firm Ministerial direction, and strong VET
management.

The reforms commenced in the school VET sector will yield more rounded educational outcomes for
young people and therefore more trades outcomes in due course, if the limited funds available are
targeted to skills in demand. Coupled with the establishment of a Queensland Minerals and Energy
Academy flagship school in Brisbane through conversion of an existing school under the Independent
Public Schools initiative, the training focus needs to shift to industry-informed and industry-standard
training for real jobs.

The number of women in trades across industries varies, but a general theme is that women remain
under-represented in the trades. The traditional apprenticeship pathway and culture is demonstrably
not attractive to women. This is an ongoing skills problem providing an opportunity for some lateral
policy thinking and responses, and associated reforms.

QRC continues to be heavily engaged in the long legislative reform journey for the states mining H&S
legislation particularly around live proposals to significantly increase the number of statutory
positions in the coal industry. QRC costs these proposals at an additional $86M/year to the coal sector,
when the regulator has made no safety case whatsoever for these additional positions, rather
proposing their implementation on the grounds of consistency with other states, notably NSW.
Experience to date shows that applicants for statutory positions become union-preferred or
freelance guns for hire- in both cases at more cost to industry of entrenched union privilege or high
contract costs to offset the regulatory risks associated with such positions.


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Additionally, it is proposed that candidates for these positions be evaluated through the Board of
Examiners. This is an antiquated cottage industry approach to educating and evaluating people for
modern jobs, and at an additional cost to industry. The Board of Examiners is struggling now to handle
its functions and additional statutory positions will cause it to become a greater bottleneck. If mines
cannot operate without the multiple numbers of individuals needed for each statutory position across
shifts, production will be impaired for no safety-related reason.