Image for Economic Assessment of the Gunns Pulp Mill 2004-2008

School of Economics and Finance Discussion Paper 2010-01

Abstract

This paper outlines the process for evaluating the economic effects of Gunns proposed pulp mill in northern Tasmania. Removal of the project from the Resource planning and Development Commission had two important effects. First, assumptions underlying the proponent’s impact statement could not be tested in public hearings. Second, important parts of the RPDC economic assessment criteria were never addressed. In the end, the review process was structured so that only one outcome, favourable to the proponents, was ever possible.

Introduction

Speaking in support of the Pulp Mill Permit on 30 August 2007, Legislative Councillor Mr Jim Wilkinson concluded that ‘I am satisfied that the pulp mill proposal has been assessed against the guidelines established by the RPDC and against the conditions that were imposed by various regulators according to the law’. Some seven weeks earlier the economic consulting firm ITS Global had completed its review of the social and economic benefits of the mill. It is clear from the Hansard record of the debate that many Councillors relied on the conclusions of this review in supporting the granting of a permit for the mill, but it is a matter of speculation as to whether Councillors other than Mr Wilkinson believed that the RPDC guidelines had been met. The review by ITS Global, however, leaves no doubt as to its position – it noted that since Gunns had withdrawn from the RPDC assessment process, the guidelines for the draft IIS were ‘defunct’[1]. For the Lennon government it was self-evident that the large investment associated with the mill would benefit Tasmanians. In 2004, well before any formal assessment process had begun, Economic Development Minister Lara Giddings said that,

‘There are clear benefits for Tasmania in developing a pulp mill. The benefits can be measured in terms of jobs and economic growth through the downstream processing of our timber resource and we are determined to do all we can to see a modern pulp mill facility using world’s best practice in Tasmania.’[2] 

The government was true to its word. Significant funds from Commonwealth and State governments were spent to facilitate development of the mill proposal and to persuade Tasmanians of its merits. The Tasmanian government lobbied for continuation of tax concessions under managed investment schemes so as to ensure the financial viability of the mill and, after the mill permit was legislated by the Tasmanian parliament, for Commonwealth infrastructure funding for transportation of pulpwood around the state. 

The effect of withdrawing the mill from the RPDC assessment process was that these and other expenditures or tax concessions, together with possible externality costs, were never quantified by either the proponents or reviewers of the IIS. This made it inevitable that the assessment process would find ‘clear economic and social benefits’ from building the mill.

The focus of this paper is on the adequacy of the economic assessment of the pulp mill project – both through the RPDC process and the subsequent ITS Global review commissioned by the Department of Premier and Cabinet. The story begins with an outline of the RPDC assessment criteria, followed by a section illustrating the pro-mill environment of political spin in which the assessment took place. I then analyse the assessment process in two stages. The first stage comprises three sections which examine the economic modelling strategy underpinning Gunns’ IIS, the welfare measures derived from it, and whether the IIS met the RPDC guidelines. The second stage deals with events after submission of the IIS – the peer review reports of the IIS, the ITS Global review, and the modelling conducted by the National Institute of Economic and Social Research. 

It is just possible that, had a more critical assessment been completed, a broad consensus might have been reached in which a formal benefit-cost analysis showed the mill to be of net benefit to the residents of Tasmania. This is not what happened. The last section of the chapter concludes that, at the time Mr Wilkinson spoke, the economic assessment of the pulp mill was incomplete in a number of important respects – consideration of subsidies for the mill had been sidelined; important modelling assumptions had not been scrutinised; the possible cost of environmental externalities had been excluded; and benefits accruing to Tasmanian households had been misrepresented.

HERE: Download Paper with footnotes: Discussion_paper_2010-01.pdf