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Power to grow

THE PILBARA, THE mighty, resource rich, economic powerhouse in Australia’s far north-west, is breathtakingly vast and ecologically unique. It has been subject to gargantuan economic growth and investment to satisfy the global demand for iron ore. This has happened before in Western Australia. The state has eighty-seven ghost towns – the rest of Australia just seventy-five. Dozens of Goldfields towns developed and then died in the late nineteenth century.

The Pilbara is a region that has won the lottery twice. In the 1950s, iron ore was discovered in the Hamersley Ranges. Development started in 1961 and by the mid-1970s, the region was extracting 100 million tonnes per annum (Mtpa); by 2012, it was extracting over 600 Mtpa and adding $50 billion to the economy. In 1971, natural gas was discovered. Since 1980, this has generated total revenues of $300 billion – earnings that are forecast to continue for fifty years.

Iron ore and natural gas are the dominant sectors in the Pilbara, but there is potential for economic diversification. It is strategically placed on trade routes, adjacent to much of the world – GMT+8 is the most populous part of the world. Now that more water has been discovered, the potential for agriculture and energy is great in a region with vast renewable resources. It is a tourist gateway to local Aboriginal historical sites, the famed Ningaloo Reef and the Kimberly region with its incredible wilderness.

But how will it fulfill its potential? How can spin-off industries of ‘the boom’ stabilise and become self-sustaining, to create an intergenerational legacy after resource extraction peaks in 2050? What infrastructure is needed to shape a sustainable economy and society? What does the government need to do to facilitate this?

The Pilbara accounts for more than half a million square kilometres, and its inhabited history dates back to forty thousand years before the first Europeans settled in 1860. Economically, it has a chequered history. Pearling, pastoralism and agriculture started and failed before the discovery of iron ore in the 1950s, and slavery was a dark blot on the area’s history that will take generations to overcome.

Oil, gas and mining operations account for three quarters of the economy; half the workforce is engaged in mining, construction and its associated retail industries. The Pilbara is the nation’s powerhouse, contributing around 5.5 per cent of Australia’s gross domestic product.

Rainfall is only between two hundred and three hundred and fifty millimetres, falling in monsoonal downpours that are followed by long, scorching dry seasons. Large volumes of underground water could allow the rapid expansion of agriculture and even facilitate pumped hydro-energy storage systems.

Electricity transmissions, gas pipelines, water pipelines and rail systems are operated by mining, petroleum and energy companies for their own purposes. Connecting these into a grid would increase resilience and enable electrification of railroads and mines to reduce operating costs and the carbon profile. Isolated Aboriginal settlements could then be connected to these grids, instead of relying on expensive diesel.

Renewable energy has a big future in an area with the highest concentration of solar radiation on earth. Diesel could be replaced with renewable energy at a much lower cost, and rail could be electrified instead of running on diesel. This would create the preconditions for other, more energy-intensive industries, which would otherwise locate elsewhere.

Power is supplied by a network of stand-alone suppliers that was developed in the 1970s, then partially interconnected in 1985 and renamed North West Interconnected System (NWIS). Powered by gas, it is a costly and carbon-intensive system.

A study by Regional Development Australia[i] found that the cost of doing business in the Pilbara is 40 per cent more expensive than in Perth, and much higher than other parts of Australia. Some of this cost is due to the expense of power under this system, but for the most part it is due to the lack of resilience and local diversity in the economy, which makes simple matters such as construction, food supply and health services very expensive.

The recent commitment of funds via the Royalties for the Regions program (20 per cent of all mining royalties are returned to the regions of WA) has led to massive improvements in local recreational facilities, improved education and health services and some infrastructure, making the Pilbara a much more attractive place for families. But most opportunities still bring people to Perth, and fly-in fly-out remains the dominant choice of employees.

 

THE LONG-TERM PROSPERITY of a region is made up of more than just its history and short-term planning priorities. Planning and societal progress is an evolving public issue. It needs to be a part of the local, state and national discourse. The strengths and weaknesses, incentives and threats of the near and long-term are vital considerations – particularly with an economy as lucrative as the Pilbara.

For the short-term, the iron ore industry is experiencing a fantastic opportunity that comes from a whole variety of strengths: high-grade iron ore, political stability, a desirable geographical location. But in 2013, the Bureau of Resources and Energy Economics (BREE) and the Reserve Bank of Australia[ii] found that productivity has been deteriorating due to resource depletion. Companies take the easiest resources first.

The Pilbara does not have to be destined to be a one-trick pony. Major opportunities exist around tourism, industrials, technology and agriculture. Becoming more outwardly focused will help facilitate this outcome.

The Good Country Index, created by Simon Anholt, shows that success and failure is determined by the extent to which countries are outwardly facing, the degree they contribute towards solving big global problems. The index’s assessments are based on the idea that countries that want to sell more products, and get more investment, need to be perceived positively and have better and cheaper access to capital, trade relationships and partnerships, and in doing so become more competitive – countries such as Germany, Sweden and Switzerland. Australia presently ranks fifteenth out of 125 countries.

The Pilbara is at the heart of the challenge, for the state and the nation, to face outward more than inward. For it, there is a threat that along with the rise of competing nations, transport and quality constraints, and high labour costs, relative advantages are eroded over time. Within a few decades there could also be a substitution risk from recycled steel as China begins to repurpose its existing infrastructure. To what degree strategic decisions should balance global megatrends is a question that needs to be answered.

Before any silver bullet is found, there is a need to ensure that infrastructure is developed to serve the whole region, in order to eliminate duplication and inefficiency. The population of the Pilbara grew 42 per cent between 2006 and 2011, and in the decade leading up to 2011 median salaries grew by a staggering 219 per cent. The region was too busy extracting resources to develop the physical and social infrastructure to cope with a rate of growth that was faster than anywhere else in the nation.

Conversely, though, in 2014 iron ore prices fell from more than $140 a tonne in 2008 to less than $80 a tonne; the region now has a chance to pause and reflect on where to go next. Mining companies remain very profitable, but are making less money. Royalties have also fallen. Western Australia’s credit rating was downgraded from AAA in September 2013, and the government’s spending has tightened as a result. All this means less money to build infrastructure[iii]. It’s a catch 22 situation.

 

VITAL INFRASTRUCTURE ENABLES regions to stabilise and mature. When a boom ends, the secondary and tertiary infrastructure remain. Decisions about infrastructure investments determine whether cities either grow then shrink, or grow and multiply. Shared essential services, such as energy and trains, are fundamental to ensuring a productive future.

There are examples of infrastructure acting as a catalyst for communities on the edge of boom or bust. California evolved from gold mining, then used its mining rail system to transport agricultural products across land for export from the ports constructed for its shipbuilding industry. Hollywood was born as a cheaper alternative to filmmaking in New York. The state then focused on university research, which led to advances in aerospace engineering, and from there it became the technology capital of the world. Norway turned its oil riches into the biggest sovereign wealth fund in the world; it has invested heavily in social infrastructure, and this benefits its people in perpetuity. In doing so, it has immunised itself against the waxing and waning of the economic cycle. Western Australia has committed to establishing a similar fund, but is yet to do so. Rather than simply creating one project after another and dealing with what’s left at the end, it’s important to take a forward-thinking approach by observing the successful strategic decisions taken elsewhere.

Numerous options for economic diversification have been imagined for the Pilbara. In 1991, the Pilbara 21 report suggested a strategy for the region. While many issues in this report have been addressed, much remains relevant more than two decades later[iv]. There are two prevailing opinions on the subject, which are not mutually exclusive. The first is to cluster development in support of the oil, gas and mining industries; the second is to encourage non-resource based developments, particularly agro-industry and renewable energy that build on mining and gas infrastructure.

 

THE LONG-TERM economic viability of Australia is huge, thanks to its proximity to Asia. This has been recognised by both major political agendas, and the Pilbara is ideally situated to take full advantage.

Decisions made now will determine the extent to which it can service the Asian markets. Permanent, established residential communities could exist and modern cities could grow. It is a complex problem, but maximising the potential of the Pilbara offers enough diplomatic and fiscal opportunity for Australia to justify the effort.

No city can grow without having an agricultural base in their region, and the settlements of the Pilbara will always appear to be short-term and ephemeral until such a base is established. This will require new water pipelines – some materials can come from the mines, where large supplies are available from dewatering – as well as deeper access to groundwater. Again, a water grid will be needed linking fertile soils on the plains with inland sources.

An interconnected energy network in the Pilbara has been debated for decades. Without it, the region will not become self-sustaining. An integrated network would decrease energy intensity and reduce energy consumption, but it would need a co-ordinated governance framework. Using the assets created by natural resource extractors would mean existing capacity could be used more efficiently, and there would be less need for investment.

Some say that private companies would not, and should not, put their vital lifelines under someone else’s control. It would require government intervention to make this happen, but examples of this kind of consolidation and reform are evident in competitive markets throughout the world, where it has been to the mutual benefit of all.[v]

The argument that private companies and should not cede control over access to critical infrastructure is not borne out in international case studies. Despite often-cited business concerns around the loss of control and risks to business continuity, evidence suggests that, in fact, integrated public planning can be extremely cost-effective. Given the substantial advantages, it would seem sensible to try to find mutually beneficial solutions, such as the completion of power grids, water grids and shared rail systems to lower the costs of operating in the Pilbara.

At the heart of this debate is whether the private or public sector is best placed to instigate, invest and control reforms that influence the longevity of a community. Without the creation of networks and benefits of scale, economic diversification will remain elusive. Competing interests, when addressed holistically, could yield beneficial outcomes for governments, industry and, ultimately, the community.

The process of diversification within the reform process can also allow multiple issues to be tackled simultaneously. If planning for energy continuity and security over the long term, ecologically sustainable parameters must also be considered. The Pilbara’s greenhouse gas emissions make up approximately one third of the West Australian total at 25 Mtpa – an amount that could be drastically reduced by installing renewable energy sources as part of the same endeavor.

The Pilbara may have already won the natural resource lottery twice, but not all lottery winners stay rich. The bounty needs to be invested to create an intergenerational legacy. The difference between success and failure is not in the lap of the gods: it can be achieved by forward thinking and sound planning.

In many ways, the Pilbara is emblematic of Australia today. It has the potential to become a resilient economy and community, and take its place at the top table if the political will exists to do so. The right infrastructure can unlock the potential for the Pilbara to become sustainable, in the biggest sense of the word.

 


[i] Regional Development Australia 2013, The Cost of Doing Business in the Pilbara. Viewed at http://www.rdapilbara.org.au/resources/site1/General/Publication%20Reports/RDA%20Business%20in%20Pilbara_SinglePages.pdf.

[ii] Lowe, P 2014, ‘Demographics, Productivity and Innovation’, Reserve Bank of Australia. Viewed at http://www.rba.gov.au/speeches/2014/sp-dg-120314.html.

[iii] Graham, L 2014, ‘Promises, promises as Pilbara put on hold’, WA Today. Viewed at http://www.watoday.com.au/comment/promises-promises-as-pilbara-put-on-hold-20140928-10n467.html.

[iv] Graham, L 2014, ‘Larry Graham: Who’s responsible for the Pilbara’s future?’, The Sydney Morning Herald. Viewed at http://www.smh.com.au/comment/larry-graham-whos-responsible-for-the-pilbaras-future-20140524-zrn60.html.

[v] Green, J & Newman, P 2014, ‘As slowdown looms, Pilbara will need networks to survive’, The Conversation. Viewed at http://theconversation.com/as-slowdown-looms-pilbara-will-need-networks-to-thrive-27076.


From Griffith Review Edition 47: Looking West © Copyright Griffith University & the author.

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