china accord only a first step

Source:http://www.theaustralian.com.au/business/opinion/china-accord-only-a-first-step-in-getting-oakajee-back-on-track/story-e6frg9kx-1226141225168

China accord only a first step in getting Oakajee back on track
BRYAN FRITH From: The Australian September 20, 2011 12:00AM


THE unprecedented trade and investment accord between China and the West Australian government is probably a step in the right direction, but Premier Colin Barnett doesn't expect it to be an easy task to get the stalled Oakajee port and rail project back on track.

Barnett signed a draft agreement over the weekend with China's peak economic planning body, the National Development and Reform Commission.

It is the first time a Chinese government body has signed such an agreement with a state, rather than national, government.

The Oakajee port and rail project, a 50:50 joint venture between Murchison Metals and Japan's Mitsubishi, is intended to open up the development of WA's landlocked Mid West iron region by building a deepwater port at Oakajee and a 570km railway to enable export of 45 million tonnes of iron ore annually.

However, the project has run into difficulties, with Murchison admitting it is unable to fund its share of the project.

Moreover, China's state-owned Sinosteel, a possible foundation customer, has halted work on its $2 billion Weld Range iron ore project and laid off its staff, waiting for a "viable" port and rail plan.

Barnett says the Chinese company is still miffed at missing out in the original tender process.

For that, Barnett and his government must bear some of the responsibility.

The previous Labor government, in 2008, awarded preferred tender status to Oakajee Port & Rail, owned by Murchison and Mitsubishi, to develop a the Oakajee port.

OPR got the nod ahead of a rival tender from Yilgarn Infrastructure, which was owned 50 per cent by Chinese state-owned concerns and 50 per cent by Australian investors. It had $3 billion of debt funding essentially committed by China's Exim Bank.

That still left OPR and Yilgarn vying for the railway project. Yilgarn came up with an enterprising proposal to bring forward development of the railway by at least three years, exporting iron ore through Geraldton until Oakajee became operational.

That would have involved stockpiling ore about 14.5km from Geraldton and moving it to the port on a covered conveyor belt. That would have enabled early development of the Mt Weld and Golden West mines, which would have generated cash for them, ensured immediate product for Oakajee as soon as it came into operation and provided royalties of at least $80 million for the state government in the meantime.

Barnett rejected the proposal, declaring that the government would deal only with OPR, as it had won the tender to develop the port and railway, and accused Yilgarn of "trying to change the rules".

In fact, it was Barnett who changed the rules. The Oakajee tender was for the port only, and OPR and Yilgarn both had the right to pitch for the railway.

However, Barnett went ahead and signed a development agreement giving OPR the exclusive right to develop the port and the railway.

Barnett also changed the rules by deciding that the common user infrastructure of the Oakajee port should be government-owned with the WA government and the federal government each pitching in $339m. Yilgarn was not given the opportunity to tender on that basis.

The Chinese company believes it lost out on the port tender because of US concerns at the possibility of China controlling a port in the Indian Ocean, and that concern was resolved by the state and federal governments taking over ownership and control of the seawall, turning bases and, importantly, the maritime aids, including port telecommunications.

Barnett's action was consistent with remarks he made while in opposition that it was against the state's interests to allow Chinese backed companies to bid for the port because it would "give them a stranglehold on development in the region".

He also claimed that Japanese companies had "played by the rules of the game" when they invested in WA is the 1960s and 1970s, by taking small stakes in mining companies, but that Chinese companies pursuing WA miners were "slightly different scenarios".

Barnett has now changed his tune and sees it as essential that the Oakajee port and rail project includes Chinese participation. It was always the Chinese exporters that had the wherewithal, and all they had to do was wait for OPR to unravel.

Barnett claims that the Chinese companies are unhappy about the proposed mineral resources rent tax because it targets iron ore and coal and Chinese companies are the largest buyers of those commodities.

Chinese companies are unhappy about Australia's foreign investment policy of restricting sovereign wealth funds to maximum ownership of 49.9 per cent of Australian companies, which they view as aimed at China.

Sinosteel's hostile takeover of Midwest in 2008 made the government wary. Sinosteel sought to test the government by applying for approval to acquire up to 100 per cent of Murchison, although it had no plan to do so.

The government instead gave approval for Sinosteel to acquire a maximum of 49.9 per cent. It's not commonly known that Sinosteel no longer has that approval. The approval was only granted for 12 months, and in October 2009 Sinosteel made a new application to acquire up to 49.9 per cent of Murchison but it was not approved by the Foreign Investment Review Board because Sinosteel did not provide details of a specific transaction to acquire a share in Murchison.

That's ironic, as Sinosteel never had specific plans when it was first given approval to go to 49.9 per cent.

The subsequent knockback may have hardened the belief that China is being discriminated against in foreign investment applications.

Unfortunately, Barnett is still talking about ensuring that China is able to take "minority stakes" in major resources projects and infrastructure developments.

If Chinese interests do decide to participate in the Oakajee project, it's unlikely they will be satisfied with a minority stake. They are interested in the railway so they influence the costs of the infrastructure.

Under the Yilgarn model the railway would have been essentially a service to the miners, with the profits generated from investment in the mines. Under the OPR model the miners faced port charges and a tariff for hauling their iron ore, which kept rising as the estimated cost of the project increased.

The estimated cost has already blown out from $4.4 billion to $5.9bn, pushing up the proposed charges to the point that the potential customers, the iron ore miners, believe the project, as proposed by OPR, is not economic.

There are now suggestions that the cost of the project have blown out even more and may top $7bn. If so, that would further undermine the OPR model.