Inland rail’s dirty secret

As the federal government pushes forward with Barnaby Joyce’s white elephant political legacy of a $10 billion inland rail line, overlooked is the extent to which subsidised coal exports will play a key role in the finances of the project.

Despite using optimistic demand scenarios, the government has been unable to conjure a business case for the inland rail line, which will ostensibly connect Melbourne and Brisbane via central New South Wales, albeit stopping at Acacia Ridge in outer Brisbane, with a connection to the Port of Brisbane not slated until the 2040s. According to the business case prepared in 2015 by rail infrastructure owner Australian Rail Track Corporation for a committee headed by former Nationals leader John Anderson, the inland rail project as a whole will wipe out $6.5 billion in taxpayer funding over its life, with total revenues less than half of the cost of building and operating the line, and assuming there are no blowouts and delays to construction.

In order to avoid the embarrassment of moving this huge loss onto the budget, the government has used a financial sleight of hand and justified treating the loss as an investment, by using the ARTC’s overall financial position as cover, rather than having the project stand on its own merits in the budget. Recognising the financial weakness of the business case, the ARTC in its business case instead argued that the project would produce revenue well in excess of maintenance and operating costs, as long as the capital investment was written off.

That’s where coal comes in. The second-largest revenue item for the inland rail project in the business case is nearly a billion dollars in revenue from coal haulage. That’s conditional on an expansion in thermal coal exports. “There is potential for Inland Rail to be a catalyst for additional coal exports from south east Queensland through the Port of Brisbane,” the business case states.

Inland Rail will provide a more direct and cost effective route particularly when crossing the Toowoomba Range, and complementary investments in branch lines would further assist to take advantage of Inland Rail capacity improvements in axle load and train length. Up to 19.5 million tonnes of coal is expected to use Inland Rail as a result of offering a more efficient rail connection to the Port of Brisbane, compared with the existing 8 million tonnes.

Those assumed “complementary investments” are Queensland government expenditure on Queensland Rail lines and suburban to increase the capacity for coal haulage, which Queensland taxpayers will be on the hook for.

But crucially, the ARTC plans to subsidise coal exports in order to get more traffic on the inland rail route. The business case states:

In the financial analysis, access charges have been set to maximise rail volumes rather than to maximise financial revenue. For example, charges per tonne have been matched with coastal route charges and coal access charges have been set to maximise volume of coal that can be accommodated within the assumed cap of 87 coal train paths while providing sufficient revenue to cover Inland Rail below rail operating and maintenance costs. This approach favours rail mode shift thereby maximising economic benefits.

The size of this taxpayer subsidy to coal exports will be substantial: the ARTC plans a 35% subsidy on the normal coal access price that coal miners are required to pay. Charging coal exporters full price would generate an extra $450 million in revenue for the project, while leading to a fall in the level of coal exports compared to that of the project’s “core scenario”. The entire project is sensitive to coal price movements — a low coal price could strip $600 million from the project, while a strong coal price, coupled with more realistic access charges, could deliver an extra $1.1 billion.

As the business case stands, however, coal exporters will be the big winners, with a substantial subsidy from taxpayers for a project that not merely can’t stand on its merits, but is explicitly designed not to.