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<RICHARD DENNISS, AFFIRMED AND ANDREW MAXWELL SEARLES, SWORN(11.59AM) WHITE: Are you Dr Denniss? 5 WITNESS DENNISS: Yes, I am. WHITE: Dr Denniss, is your professional address the University of Canberra? 10 WITNESS DENNISS: Yes, it is. WHITE: Dr Denniss, are you the executive director of the Australia Institute and an adjunct associate professor at the Crawford School of Economics and Government at the ANU? 15 WITNESS DENNISS: Yes. WHITE: Dr Denniss, have you affirmed an affidavit in these proceedings dated 11 July 2012? 20 WITNESS DENNISS: Yes, I have. WHITE: Do the opinions expressed in the report attached to that affidavit remain your opinions subject to the views contained in the joint report? 25 WITNESS DENNISS: Yes, they do. WILLIAMS: Dr Searles, could you tell the Court your full name please? 30 WITNESS SEARLES: Andrew Maxwell Searles. WILLIAMS: What is your occupation? WITNESS SEARLES: I am a principal researcher at the Hunter Valley Research Foundation and an associate professor in economics at the University of Newcastle. WILLIAMS: You have sworn an affidavit of 7 August this year annexing a report. 40 WITNESS SEARLES: An oath, yes. WILLIAMS: To the best of your ability are the factual matters in that report true and correct? 45 WITNESS SEARLES: Yes. WILLIAMS: Are the opinions in that report opinions that you hold? 50 WITNESS SEARLES: Yes. .10/09/12 30 DENNISS/SEARLES

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WILLIAMS: Your Honour, the parties are again agreed subject to the Courts direction, that the most efficient way to proceed would be for a five or 10 minute presentation by each followed by cross-examination. 5 HIS HONOUR: Thank you. Dr Denniss, why dont you start and just explain your points of view. WITNESS DENNISS: Sure, thank you. From my point of view the information thats been provided in forming this decision is based on the inappropriate use of input/output modelling, and while I think there is a role for input/output modelling in understanding impacts of some decisions, I dont think the kind of decision that we are considering in this case is one of those situations. Basically input/output modelling describes the strength, the relative strength of the relationship between different parts of the economy. So when a car manufacturer makes cars, cars are made out of steel, labour is required, energy is required and the input/output tables tell us about the relative strength of that relationship, so if you wanted to know how much more steel would be required to make an extra 1,000 cars the input/output tables arent a bad first estimate for where to go looking. However, when we start to use these input/output tables to try and understand the economic impacts, and in particular the labour market impacts of an investment such as the Warkworth expansion, I dont think the results are terribly meaningful at all. Now, this is a view which is shared by Treasury and the Australian Bureau of Statistics and indeed is even conceded in parts of the Bennett and Gillespie report, that to try and use input/output tables to tell us about job creation is simply inappropriate. The reason for that is that quite explicitly, and I am sure Dr Searle will agree with me, quite explicitly, the input/output data that is before you assumes the existence of what I refer to as a ghost workforce. There are hundreds of skilled potential job seekers currently unemployed, waiting for this investment to go ahead and quite explicitly in input/output tables, the assumption is that there are these unemployed resources which will be drawn in to the new activity but not drawn away from any other activity, which is - you know, the significance of the employment - the unemployment assumption, that they are not being drawn away from anywhere. Now, the consequences of that cant be underestimated when youve got not just an economy that is approaching full employment or as Professor Quiggin said, an economy which is sufficiently fully employed that the Reserve Bank will increase interest rates if unemployment rates would be much lower, but even leaving aside the national unemployment rate which is very low, the idea that there are hundreds of skilled mining or manufacturing workers sitting idle at the moment waiting for these projects to go ahead, is even more unrealistic. To add to that, the idea that there are unemployed skilled mining and manufacturing workers in the Hunter Valley at the moment again sitting and waiting for these projects to go ahead, I just dont think is plausible, accurate or .10/09/12 31 DENNISS/SEARLES

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Now, it is very widespread. There is no doubt it is very widespread for people to use these sorts of input/output models and what are often called input/output multipliers to tell a story about the indirect or upstream and downstream impacts of a project, you hear it all the time, but what you dont hear all the time is what would happen if every industry were to commission a consultant to write the same report for them, because what happens with input/output modelling is that a particular industry, usually the proponent who has paid a consultant, says, Well, Im going to spend a billion dollars on this, what are all the jobs that will be created in some other part of the economy? Effectively what that allows the proponent to do is claim credit for employment in other industries, employment in other sectors, and we have conducted this exercise. If every industry were to go and try and estimate the indirect jobs that flowed because of their industrys existence, what you find is that Australia would employ around 200% of its current workforce, that is these spill-over or indirect jobs are only meaningful in the kind of partial equilibrium framework that Professor Quiggin was referring to. Of course it is nonsensical to think that the Australian economy employs 200% of its workforce, it doesnt, that the problem is that its partial equilibrium analysis assumes ceteris paribus, all other things being equal. So the mining industry does its analysis, assuming ceteris paribus in manufacturing. Manufacturing does its analysis assuming ceteris paribus in construction. Construction does its analysis assuming ceteris paribus in retail and they can all come up with these little numbers that are politically useful to them but they dont make any common sense and any economic sense when viewed at the macro scale. That is what the difference between a partial equilibrium analysis and input/output analysis is one of those, compared to what is called a CGE or computable general equilibrium model. In a CGE model quite explicitly--

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HIS HONOUR: Sorry, computer? WITNESS DENNISS: Computer - sorry, computable. HIS HONOUR: Computable.

40 WITNESS DENNISS: Computable. HIS HONOUR: Yes. 45 WITNESS DENNISS: General equilibrium. Thats the more common and I think most economists would argue, more appropriate kind of model to estimate things like net employment creation associated with projects, because while input/output models assume these ghost workers or this pool of unemployed skilled workers, computable general equilibrium models, CGE, if you dont mind, CGE models start from the pool of labour that exists. So in a .10/09/12 32 DENNISS/SEARLES

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CGE model if you increase employment in mining by 1,000 people, the CGE model will effectively draw 1,000 people out of other industries. That is the role of the model, to say well, which industries would most likely be the source of that. 5 So in Queensland, for example, where theres been some big mine developments and proposals, we see, for example, that if the China First Mine were to go ahead, the proponents of that mine concede their own CGE modelling says 2,000 manufacturing jobs would be lost in the rest of Queensland. So its not controversial at all to suggest that with a CGE model new jobs in one industry come from other industries. If all of a sudden I wanted to buy up waterfront property in Sydney, it wouldnt create more waterfront property. I would be buying it off someone else. These sorts of transfers are quite common in economics. It is certainly the case with skilled labour in the middle of a fully employed economy in the middle of a mining boom. Again, to argue that there is lots of unemployed miners, I dont think, is very realistic. Now Professor Bennett made the point that even if these arent new jobs, the continuation of existing jobs is particularly valuable. Now, I would say if there is - and to be clear, I dont think there will be any net employment creation from this mine going ahead. I think if this mine goes ahead jobs will be lost in other mines or in other manufacturing enterprises. But Professor Bennett suggested that even if that were the case, that there are benefits associated with the continuation of existing jobs, but I just looked this up when Professor Bennett was speaking. Professor Bruce Chapman, Professor Bennett and mines colleague at the Crawford School, has estimated based on the rate at which mining workers leave the industry, that in 10 years time 85% of todays mining workers will have left the industry and in 20 years time 97% of todays mining workers will have left the industry. So while I dont think theres any employment creation associated with this project, I also dont think that the benefits of continuation would be anywhere near as significant as has been suggested for the simple fact that theres higher turnover within the mining industry. A few other points that I would make about the use of these input/output models in this instance. All input/output tables are based on assumptions about the relative strength of the relationships between different industries, and I think that - well, the data that we are looking at is based from 2001, the Hunter economy, as the rest of the economy has transformed quite significantly since then. The uptake of mobile phones and the internet since 2001 are a very small example, but all industries over time undertake technological and structural change. I would suggest that no input/output table based on data from 2001 could provide an accurate depiction of not only what is going to happen in 2012 but what is forecast to happen as far out as 2030. Now, the employment intensity of some industries might increase, might decrease in others. My contention is .10/09/12 33 DENNISS/SEARLES

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that 10 year old data is hard to use now, it is very problematic using it 20 years hence. To conclude, I again reflect on what was said this morning, it seems to me that when we look at things like the total value of the coal sold and we are including the profits of the owners of the mine, when we are including all those benefits, that it doesnt make economic sense to ignore the related costs. That is if we are going to include benefits that occur outside a boundary, surely we should include the costs that arise outside of those boundaries. To summarise, I would suggest that what the mining industry has done in many instances using these sorts of techniques is they are very good at claiming credit for indirect benefits, but they are very reluctant to take responsibility for indirect costs. So they are very quick to point to jobs in retail or jobs in transport and say, Thats a benefit that comes with this project, but when it comes to people losing their jobs in the manufacturing sector because of the higher exchange rate or manufacturing enterprises, shutting down because of the higher wage rate, those costs are not being presented, and a CGE model includes those things far more forcibly. Thank you. HIS HONOUR: Yes, Dr Searles. WITNESS SEARLES: Thank you, your Honour, commissioner. I would like to just start off by giving a brief background to the foundations input/output model. The foundation has been involved in input/output modelling since the late 1960s and 1970s, well before the time I started there, but I have been involved in input/output modelling since the late 1980s. I agree with Dr Denniss that what the IO model does is identify linkages within the economy, and specifically it identifies the strength of linkages, and thats represented by a statistic called the multiplier. They are very good, I believe, for showing the effects of a stimulus or a contraction in the economy. The outcomes from an input/output analysis usually report a change in employment, output or income, so there are three key results from an input/output analysis. In terms of the foundations input/output model our model only relates to the Hunter region, so we identify any benefits that go outside the Hunter, for example, to the Central Coast, Sydney or Melbourne, we regard that as a leakage and we dont include it as jobs or output being created. One of the important aspects of our model that we believe differentiates it from many other - particularly regional models that are used is that it is survey based. We have interviewed a random selection of around 300 firms to identify where those firms buy their products from and where they sell their product to. It is using this survey based information that enabled us to construct a region specific input/output model. The data that we last collected was from 2001 and for reasons that I have both addressed in my affidavit and that I will just briefly touch on in this presentation, we still believe that that 2001 data is a reasonable representation .10/09/12 34 DENNISS/SEARLES

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In terms of the Warkworth report that we undertook, I believe it is a conservative approach to the modelling. Firstly, the analysis that we undertook removed in terms of an input to the model any expenditures that Coal and Allied, Rio Tinto, identified to us were not going to be spent in the Hunter region, so that was the first step down in terms of having a conservative run of the model. I would also like to identify that the model itself also assumes from that initial impact that there is a leakage from the region. We left the model to do that as well. So there is a built in conservative approach to what we did. In terms of the operations, we removed those external expenditures and we did the same thing for capital expenditures as well. If Rio Tinto identified that the capital being purchased from overseas or outside the Hunter we would remove that before we actually put those figures into the model. In terms of the key results, and I think this is actually quite important because it also relates to the availability of resources. The analysis that we did compared the base case, which is the existence of the mine, and we ran a scenario between 2011 and 2021, we also ran a scenario with the mine being extended out to 2031. The main difference in terms of the analysis was that the benefits being created from the base case extended out so they continued on, and this is important when people talk about what might appear to be a sudden boost in employment or employment being dragged in from the region. Those employees are actually already there, and what would likely be to happen is that if the mine stopped producing at .X for example, then those employees would then be without work, so that in a way is where the available resources come from. If the mine continues, there is a continuation of those positions, not necessarily the same people, but those positions. HIS HONOUR: Does that make the assumption that there is no other work for them to go to? What if there is another coalmine that opens up and theyre looking for a workforce in 2021. WITNESS SEARLES: That is possible. What I can do though is comment on the available labour supply in the current market and if it suits your Honour, I would like to get onto that. I have just got to sort of progress through the presentation. HIS HONOUR: Yes, yes, please. WITNESS SEARLES: If that is suitable. So in terms then of actually addressing what had been the concerns with the input/output modelling, in my affidavit I have identified evidence that has been drawn from both the Australian Bureau of Statistics and also from sample methodologies that we use at the Hunter Valley Research Foundation to identify trends in the regional economy, both from households and from firms. .10/09/12 35 DENNISS/SEARLES

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The reason that I am citing this is that I think it is quite a high standard of evidence that we are using and we are using information that is particular to the Hunter region, so we are not assuming that the Australian statistics apply to the Hunter, because the Hunter is a very different region to what is happening in other areas of Australia. As an example, in the 1990s I was an economist with the Hunter Valley Research Foundation at the time when unemployment rates in the Hunter were approaching 17%. It was very different from even though we were in a recessionary period, it was much harder in the Hunter region than it was elsewhere in Australia. In terms of using the 2001 data for the Hunter region, I believe that in fact it is appropriate. It wouldnt have been appropriate had we been using a model that was based on data that had been collected in the 80s and 90s and the reason for that is that during the 70s, 80s and 90s, there was very significant structural change occurring within the Hunter region. We were moving from an economy that was very reliant on heavy manufacturing to an economy that was much more diversified. Most of that structural change had actually completed by the end of the 1990s, and in fact one of the well-known changes that occurred in the Hunters economy was the closure of steel making at BHP in 1999. Between 2001 coming up to 2012 there have been changes in the economy but I believe that the evidence suggests that in fact theyve just been a continuation of minor changes on a path that was already set prior to 2001, after that structural change happened. In terms of unemployed resources, I believe that the evidence would suggest that there are unemployed resources in the Hunter region and I refer both to labour but also to the capacity of local firms. Starting firstly with the unemployment rate. In the Hunter region at the moment the unemployment rate does tend to oscillate quite a bit because it is based on a reasonably small sample, but it does hover between 5 and 6%. The unemployment - to be defined as unemployed by the Australian Bureau of Statistics means - sorry, to be defined as employed by the Australian Bureau of Statistics means that you have found an hour or more of work in the reference period, so it is actually a very small step up to actually be considered as being employed. So the unemployment rate is a proxy for unemployed resources, but it is a very conservative one. We believe that you also have to look at some of the other labour force figures as well. One, for example, is the participation rate, and the participation rate is the proportion of people in the working age population who are either unemployed, that is they are looking for work, or are in work. The participation rate in the Hunter region has tended to be for decades well below the participation rate in both New South Wales and Australia. That alone suggests that there is a potential for a pool of - or a supply of labour to come forward, and in fact over recent years that is exactly what we have been noticing. As more and more jobs become available, people who were .10/09/12 36 DENNISS/SEARLES

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previously not looking for work or not putting themselves forward for work are coming forward, and in my affidavit I have a chart there on the participation rates and you can see that in the Hunter region t he participation rate is approaching that New South Wales, but it is still below it. 5 There is also a factor of underemployment. Underemployment is quite difficult to measure at the regional level. We conduct each quarter a survey of Hunter region households, and one of the questions that we ask them, particularly for people working in part-time employment, whether they are working sufficient hours, and, again, in my affidavit I have presented a chart in there which indicates that on balance people are working fewer hours than they would like to. This again represents the potential for labour supply that is in existence at this point in time. There is also the ability to increase the supply of labour through training, and in my affidavit I give an example of a TAFE initiated course that is located in the upper Hunter that is designed to specifically skilled people for working in the mining industry. So again there is this supply of labour which the region is capable of providing. The final point that I would like to mention here is that supply is also being released constantly from other sectors. For example, in the Hunter region at this point in time we have got a very weak residential building sector, and that of course has implications for people who would normally be working, the trades, who would normally be working in the housing industry. Two other pieces of information that I would like to put forward that support the contention that there is available resources. One comes from our - sorry, both come from our business surveys, which are undertaken amongst a randomly selected group of firms, each quarter in the Hunter region. One of the questions we put forward to them is, What is the main factor thats constraining their output? The most frequently cited factor is actually sales and orders. Labour comes midway out of six particular options that we put to respondents, labour comes in third, and about 25% of firms indicate that the supply of suitable labour, so that means skilled labour, is a concern for them. That proportion and the chart is in my affidavit, has remained pretty stable from I think put the chart back from 2000 and it has virtually been unchanged right throughout the mining boom. The second piece of information from our labour force surveys is related to the supply of resources in general, and it is the capacity of local firms, and one of the questions we asked our firms in the Hunter region is about their operating capacity and between 40 and 45% of firms have indicated that they are operating at 80% or below. Again, this is indicating that there is supply of resources within the Hunter region and that proportion, in my affidavit, has also remained pretty stable over the last decade. One of the criticisms about the input/output modelling that had been identified was the fact that it could duplicate and double count. I agree that there is the potential for input/output modelling to duplicate, .10/09/12 37 DENNISS/SEARLES

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however I also would like to say, and I have documented this in my affidavit, that we took care to make sure this duplication did not occur. The duplication, I believe, will occur if people conduct the analysis and report both the income effects and the output effects. Both are represented in dollar terms and its quite likely that people will add them together, and in fact the income effect and the output effect do overlap, so if you do add those two figures together, you will be double counting. We did not do that in the Warkworth report and we only reported the output effects specifically for that reason. In terms of the benefits of using the foundations input/output model, firstly we believe it is specific to the Hunter, because it is based on surveys of local firms. We believe that we have taken a very conservative approach. The model itself only pertains to the Hunter region so it doesnt include employment benefits that fall outside of the Hunter region, and in the way that we did the modelling, we were very careful to remove inputs that may have overstated what the benefit could be. That actually relates to one of the criticisms of the input/output modelling in that we used the - it was stated that we had used the sale price of coal and I would like to be clear that in fact we didnt use the sale price of coal, we actually used the cost of producing coal, which is a very different figure and a much lower figure, and that was the input that we used for our modelling work. That sums up my statement, thank you. HIS HONOUR: Now, Dr Denniss, is there anything that you want to respond to that or ask questions? 30 WITNESS DENNISS: Yes, look, theres a couple of points that need to be made, and perhaps we might need to clarify whats meant by duplication because I would contend that there is substantial duplication of the benefits associated with this modelling. Can I just read a quote from the ABS to help describe why I think theres duplication? HIS HONOUR: Yes. WITNESS DENNISS: According to the ABS, when using input/output models the implicit assumption is that those taken into employment were previously unemployed and were previously consuming nothing. In reality, however, not all new employment will be drawn from the ranks of the unemployed, and to the extent that it was, those previously unemployed would presumably have consumed out of income support measures and personal savings. Employment output and income responses are therefore overstated by the multipliers for these additional reasons. Now, the significance of that is that while I dont suggest for a minute that Dr Searles has conflated the two different forms of multipliers, but when you assume that everyone moves from the ranks of the unemployed to the ranks of the employed, and you then go and calculated what he refers to as the pay .10/09/12 38 DENNISS/SEARLES

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packet effect, if people were moving from having zero pay packet to their mining income pay packet, then when they go and spend that money in the local economy, that will have a far bigger impact on the local economy than if people move from manufacturing job A to mining job B. 5 So the pay packet effect that is referred to in the Hunter Valley Research Foundation work I would argue is a duplication of the benefits because quite explicitly, and Dr Searles doesnt dispute this, the assumption is that all of these jobs come from the ranks of the unemployed. Now, to quote the Mining Council of Australia: The mining industry has got a skills shortage issue, a chronic shortage of mining professionals and tradesmen. 15 I dont believe, and it is my opinion, that it is frankly absurd to believe that is a pool of unemployed skilled people who can move from zero pay packet to employment in this industry and that in turn the social and economic benefits associated with that transition can be anything like what is being estimated by the Hunter Valley Research Foundation. Dr Searle(as said) might have some evidence for you on what proportion well, there are two extremes and there is a middle ground. I am comfortable with my proposition that the employment creation from this will be zero or something approaching zero. Dr Searle is suggesting that some people might be trained and take up these jobs, but the question is will all of them be trained and take up this job? Even if we concede some small net employment increase, I think it is inconceivable that all of these jobs that are being described as having economic and social value are jobs that would otherwise not exist. That is what we know is the Reserve Bank sets interest rate policy to manage the macro economy in such a way that it targets an unemployment rate, unfortunately some would say of around 5%. So whether Dr Searle thinks there is under employment or not in the Hunter region it is not really the point. The point is what would the Reserve Bank do if unemployment were significantly lower than it is now and the answer is it would increase interest rates. So I do think that there is significant duplication, not that - I agree that the kind of duplication he described does not occur, but if you think that there are 900 or so unemployed people who can move into these jobs, then the numbers put forward by the HVRF are sound, but if this is just people moving from one industry to another, then it is not. Now, to quote the proponents of a large mind in Queensland, this is the proponents, I might add, when they did CGE modelling of the kind that I think is far more appropriate they say: Of note, the manufacturing sector is estimated to record a considerable decline in overall industry output during its operation. It is anticipated that the manufacturing sector will be one of the .10/09/12 39 DENNISS/SEARLES

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hardest hit sectors in terms of the reallocation and draw of labour to the China First Project given the relatively similar skill sets employed. 5 Now, there might be something uniquely Hunter Valley about the capacity to generate these skilled workers that the industry needs, but the mining industry in Queensland arent aware of them and the Mining Council itself dont appear to be aware of them. HIS HONOUR: Question of - Dr Searles, is you mentioned about the basis of structural change and how this economy occurred before 2001, since then theres only minor changes. Just on this point about the employment where theres been a number of mining projects which have commenced since 2001 and indeed this project itself got ascent in 2003, have you done any research on the workforce that were employed in these mining projects and from whence they came. Did they, for example, support your hypothesis that they would be all unemployed people first getting their job in the mines, or did they, as I think would seem more likely, come from other industries either within the Hunter or other mining projects elsewhere. WITNESS SEARLES: We havent done any specific research to see exactly where the employees have come from, but if I could make just a couple of points. One is that in the Warkworth example, there is sort of a continuum and I guess the way that I am viewing it is that there are people in those mining positions up and to a certain point. If the extension does not go ahead, then those people will become unemployed at that point. If the extension does continue on, those people would then transit from being in this job to that job, so it is effectively the same positions. The contention - I believe the contention is that people being drawn from other sectors does rely on us being close - either at or close to full employment, and in the Hunter region I dont believe that is the case. We have a reasonably complex regional economy and, for example, at the moment, as I mentioned earlier, people who are working in the building sector are going to find that their job prospects are actually reasonably quite weak and some of those skills should be skills that will be picked up by the mining sector. HIS HONOUR: All right. Questions please. WILLIAMS: Dr Denniss, this is an extension project, as youre aware, with its major employment effects, some before then, but the major employment effects, 2021 to 2031. Does the labour market have the capacity to respond to anticipated demand in a 10 year timeframe? WITNESS DENNISS: Well Im not quite sure what you mean. The labour market doesnt exist per se. The labour market is you know thousands of employers and tens of thousands of employees coming together, so individual students deciding what to do at university might be looking 10 years out and .10/09/12 40 DENNISS/SEARLES

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some firms with those sort of time horizons might be thinking about that. But the labour market sort of isnt sitting there making any decisions today. Employers are making decisions and employees are making decisions. 5 WILLIAMS: No but as you point out, people will be leaving school in the Hunter Region for example? WITNESS DENNISS: Yes. 10 WILLIAMS: And they will be making decisions whether to train in a trade? WITNESS DENNISS: Yes. WILLIAMS: Whether to study engineering at university. Others who are presently unemployed in the area might be making decisions about whether to take a shorter form of training, for example the plant operator training that can be undertaken in a much shorter time? WITNESS DENNISS: Yes. 20 WILLIAMS: Those kinds of decisions are in part informed by expectations about employment-WITNESS DENNISS: Yes. 25 WILLIAMS: --within an industry such as this on a 10 year timeframe? WITNESS DENNISS: Indeed. I mean to the extent that the labour market does a good job of matching all those desires with all the outcomes, thats exactly whats going on. But at the same time theres lots of people enrolling in courses today that probably arent going to generate the jobs for them in 10 years time because no-one has that sort of foresight. WILLIAMS: That is what you would call a labour market imperfection? 35 WITNESS DENNISS: Indeed and its one of the reasons why 5 per cent unemployment is perhaps confusingly for non economists seen as full employment. 40 WILLIAMS: But theres various facilities available, vocational guidance for example to inform people about anticipated labour market trends? WITNESS DENNISS: Yes. 45 WILLIAMS: And one would assume that rational school leavers or rational unemployed people would take account of information of that kind on a 10 year time horizon? WITNESS DENNISS: Yeah well look I guess if you, history suggests people havent done a great job of that and theres certainly a lot of optimistic people .10/09/12 41 DENNISS/SEARLES

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WILLIAMS: Well leave the fringes aside, theres certainly a trend in jobs like geology, when theres a shortage of geologists theres a spike in enrolment in geology at universities? WITNESS DENNISS: Look indeed, well I dont, thats not my expertise but I dont dispute for a minute that people make decisions about what to study, what to learn and what skills to get based on some hope of what they think is going to happen. I dont dispute that at all. WILLIAMS: And some level of information about what they expect is going to happen?

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WITNESS DENNISS: Some of them what sorry? WILLIAMS: Some level of information? WITNESS DENNISS: Yes some level of information but I mean people are horribly wrong. I mean we did a survey recently and asked people what percentage of the work force do you think is employed in mining. The average guess of the average Australian is around 10 per cent. According to the ABS, its 2 per cent. So people are 500 per cent out with their perception and in Tasmania, you mention jobs before - we recently surveyed people and asked them what percentage of Tasmanians work in forestry and the average answer was 20 per cent, when in fact 1 per cent of people work in forestry. So look theres no doubt that people make decisions based on their perceptions but I guess Im a bit dubious about the accuracy of the information that some people base those decisions on. WILLIAMS: But the two examples that you give surveying the general population about matters that many economists would not be able to give an educated answer to, is really quite different to asking about the decisions that for example school leavers make based on information available to them as to what areas they expect employment to be solid in? WITNESS DENNISS: Look again, its you know the decisions of school leavers isnt my expertise, but I think, the point I was raising is that if humans are making decisions based on the information theyre exposed to, well you know you only have to pick up a newspaper to see apparently how many people work in mining. Theres ads on television telling us this stuff. But the fact is perception and reality are often quite blurred so, but again I dont dispute the underlying point that people look ahead and try and make good decisions for themselves. I just dont think theyre always accurate. WILLIAMS: You give a deal of emphasis in your affidavit to what you refer to as the invisible pool of highly skilled workers? WITNESS DENNISS: Yes.

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WILLIAMS: If we turn to your preferred approach of computable general equilibrium modelling, that makes its own quite extensive assumptions does it not? 5 WITNESS DENNISS: It does. And if you think of the assumptions sort of a Venn diagram the computable general equilibrium model has got some assumptions that overlap with the input output and some that are unique to both. WILLIAMS: And in relation to employment, CGE assumes in the long term full employment, correct? WITNESS DENNISS: Yes it does. 15 WILLIAMS: So if you make the assumption of long term full employment, it necessarily follows from that assumption that a job created in mining is a job taken away from somewhere else? WITNESS DENNISS: Possibly, but even outside of full employment, so CGE models typically assume that full employment might be achieved at some point in the future. They dont assume that were at full employment right now. So thats the difference between the static and the dynamic. But really whats binding in a model like that, is the assumption about the degree of substitute ability say of a manufacturing workforce for a mining workforce. So the degree of movement that the model allows between employment in one sector and employment in another sector. So if you look at that China First CGE modelling for Queensland, the reason that the CGE models draws 2,000 jobs out of manufacturing, is that the modeller has assumed that unlike the input output assumption that theres 2,000 skilled people sitting around, the CGE modeller has assumed that there is some degree of substitute ability between manufacturing workers and mining workers. So you know, at that extreme version theyre making the exact opposite assumption but, but its up to the modeller to say, well what percentage of the manufacturing workforce could be employed in mining, what per cent, and youd find the proportion is higher for manufacturing than it is for tourism for example. WILLIAMS: But the further out you go from today, in terms of the project youre considering, first the greater the uncertainty about whether there will be full employment however thats defined, correct? 40 WITNESS DENNISS: Absolutely. WILLIAMS: And in 2021, theres at least a very significant chance that the relatively full employment that we have at present will not subsist in Australia? 45 WITNESS DENNISS: Theres a chance itll be higher. Theres a chance itll be lower. Theres a chance itll be exactly the same. WILLIAMS: And in reality, no-one can say with confidence what it will be? 50 .10/09/12 43 DENNISS/SEARLES

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WITNESS DENNISS: No but I guess you know its the modelling thats before us thats full of decimal places and confidence. WILLIAMS: And further out we go, with the start date of a project, the greater the possibility of labour substitute ability through skills acquisition and like measures? WITNESS DENNISS: Well it depends. I mean one of the main, as I said the Minerals Council are quite concerned about the skilled shortage and training-10 WILLIAMS: Thats at present isnt it? WITNESS DENNISS: No I was going to say, there are people who have got training but dont have experience and unfortunately, employers often dont just want someone with the TAFE qualification, they want someone who has experience doing the job. And you cant train experience so. WILLIAMS: But in - Im sorry? 20 WITNESS DENNISS: Well I was just going to say theres a lag, but again I come back to what I said at the beginning. I dont dispute that some people, more people might be attracted into this you know these sorts of courses over time. Its entirely-WILLIAMS: And in-WITNESS DENNISS: --possible. WILLIAMS: --I am sorry I am not wishing to interrupt. 30 WITNESS DENNISS: Thats all right. Ive finished. WILLIAMS: Have you finished? 35 WITNESS DENNISS: Yes. WILLIAMS: And in 10 years thats time to get skills and experience? WITNESS DENNISS: Its, possibly yeah absolutely. 40 WILLIAMS: Dr Searles would you like to comment on any of those observations? WITNESS SEARLES: No I dont think theres sort of anything further really I can, I can add. WILLIAMS: Can I then - now you have not undertaken a CGE model-WITNESS DENNISS: No. 50 .10/09/12 44 DENNISS/SEARLES

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WITNESS DENNISS: No Ive reported other peoples CGE modelling of sort of analogist sorts of projects but no Ive not undertaken such a model. 5 WILLIAMS: But projects being undertaken a long way from this project? WITNESS DENNISS: Yes. But just to show what a CGE model output looks like and why it differs from input output modelling. 10 WILLIAMS: In the case of the China First Project that you refer to, thats a Greenfields project is it? WITNESS DENNISS: Yes it is. 15 WILLIAMS: Could I just ask this, the government has moved recently to abandon the $15 floor under the price of carbon in 2015 that will result in a lower carbon price at that time, will it not? 20 WITNESS DENNISS: I think so yes. WHITE: Dr Searles you have provided some evidence in your report about the unemployment rate in the Hunter Region I believe, and it would be relevant for the Court to understand what the unemployment rate in the Singleton Council area would be? WITNESS SEARLES: Within the Hunter Region there is variability and I cant tell you exactly what it is today, but I do know that it can be under 2%. 30 WHITE: The first question I asked you was, it is relevant for the Court to understand what the unemployment rate in Singleton Council is? WITNESS SEARLES: I think yes it is relevant, but there are other aspects to it as well and in terms of mobility of labour for example a lot of employment and a lot of people working in the Singleton area actually to live in other local government areas in the lower hunter and I havent actually got the information with me at hand, but journey to work from the Australian Bureau Statistics, I did actually look at it a couple of weeks ago and it showed that there was substantial numbers of people who travel from Newcastle or Lake Macquarie and Maitland to the Singleton area. WHITE: No doubt, but it would be relevant for the Court to note would it not that the latest data from Singleton Council indicates that the unemployment rate in 2012 is 1.1%? 45 WITNESS SEARLES: Yes. WHITE: Your Honour for your Honours note the report of that is tender bundle volume 7, tab 265 at page 4092. In response to Dr Denniss you opine that there is an available supply of labour within the Hunter Region, I dont need to .10/09/12 45 DENNISS/SEARLES

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go over that with you, that has been well covered. It is fair for the Court to note, isnt it that whilst you say that there is an available supply of labour, you dont identify what the skill set of the labour pool is? 5 WITNESS SEARLES: No it is very difficult to determine the information that I have used both from the Australian Bureau of Statistics but also from our own surveys just indicates there is an available supply of labour. The business surveys that we have which do include a cross-section of firms throughout the Hunter Region indicate that labour is - sorry suitable labour, so there is an implication there that we are talking about labour with the appropriate skill set, that that is third down the list in terms of constraints on the firm. WHITE: Yes, but as you fairly concede in your report you are not in a position to comment on the skill set of the available labour pool? 15 WITNESS SEARLES: Thats correct. WHITE: So you dont know even if the labour pool exists which is a bone of contention between you and Dr Dennis whether those people would be able to take up jobs in the mine? WITNESS SEARLES: If you were talking about a specific, a new project altogether, yes I think there would be some validity to that point. However in this particular instance we are talking about a continuum of a project that would actually move beyond closure to - sorry that there would be a point where the mine wouldnt be operating and then would actually continue on so that there would be a transition of those jobs. WHITE: I will ask Dr Denniss to comment on that last point? 30 WITNESS DENNISS: Well again I think for me it comes back to this issue of duplication, I mean on the one hand that we are hearing that there will be all these benefits to the local economy as new jobs are created, but at the same time we are hearing that these jobs are already in existence and in turn the pay packet effect of someone keeping the job theyve got, the new pay packet is by definition zero at that point in time. I just think that perhaps the way the data has been presented in the report is confusing, but if what we are being asked to consider is how many more people will have a job if this goes ahead, I would argue the answer is something near zero. The long time periods involved allow for adjustment to occur in any direction into any industry, you know just as we can train new mining workers over ten years, we can train new manufacturing hospitality workers and thats give or take what the economy struggles to do on a daily basis and the - on the one hand what is being suggested is you know big numbers about you know, forty thousand men, what was it jobs or something being created but then part of the explanation for what is going on is this continuation argument when again the evidence suggests most of the people working in minding now wont be in mining in ten years time. .10/09/12 46 DENNISS/SEARLES

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So I think there is - there is a number of issues crashing in on the same problem, but most people working in mining now wont be working there in a decades time. People in school today are preparing to do a whole bunch of different jobs, some of which are mining, most of which arent, but there is going to be a mismatch between those decisions, but when we just sort of strip it back and look at these so called social benefits of continuity, theyre absent. When we look at the pay packet effect it is absent, unless this ghost pool of workers exists, and you know whether it exists now or whether it exists in ten years it is from an economist point of view a strange assumption to make, I think. WHITE: Dr Searles your firm doesnt do CGE modelling does it? WITNESS SEARLES: No.

15 WHITE: It just does the input output modelling? WITNESS SEARLES: While we dont have CGE model or I havent personally not been involved with it, but a colleague of mine has been in touch with one of the Victorian universities who do undertake CGE modelling because a client asked us to actually undertake that specific form of modelling, so we have the potential to do it if we had to. WHITE: But you dont do it at the moment? 25 WITNESS SEARLES: Well this was actually for a project that weve just put in for, so I am not quite sure how to answer that to you. I am not doing it at this point in time. 30 WHITE: I will put it another way. Your experience isnt with CGE modelling? WITNESS SEARLES: Correct. WHITE: As you concede in your report, you are not qualified to comment on the outputs of CGE models? WITNESS SEARLES: Correct. <THE WITNESS WITHDREW 40 WILLIAMS: Your Honour could I deal with two or three housekeeping matters. Those are the witnesses for today. We have the joint report of the ecology experts if I could have leave to file that in Court or perhaps I will tender it now. 45 HIS HONOUR: I assume to have inherited three. WILLIAMS: Yes I handed up three. The trees have already been cut down your Honour on those ones. 50 HIS HONOUR: We will give you one back. .10/09/12 47 DENNISS/SEARLES WD

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