Attachment 9

BLUE WEDGES INC. PORT PHILLIP BAY CHANNEL DEEPENING ECONOMIC BRIEFING NOTES JULY 2005

INTRODUCTION

Since State Government and the Port of Melbourne Corporation (POMC) announced an intention to investigate channel deepening in Port Phillip Bay there has been wide spread concern in local bay-side communities about both the environmental and economic impact of such a project. Over twenty thousand Victorian residents have signed a petition, opposing the project and that number continues to grow. Thousands of people have attended Bay wide demonstrations, opposing the project.

These briefing notes are a preliminary consideration by the Blue Wedges Coalition of economic issues that pertain to the project.

SHALLOW WATER DOES NOT EQUAL BACKWATER In their analysis of the channel deepening proposal, PoMC’s economic analysts, Meyrick & Associates make the following opening statements: • Trade growth through the Port of Melbourne will continue. • This will occur irrespective of whether deepening proceeds (1). Meyrick’s predict a quadrupling of trade through the port of Melbourne by 2030, irrespective of whether or not the deepening occurs. “Because of the importance of Melbourne in the National shipping system, it is unlikely that ship owners will drop Melbourne from their itinerary even if the channels are not deepened”, according to Meyrick & Associates. They argue that ship owners will adapt if Melbourne is not deepened, by "limiting the size of vessel used to a size that can operate efficiently into Melbourne”. A quadrupling of trade without deepening does not equal a “backwater”. The claim made by proponents of the channel-deepening project that unless the channels are deepened, Melbourne will become a backwater is misleading, and certainly invites rigorous analysis.

CURRENT ‘CRISIS’ NOT REAL The POMC has claimed that 30% of containerships currently entering and leaving the Bay are under-loaded to meet depth limitations. However the Independent Panel assessing the Channel Deepening EES “saw no evidence” to support this figure (2). The Panel noted that the Port of Melbourne is a “net generator of empty containers and its location at the end of international trade routes has logical consequences, resulting in significant under-loading, regardless of channel depth” (2).

COST BENEFIT ANALYSIS

The costs and benefits of the project must be analysed in relation to the full range of costs and benefits to Victorians. The project was costed at $545 million in the EES. The cost of trial dredging is now estimated to be $32 million, taking the project cost up to around $577 million. According to the panel these costs are “by no means secure” (3). The dredging costs are likely to blow out well beyond the figures given in the 2004 EES. ‘The total dredging cost for the channel deepening proposal is likely to be very many times greater than the stated $240 million (3a) and could cost well in excess of $1 billion’ according to retired Harbour Master, Frank Hart. Please refer to appendix A for details. This estimate does not include the necessary land based infrastructure changes such as the relocation of Footscray Markets ($300+million taxpayer funded, total cost ~ $1 billion) and moving Footscray Rd. to enable the extension of Swanson Dock (so as to accommodate even larger vessels). The project benefits are claimed to be $1.5 billion savings in transport costs over 25 years. This figure appears to be an “overstatement” according to the Independent Panel (4). It also relies on the following assumptions: • A quadrupling of trade through the Port of Melbourne by 2030 • A substantial increase in the percentage of mega ships entering the Port by 2030, from the current figure of zero to 65% of all ships by 2030, (5). These predictions may well not be met. If not, the benefit will be much smaller. Even if the assumptions are correct and benefits do occur, they will flow directly to international shipping companies (1). International shipping companies are ‘a collection of highly cost driven, highly mobile, multinational companies, all of them based offshore and with legal and taxation structures designed to minimize taxation and to make it difficult for them to be legally brought to task if any environmental damage occurs. Therefore, these benefits will most likely be repatriated to vessel operators in Panama, Monrovia & Guinea’ (6). The Independent Panel calculated direct project benefit to Victoria in 2004 at a maximum $523 million. With a project cost at a minimum of $577 million and at best a project benefit to the Victorian community of $523 million (7). This adds up to a minimum direct negative (dis- benefit) to the Victorian community of $54 million.

ENVIRONMENTAL AND INFRASTRUCTURE COSTS

The economic costs of the environmental damage have not been properly evaluated, according the Independent Panel Report (4). This was due to systemic flaws in the EES risk analysis. “The existing EES risk assessment embodies flaws that have propagated throughout the EES, which makes reliance upon its outcomes for environmental assessment and decision making purposes most unsound” (8). In particular the damage to ecosystem services has not been properly evaluated. For example, the economic value of the damage to the Bay’s nutrient processing capacity alone has been calculated to be around $200 million dollars per annum (9). The Channel deepening project will adversely affect a number of industries and businesses. These include the Newport Power Station, marine and land based aquaculture, the commercial and recreational fishing industries, recreational diving and boating and beach and bay tourism and recreation (10). A number of these industries are potential growth industries, so that any loss of opportunity for growth ought to be evaluated. In particular, marine based aquaculture was noted as having significant potential for growth (11). The Phillip Island penguin colony risks significant adverse effects resulting from the Channel deepening project (12). The penguin colony relies on Port Phillip Bay as a key winter feeding ground, where the penguins feed and gain condition, so that they can survive their breeding and moulting seasons (13). The Phillip Island penguin colony makes a significant contribution to the Victorian economy. This contribution has been estimated to be worth $96.5 million per annum and 1000 related jobs (14). There are also significant infrastructure implications to the Channel Deepening Project. The Yarra Sewer is at increased risk of damage, as is the West Gate Bridge. The economic implications are yet to be properly evaluated and may well be substantial (15). The current direct cost of the project has been estimated to be $577 million and this figure is likely to increase substantially. If interest repayments and the costs of the damage this project will cause are factored in, the total cost of this project may well reach a figure exceeding $1 billion. A speculative and overstated benefit of $523 million to Victoria against a project cost well in excess of this figure does not make economic sense.

WEIGHTING OF ECONOMIC AND SOCIAL IMPACTS

The Independent Panel emphasizes the importance of the weighting of environmental risks involved in the project. It is important therefore to weight the economic and social risks and benefits the project involves. The figure of $1.5 billion in transport savings may seem large at first glance. When this figure is spread over 25 years it equates to a benefit of (without taking into account costs) only approx. $52 million per annum. This figure, when compared to the trade through the Port of Melbourne being roughly $60 billion per annum, is relatively very small. In fact it is less than 0.1%. In contrast, the economic damage caused by channel deepening to businesses that rely on the amenity of Port Phillip Bay is likely to represent a much larger proportion of the income of the affected businesses. Marine based tourism working from the Mornington Peninsula is likely to be directly affected by the channel deepening. This industry is estimated to be worth $376 million per annum (16). The Independent Panel Report takes the view that the project has the potential to “damage or extinguish” affected businesses (17). In the event of the probable adverse environmental impacts occurring then a perception will rapidly grow among potential bayside tourists that the bay is no longer an attractive place to visit. This would impact on bayside businesses and employment in an extremely adverse fashion, particularly on the Mornington Peninsula and have a further multiplier effect on the Victorian economy of significant magnitude. A possible increase in trade through the Port of Melbourne of < 0.1% is not worth the risk of extinguishing a growing and sustainable industry that is already worth $376 million per annum.

REGIONAL ECONOMIC AND SOCIAL IMPACTS The economic analysis done by the POMC failed to investigate regional economic impacts. Regional economic and social impacts must be evaluated if the risks and benefits of the project are to be fully appreciated. The Mornington Peninsula is particularly vulnerable to the negative impacts of channel deepening. The $376 million marine based tourism industry will be directly affected by channel deepening. This figure includes Bay related tourism operators. It does not include the tourism industry as a whole, which is the largest employer in that region and is likely to sustain significant indirect impacts as a result of the channel deepening project (16). Nor does it include the marine based tourism industries operating in other parts of the Bay. St Kilda’s economy and culture is also shaped by its proximity to and the amenity of the Port Phillip Bay. Potential negative social and economic impacts on bayside suburbs and St Kilda in particular should also be properly assessed. The broader impact on the Victorian economy is yet to be assessed but is potentially far greater than what has so far been examined.

DAMAGE TO THE PORT OF MELBOURNE’S COMPETITIVE ADVANTAGE If Channel deepening is funded through a user pays system, this will necessarily involve an increase in fees and charges at the Port of Melbourne. This may well damage the Port’s competitive advantage over other ports, thus harm trade growth through the Port of Melbourne.

The POMC charges are around $21 per container less than the ports of Sydney, Adelaide and Fremantle and $30 less than Brisbane for freight handling. When the POMC increases its charges, as it must, there may be an inclination for some shipping lines to use some of the other ports. At present we understand that a ‘user pays’ system based on shippers being levied approximately $20 per container rising by $5 per annum is proposed.

CHANNEL DEEPENING WON’T BENEFIT THE VICTORIAN ECONOMY

Royal Boskalis, the dredging company with the contract for this project, is a foreign company purportedly using high-tech imported equipment. The $500 million+ to be expended on the project will have in itself little positive impact on the Victorian economy. THE DUKC® SYSTEM A CHEAPER ALTERNATIVE A Melbourne company has produced a system, now used internationally that has the potential capability of fixing many of the Port of Melbourne Corporation’s problems. This system, “Dynamic Under Keel Clearance” (DUKC®) is a complex navigational computer program using real time under keel water clearance to allow deeper ships to successfully negotiate shallow waters. The DUKC® system has the capacity to allow 100% of the ships, currently entering Port Phillip Bay fully loaded. It would take 14 weeks to install and costs $200,000 per annum. If the government had spent the 12 million+ that it spent on the EES on the DUKC® system it could have paid for 60 years of its operations. The Independent Panel recommended that the DUKC® system be properly explored. It is a terrible waste of public money not to explore this vastly cheaper and far less damaging alternative.

THE FINANCING OF THE CHANNEL DEEPENING PROPOSAL

The government’s in principle support for the project is based, on “a sound financing strategy”. There has been no evidence of a sound financing strategy. There has been ongoing public conflict between the government and the business community, over who ought to finance the channel deepening project. The business sector argues that “large user pay fees, necessary to fund the project if the Government doesn’t pay will harm industry competition”. Government is maintaining that “the bulk of the costs would be borne by business that directly benefited from it”. The government has agreed to the POMC borrowing to finance the project. The borrowing of this large sum of money will inevitably increase the overall cost of the project. Clearly, payment is made “up front” whilst it may be many years (at least 16 years based on the figures relied upon by the PoMC) to achieve a “break even” point for realisation of the purported savings. Justice and The Triple Bottom Line (TBL) will be best served by the POMC being made to bear the full costs of both the Deepening, including the Contingent Costs of Environmental and Consequential Damages. This full user pays system has been strongly recommended by the Panel Report. The government has also been arguing for a full user pays system in other situations such as water reform. There is no reason why port activities should be insulated from the costs and consequences of their actions.

THE ROLE OF THE PROPONENT VS THE ROLE OF THE GOVERNMENT

The history of environmental and economic modelling is that:

• Proponents of change are not the most impartial judges • Modelling can never catch the unforeseen and there will always be the unforeseen.

The Government therefore needs to overlay onto the issue an economic and environmental strategy for the Bay, along the lines of Least Cost, Least Disturbance and More Information.

SUMMARY Channel deepening in Port Phillip Bay is not necessary for Victoria’s economic survival. Trade through the Port of Melbourne is predicted to quadruple irrespective of whether the channel is deepened or not. There is no evidence of a real crisis in trade due to depth limitations. The Independent Panel assessing the EES was unable to “recommend that the project is acceptable in economic terms” (19). The costs of the project are insecure and the cost benefit analysis does not come out in the project’s favor. The economic costs related to the environmental damage, inherent in the project have not been included in the present cost benefit analysis, need proper evaluation and are likely to far exceed any benefits the project may provide.

The weighting of economic and social costs highlight that a benefit to the Port of Melbourne of less than 0.1% of trade is not worth risking an industry that is the largest employer on the Mornington Peninsula. A full user pays system, where the Port of Melbourne is responsible for all costs associated with the project may force the proponent to reconsider its options.

There is an urgent need to shelve this project, in favour of more sustainable long term solutions, before any more public money is wasted and any actual environmental damage is caused. There is also an urgent need for the POMC to be replaced by a new Port Phillip Bay authority with a broader, bay wide perspective as well as an expert understanding of and care for the entire Port Phillip Bay ecosystem.

JO SAMUEL-KING for BLUE WEDGES COALITION, With thanks to Jenny Warfe, Simon Roberts, Geoff Lazarus, Frank Hart and Peter Fitzgerald (Director, Growth Solutions Group).

References:

1) Meyrick and Associates, Channel deepening project Economic analysis, Technical appendices 2) Channel deepening EES panel report, p284 3) Channel deepening EES panel report, p 283 3a) Channel deepening EES panel report, p 281 4) Channel deepening EES panel report 285 5) Environmental Effects statement Volume 4 6) Melbourne based Shipping Economist, private correspondence 7) Channel deepening EES panel report p280 8) Channel deepening EES panel report p74 9) Harris G, Address to the Blue Wedges Coalition, Lwr. Melbourne Town Hall, 16th March 2004. 10) Channel deepening EES panel report pp 278-321 11) Channel deepening EES panel report p302 12) Channel deepening EES panel report p236 13) Norman, F.1. 1992, Counts of Little Penguins Eudyptul minor in Port Phillip Bay and off Southern Phillip Island, Victoria, 1986-1988, EMU Vol. 91, 287-301 14) KPMG Management Consulting, Economic significance of the Phillip Island Penguin Parade to the State of Victoria. 15) Channel deepening EES panel report p331 16) Muir J, The channel deepening project and tourism impacts – Submission to the Channel Deepening Independent Panel Hearing 17) Channel deepening EES panel report p 311 18) DUKC briefing notes to the Blue Wedges Coalition 19) Channel deepening EES panel report, p282

APPENDIX A: AN ANALYSIS OF PORT PHILLIP BAY DREDGING COSTS

Port Phillip Bay proposed dredging. The POMC states the cost for dredging 40 million cu. metre of bottom material in Port Phillip Bay is $240 million. This cost equates to $6 per cu. metre. The POMC advise that an ‘Alliance’ has been entered into with a dredging contractor.

Geraldton dredging As a comparison, the same dredging contractor in a joint venture, was awarded a contract in 2003 to dredge 4.5 million cu. metres from Geraldton Harbour in West Australia (to deepen the channel by between 2.8 and 4.1 metre) the contract price was $73 million. This cost equates to over $18 per cu. metre.

Subsequent to completion of this dredging, the contractor submitted a further account for overruns alleging losses amounting to $77 million making total cost $150 million. This equates to a total cost of over $33 per metre. This additional cost has at this time not been conceded by the Port of Geraldton.

Adelaide proposed dredging In South Australia, Flinders Ports (Adelaide) proposes to deepen the shipping channel and turning basin at the Outer Harbour, from 12.2 metre to 14.2 metre. Quantity of spoil to be removed is between 2.7 and 3.0 million cu. metre. Cost of dredging is estimated at $55 million. This cost equates to between $18 per cu. metre and $20 per cu. metre. Overruns will be an additional cost. At the time of writing the same dredging contractor is involved in the three ports above.

Comparative dredging costs.

Caution must be exercised when comparing costs per cubic metre, however; When the extreme dredging difficulties that are expected and predicted to prevail at Port Phillip Heads, together with rock in parts of the South Channel, special dredging techniques required for the toxic spoil in the river Yarra and special dumping, bunding and containment techniques required for the toxic spoil in Port Phillip Bay and the large size, variety and complexity of the dredging equipment to be employed are all taken into account, the total dredging cost for the channel deepening proposal is likely to be very many times greater than the stated $240 million and could cost well in excess of one billion dollars

Dredging cost overruns may result from: 1. More dredging than originally estimated after final surveys are carried out, 2. Variations when actual dredged cu. metre do not equate to the survey cubic metre, 3. Differences in agreeing with quantity of material dredged, 4. Decanting of dredged water (dredged material in a hopper can occupy up to one-third more space than the material in the channel before dredging), 5. Inadequate spoil ground capacities, 6. Debris removal and disposal, (dredged material from the bottom can contain up to 20% debris), 7. Requirements for additional sampling, 8. Geo-technical information deficiencies and/or inaccuracies, 9. Delays in dredging due to forced cessation of activities and interruptions caused by “passing vessels” in all parts of the channel, particularly at the Heads and in the river Yarra, 10. Bad weather delays, particularly at Port Phillip Heads. 11. Inability to dredge at times of strong cross currents at Port Phillip Heads. 12. Other variations due to inaccurate and/or deficient survey or geo-technical data, 13. Delays due to unforeseen circumstances.

When the likely occurrence of many of the above are considered the PoMC’s stated cost of $240 million for dredging 40 million cubic metre of spoil in Port Phillip cannot be taken seriously.

Frank Hart, Retired Harbour Master Ports of Westernport and Hastings.