Infrastructure upgrade needs dose of reality

The boom in global coal demand represents an enormous economic opportunity for Australia. To meet this demand one of our most important export facilities, Queensland's Dalrymple Bay Coal Terminal, needs to be expanded. But this valuable opportunity could be under threat. The economics underpinning further investment in the DBCT hinge on the level of charges our customers, the coalminers, pay for access to the facility and the length of time they are willing to contract.

DBCT is a regulated asset: if we can't agree on the charges, the Queensland Competition Authority (QCA) will determine them.

The terminal, the second largest in the country, is capable of loading about 54 million tonnes of coal a year. Work is under way to increase that capacity to about 60 million tonnes. But the surge in coal demand and prices during 2004 means most of the Bowen Basin miners using the facility want capacity expanded to as much as 90 million tonnes.

The demand foreshadowed by the miners did not become apparent until March or April last year and represents a doubling of the coal exported through DBCT in 2003-04. Previously, the miners had forecast incremental growth. Prime Infrastructure's 2003 master plan was developed to meet that increase.

DBCT is arguably the most complex facility of its type in the world because of customers' varying requirements. Any capacity expansion is a major engineering project with long lead times. Like any business, Prime needs to be paid a commercially viable price for its services and have confidence that future volumes will be sufficient to justify the estimated $850 million required to lift capacity to the volumes being indicated.

However, the rate of return suggested in the QCA's recently released draft decision puts in doubt Prime's ability to efficiently source the capital required. The draft decision sets the terminal's charge at $1.53 a tonne, significantly below the current rate of $2.08. The QCA's methodology has been criticised in 13 of the 15 public submissions received in response to the draft. These include the Queensland Government, Queensland Rail and the Australian Council for Infrastructure Development (AusCID).

AusCID considered the level of return proposed by the QCA for current and future investment "to be below that at which new investment will occur". Prime wants to work within the existing framework, but must also act in the best interests of security holders.

If the expansion was uneconomic in light of the QCA's determination, and given the risks, it would be commercially irresponsible to invest the sums necessary. Despite this, our customers have supported the QCA's draft determination. They also want the DBCT upgraded urgently. To put the issue in context: the proposed reduction in Prime's tariff is less than 1 per cent of the revenues won by the miners through recent substantial coal price increases, but it represents a 26.4 per cent reduction in Prime's revenue per tonne.

Despite this disincentive, Prime has commissioned all necessary feasibility studies and preliminary engineering work and put in place an optimised "critical path" development plan, which would meet the anticipated demand as quickly as possible.

By the end of the first phase in June 2007, the terminal is expected to be able to handle 65 million tonnes annually. To achieve this, Prime will need to enter into firm contracts with engineers and builders before the middle of the year. Prime would be taking huge risks to commit itself without knowing the final determination from the QCA on access charges, not having firm estimates of long-term customer capacity requirements, and without the necessary state and federal development approvals.

The access charges and long-term capacity estimates can be resolved quickly through realistic, commercial negotiations. A balance needs to be struck between the incentive to invest and customer need. If the QCA confirms its draft proposal, then uncertainty will continue to hang over the upgrading. A realistic rate would ensure the speediest possible upgrading of the terminal to enable the miners to fully exploit the buoyant demand for coal. It would be a win-win for both sides, as well as for Queensland and the nation.