Note: This is the fourth story in a five-part series that examines how the Adani and Carmichael coal mine has divided the Australian public and in the process, sparked fierce debate on issues such as coal-based energy, energy financing, jobs and the rights of indigenous people. Read the first, second and third parts.

In August 2010, the Adani group bought from the Australian energy company Linc Energy its coal tenements – estimated to contain 7.8 billion tonnes of coal – in Central Queensland’s untapped Galilee basin for a total of $680 million (AUD). According to the Adani group’s official proposal for the ‘Carmichael coal mine and rail project’, made to the government of Queensland in October 2010, the mine required a capital investment of $4.1 billion for construction and an additional $16.4 billion for operations. Peak production of 60 million tonnes was to be reached in 2022, while 2014 was to be the first year of production.

The idea was to export coal from the mine in Australia to Adani group’s power plants in India, and develop an integrated ‘pit to plug’ energy vertical comprising mines, rail and port links. Following that strategy, in May 2011, the Adani group acquired Queensland’s Abbot Point coal terminal – approximately 400 km from the site of the proposed mine – for $1.98 billion from the government of Queensland on a ninety-nine-year lease. The Adani group also proposed a 388-km rail link, connecting the mine to the port to enable it to ship coal from its mine to its power plants in India through its port in Australia.

The stage was set and things were looking up for the Adani group’s flagship investment in Australia. In 2011, coal prices touched soaring highs of $124 a tonne, and were expected to go up further, owing to growing demand. There were forecasts of an impending coal shortage in India, as demand for power was expected to rise rapidly. The Indian government was encouraging private Indian companies to invest in coal assets abroad.

However, the Adani group’s project ran into trouble from the very beginning as environmental groups, concerned about the environmental impact of the largest new coal mine in Australia, provided stiff opposition. In addition to street protests and social media campaigns, they filed court cases against the proposed coal mine.

Due to the legal tussles and a lengthy process of environment impact assessment, the project was delayed and the final mining lease was issued only in April 2016. The project was already two years behind schedule.

Change in scenery

Between 2010 – when Adani group bought coal tenements in the Galilee basin – and 2016, there were significant changes in the coal market. Demand for coal in the US fell as alternatives in the shape of oil and natural gas became significantly cheaper. China too reduced its consumption of coal as its pace of economic growth slowed and it launched a crusade against high levels of air pollution. The US and China account for more than 60% of the world demand for coal, and the reduction in demand had a massive impact on global coal prices, which fell from $90 a tonne in August 2010 to $52 a tonne in September 2016.

Closer home, India’s coal imports peaked in 2014-15 at 217 million tonnes, and then fell to 204 million tonnes in 2015-16, falling even more in the subsequent year. During this period, Piyush Goyal, Central government minister for power, coal, new and renewable energy at the time, announced the government’s intention to stop the import of coal. Solar energy prices fell drastically to be almost at par with coal prices.

As a result, in September 2016, the Adani group decided to scale down the size of the mine from the initially proposed investment of $16.4 billion to $4.2 billion, with production being curtailed at 25 million tonnes of coal per annum in the first phase of operations, instead of the initially proposed 60 million tonnes per annum at peak production.

“Between 2010 and now, things have changed drastically for the mine. It is now no longer financially viable, and that is why it has not been able to achieve financial close for seven years. On top of that, there are so many political and environmental risks associated with the project that it becomes toxic from a banking perspective,” said Tim Buckley, Director of Energy Finance Studies, Australasia, within the Institute for Energy Economics and Financial Analysis (IEEFA), a pro-renewables energy research firm. As many as twenty-four Australian and international banks have either refused funding the project or have introduced rules that would make the Carmichael project out-of-bounds for them.

To add to its woes, according to a recent report by the IEEFA, the Adani group will need to refinance $1.48 billion of debt on by November 2018 and a cumulative debt refinancing of $2.11 billion by 2020 on its Abbot point port terminal. This at a time when the port is only operating at 50% of its capacity and most of its ‘take-or-pay’ contracts, which currently earn revenue for the port, expire soon. “They have this situation where three-quarters of their debt on the port will have to be refinanced in the next 12 months. With the take-or-pay contracts progressively expiring, they will find it difficult to convince financiers that the port will be fully utilised in the future,” said Buckley, one of the authors of the report.

“For them to convince financers that port capacity will be utilised in the future, they need to show that the Carmichael mine will be up and running soon because otherwise, the export volumes will not be enough. So it now makes the mine crucial for the future of the Abbot point port,” Buckley added.

Jeyakumar Janakaraj, the chief executive officer (CEO) of Adani Australia, recently told the Economic Times in an interview that the Adani group still needs to tie-up $4.2 billion in finance for the Carmichael mine and rail project, and has a set a deadline of March 2018 to tie up funding.

According to John Quiggin, Australian Laureate Fellow in Economics at the University of Queensland, the project now relies heavily on financial support from the Australian government. “There has been a general move away from financing coal projects. It is increasingly difficult to get finance and this is a marginal project. It is low-quality coal and a long-way away from ports. There is no clear market for the coal. So the project is not very attractive commercially. They (the Adani group) are therefore looking mostly at government or quasi-government financing,” Quiggin told The Wire.

The government financing, which the project now crucially hinges on, is a prospective concessional loan of up to $900 million from the Northern Australia Infrastructure Facility (NAIF) which was set up by the government of Australia in 2016 to ‘encourage and complement private sector investment in infrastructure that benefits northern Australia’. The prospective loan is concessional as it can be provided at an interest rate lower than commercial lending rates, and for a period longer than commercial lending periods.

“The structure of the NAIF is very opaque. The interest rates could be as low as federal government bond rate, which is currently 2.75%. And the loan period could be 30 years, with the risk profile of the loan likely to be heavily subordinated terms. It would operate like quasi-equity,” said Buckley.

In effect, tax-payers in Australia would be subsidising the Adani group’s coal mine, and Julien Vincent, executive director of the environmental campaign group, Market Forces, believes that the project is only possible through tax-payer subsidy. “This project is financially unsustainable. It only works if you are prepared to shift the risk on to the tax payers. So, the NAIF is critical for Adani,” he said.

Even with the $900 million NAIF loan, the Adani group will need to secure another $3.3 billion in financing for the project. According to a recent report of the IEEFA, the Chinese state-owned enterprise China Machinery Engineering Corporation (CMEC) is one of the prospective financers that the Adani group has approached. According to a press release on the website of CMEC, in January, a top Adani Mining Private limited executive, Praveen Khandelwal, along with the CEO of Downer EDI group – a company which has a $2 billion contract with Adani Mining Private limited for the construction of the mine in Australia – met with the president of CMEC Zhang Chun. Chun said at the meeting that the CMEC “hoped to cooperate with Adani and Downer to take part in financing, construction and operation of relevant coal mines and railway projects”.

“The CMEC is in strategic alliance with the China Construction Bank and the China Import Export Bank which are two state-owned enterprises. They could take equity stakes in the Adani project. They have a history of taking minority equity stakes in projects of this kind,” said Buckley.

Aiding that theory is a statement that Janakaraj gave to Reuters in early October, where the CEO of Adani Australia said that the Adani group was ‘looking to sell minority equity stakes in the coal project’.

Further fuelling speculation is a recent revelation that certain Australian government ministers wrote to the Chinese government assuring it that the Carmichael coal mine has been approved. The letter was written by the minister for trade, tourism and investment, and by the deputy prime minister, and addressed to the National Development and Reform Commission in China. The secretary of the Department of Foreign Affairs and Trade, told Australian senators that Adani may have requested the letter to help it secure funding from the Chinese.

Three countries, three interests

According to Buckley, if the deal materialises, it could effectively mean that the Australian government is providing subsidies to a project owned by an Indian billionaire and a state-owned enterprise of the Chinese government.

However, Buckley argues that the NAIF loan remains critical even for this prospect. “The NAIF loan is absolutely crucial. I don’t think the Chinese state owned enterprise would even contemplate doing a project in Australia without an explicit endorsement of the project by the Australian government. And there is nothing more explicit than being a key funder. If the Chinese knew that the NAIF wasn’t available, I don’t think they would even give it a moment’s thought. It is too controversial a project,” he said.

Effectively, the NAIF loan – a federal government funded subsidy of almost $1 billion – would act as a signal of government support for the project, and would make it a more attractive investment proposition for prospective financers.

But government funding in the form of the subsidised NAIF loan is hugely unpopular with the Australian people, with some arguing that it amounts to a bailout. It seems that the NAIF loan has become a double-edged sword for the Adani group, as the project is unlikely to find willing financers without it, and it could face even stronger opposition from citizens if the NAIF loan is provided.

On November 4, Annastacia Palaszczuk, the Premier of Queensland and a strong supporter of the Adani project, held a dramatic press conference and announced, in a surprising turn of events, that her government will veto the prospective federal government-funded NAIF loan to the Adani group. She cited a potential ‘smear campaign’ against her by her principal opposition party in the state, the Liberal National Party (LNP), leading up to the election day in Queensland scheduled for November 25. The LNP, she argued, would use a perceived conflict of interest to ‘impugn’ her character and ‘suggest something unto worth’ as her partner works as managing partner at PricewaterhouseCoopers, which helped Adani with its NAIF loan application. She said, “to remove doubt about any perception of conflict, my government will exercise its ‘veto’ to not support the NAIF loan”.

On October 4, a survey of 2,194 residents across Australia asked respondents, ‘Should the Queensland government veto any $1bn federal loan to Adani?’. Sixty-six percent responded ‘yes’. With elections approaching, the popular opposition to the NAIF loan would also have been on Palaszczuk’s mind.

However, as her government is now in care-taker mode, she would need bipartisan support to veto the loan. The leader of the LNP in Queensland, Tim Nicholls, has already said that his party will block the Premier’s move to veto the NAIF loan to Adani.

The NAIF is expected to decide on the Adani application in December, after the Queensland election is held. According to Quiggin, the NAIF loan will now depend on the outcome of the Queensland election. “If Labour wins the election, I doubt that they will support the NAIF loan. On the other hand, if the LNP wins then the NAIF money will come through,” he said.

Battle lines have been drawn, and the question of government funding for Adani’s Carmichael coal mine project could be one of the main issues that decide the Queensland state elections.

Kabir Agarwal is an independent journalist whose writings have appeared in The Kashmir Walla, The Times of India, Mint, Al Jazeera English and The Caravan. He can be found on twitter @kabira_tweeting.