The Pilbara goes to town

Governments are pouring money into Pilbara townships with a view to huge growth and socio-economic benefits. But as mining investment slows, can the region meet expectations?

There’s even going to be a Hilton Hotel there. That’s how big this is. The luxury global hotel franchise will build a resort in Karratha under its DoubleTree brand. Think of that: the Hilton Karratha.

Western Australia’s Barnett government and resources companies are pumping billions of dollars into the Pilbara region via the government’s 'Royalties for Regions' program, for which the government budgeted $1.2 billion over the 2011-12 financial year alone. It hopes that by 2035 the towns of Karratha and Port Hedland will be transformed cities of 50,000, with modern amenities and facilities. There are also plans to lift Newman’s population to 15,000 by the same date.

It is no coincidence that the main beneficiaries of Royalties for Regions are towns central to Australia’s most lucrative resources hub, but with the likes of BHP Billiton and Rio Tinto having gone temporarily cold on some of their biggest projects – such as BHP’s outer harbour in Port Hedland – as China slows and commodity prices come off, it could be suggested that perhaps the bold plans for some Australia’s most isolated towns are a touch ambitious.

Just as the federal government has been criticised for the structure of its minerals resource rent tax, which assumed soaring commodity prices and miners' sky-high profit margins would be maintained, has the WA government also overestimated the size of the boom? And if so, what does the future look like for these new cities?

As we’ve come to understand, Australia’s big miners take a long view on their investments and it appears the WA government’s economic rationale for these new Pilbara cities is in lock step with such expectations.

Federal member for Durack, Barry Hasse, is currently on the parliamentary committee into FIFO (fly-in-fly-out) work and his seat engulfs 63 per cent of Western Australia, including the Pilbara towns in question. He says that plans for these towns are not over-ambitious or needing to be scaled back but on the contrary, "they are too little too late”. He says the towns need to be developed as quickly as possible before they buckle under the weight of ludicrous property prices and a lack of infrastructure.

Hasse estimates that 80 per cent of the Karratha and Port Hedland populations are directly employed in mining, but with both around the 20,000 mark it is questionable whether revitalisation and expansion of these places will be attractive enough to garner an extra 30,000 people each in just over 20 years, as targeted by the Royalties for Regions program.

Hasse says we’re not experiencing a boom – a boom implies there’ll be a bust – but unprecedented commercial activity around resources. So, unlike past mining booms in Australia, there is no chance the Pilbara will be smattered with ghost towns, even as the lives of particular resources projects wane.

But the high costs associated with mining are well documented and the cost of labour turnover in the mining sector was quoted by Deloitte Access Economics’ Chris Richardson at 40 per cent in some instances, which is a killer to productivity.

Take Rio Tinto, the main miner represented in Karratha. A Rio spokesman told Business Spectator that while its labour turnover rate is not that high, it is currently working to provide multitudinous options to attract and hang onto its employees. These options include FIFO, regional FIFO, residential living and also relocation to its new remote operations centre in Perth for jobs like train control. BHP is doing similar things.

The resources sector pays well, with many salaries, even for unskilled labour, over $100,000. But the trade-off is working 12 hour shifts and living away from family and friends. With substantial labour and skills shortages in the sector, it is clear that companies will continue to do everything possible to ease or eliminate the downsides of employment.

Unless the likes of Port Hedland and Karratha can shake the ‘remote’ tag in a serious way then it’s going to be tough to draw the numbers they’re after. The influx of mining workers expected as expanded iron ore and north-west gas projects come online won’t necessarily translate into stable populations of the ambitious target size. The Rio Tinto spokesman said in its case, a 50 per cent uptick in production would not equal the same increase in employment.

Furthermore, sentiment in the media and among resources companies around the size and length of the boom has turned sour, which has seen miners put expansions and projects on the backburner. In the last few days we have even seen mining services companies, like the recently floated Calibre Group, lay off workers because BHP changed its tune on spending. Many of the temporary construction jobs from project expansions will begin to dry up.

However, the WA government expects the Pilbara cities project to yield major social and economic benefits, especially for existing non-mining residents and newcomers. And property developers are getting excited about Karratha – including Mirvac, which won a tender late last year for a $1.5 billion redevelopment of the city centre and construction of a 1500-house new suburb called Mulataga. Similar developments are underway elsewhere and increased property supply will begin to lower prices, attracting long-term buyers, renters and investors, the first two of which will hopefully settle down and become part of the community.

Hasse says it is undeniable that a more stable residential population is less fraught with the social expenses incurred from FIFO. It is hoped that encouraging workers to settle with their families, either for long periods or permanently, will reduce many of the recently publicised social costs of FIFO work, such as alcohol, drug abuse, prostitution and the resulting health problems.

While these Pilbara cities are already gaining a huge influx of services and infrastructure they are going to have to become something special if they are to hit the 50,000 target by 2035. But Hasse believes developments like these will turn at least a small corner of his mostly barren Durack electorate into an oasis of growth.

In the meantime, a sense of remoteness is really only determined by a lack of opportunity and relative distance from anywhere perceived as thriving and prosperous. If the so-called ‘two speed’ economy and high Australian dollar keep claiming jobs in the thousands it may only be a matter of time before a substantial number of families on the east coast decide it is time to pack up and fly north for the ‘winter’.