Economics consulting becomes a new art form

‘Such is art, such is life.’ Photo: Glenn Hunt

Economics consulting truly is art. Look no further than the masterpiece of consulting from the Centre for International Economics, which managed to deliver entirely different outcomes for different clients by deploying the same data in a different way.

The centre had two clients late last year who wanted to know about the implications of NSW planning decisions on coal exports from the state.

Exhibit A: the first client was the NSW Minerals Industry Taskforce, a group of mining executives and the Minerals Council, which was desirous of some large numbers to support their cries for lower royalties, more government spending and their wish list of changes to the planning process.

No. 1 on the industry taskforce’s wish list is to do away with the independent Planning Assessment Commission.

Exhibit B: Ironically, the Centre for International Economics’ second client was none other than the Planning Assessment Commission.

The commission needed advice on the Newcastle T4 coal export terminal proposal and whether the huge volumes of coal predicted to be shipped by the port and the miners were actually plausible.

So, here we have two clients wanting to know about state planning decisions and their impact on coal exports.

The first part was easy. A cut and paste job – graphs and text – about coal volumes and market forecasts.

But then it got trickier.

In this report the consultants found: “The Proponent does not offer any evidence to suggest that the increased rate at which coal can or will be extracted and transported to the Port is plausible.”

Having told the Planning Commission that export volumes justifying a new terminal were probably not plausible, it took a lot of flair to say to the industry taskforce that planning was holding back these same implausible exports.

When economists have a problem, they make a model.

The consultant’s model managed to find that existing planning conditions could hold back coal exports by up to $17 billion per year by 2030 and growing.

This would reduce the state’s economic output by $47 billion, or 7 per cent – a staggering conclusion as mining accounts for only 3 per cent of gross state product (GSP) at the moment.

This reduction in GSP would lead to 85,800 fewer mining-related jobs in the state, an especially heroic assumption. According to the Labour Force Australia quarterly data from November 2014, mining employs only 28,000 people in the state.

Creative models rest on creative assumptions – like ignoring whether NSW mines can actually supply this much coal profitably – the key argument in T4: “[The model] does not accommodate changes in the relative competitiveness of NSW compared to other coal producing regions.”

The model also ignored any “merits of the current planning requirements”. In other words, they ignored whether completely unregulated mining expansion would have any impact on the community or any other industry. Under this assumption, you could put an open-cut mine in the Sydney CBD without cost to anyone. The Botanical Gardens would be a good place to start as the absence of large buildings to be demolished would deliver a definite cost advantage.

The Centre for International Economics is a well regarded operator in the field of economics consulting and it is by no means an outlier in the art of analytical contortion.

Responding to BusinessDay, the centre emphasised that the two reports were peer reviews of somebody else’s analysis, and that the taskforce report had responded to specific questions which they had been invited to address. “The purpose of what we were doing in each case was quite different,” it said.

It emphasised that the three “scenarios” on coal exports were not forecasts and the “positive scenario” on coal exports represented 2030 estimates and therefore he urged caution in comparing them with present-day labour data figures.

Readers may recall our story in praise of Deloitte Access Economics, whose work for the Minerals Council of Australia somehow manages, against all odds – yet somewhat conveniently – to conflate taxes with royalties.

Royalties are a cost of production, they are the payment a company makes to the Crown for the minerals, which belong to the people. They are not a contribution. They are not, as Deloitte frames it, part of a “total tax take”.

They are no different to payments made by manufacturers to acquire ownership of the raw materials they use in the process of manufacturing final products.

Manufacturers don’t attempt to describe their cost of raw materials as a tax. Miners involved in exploiting American mineral resources don’t attempt to lump their royalty payments with taxes either. It is only organisations like the MCA and, in particular, the foreign multinationals they represent that seek to describe one of their raw material costs (royalties) as a tax … and of course, their trusty economic consultants.

Such is art, such is life.