31 May 2010

Australian minerals: where is FIRB?

As one of his justifications for the sudden imposition of a resource rent tax on the production of Australian minerals the Prime Minister evokes economic nationalist sentiment by asserting that the Australian community is not getting its fair share of Australia’s mineral riches.

There is some truth in this, but the absence of a resource rent tax is not the principal reason for this, and the imposition of a resource rent tax is not a sure solution.

My perspectives on this issue and past attempts to deal with it:

(1)    When the Whitlam Government was elected in December 1972 there was comparatively little beneficial ownership of Australian mineral resources on the part of Australian companies or the Australian public, and there were few companies with the resources and access to capital to undertake minerals exploration and development in their own right. BHP was one, Western Mining was another.

(2)    The situation was exacerbated by an engineered oversupply of steel making raw materials and, later, of steaming coal. The steel making raw materials were sold into a monopsonistic market in which Nippon Steel conducted the purchase negotiations on behalf of the nine Japanese steel mills, and China, Korea, India and Pakistan had contracts in which they took product at the Japan price with a discount of about 5 per cent.  Oversupply was maintained by the signing of new long-term contracts, even as existing contracts were being seriously underperformed.

(3)    The Minister for Minerals and Energy in the Whitlam Government, Reginald Francis Xavier “Rex” Connor, had three principal measures for dealing with this:

(i)  The Government required all companies proposing to develop Australian mineral resources to seek at least 50% Australian equity.  The policy was applied flexibly; in the early days companies that came to talk to the Department were told that if they made a diligent effort and came with a proposal that had anything over 25% they would not have trouble.

There was one exception to the flexible application of foreign investment in minerals. Since the days of John Gorton there had been a rigorous policy of 85% Australian equity in any uranium development, and that policy was maintained.

(ii) The Government introduced legislation to establish a Government owned statutory corporation, the Petroleum and Minerals Authority, which would have power to take an equity stake in selected ventures. As a Government owned company it would never have the capital to become a big player in the mining industry but it meant that the Government could test the bona fides of foreign companies seeking an Australian partner – how could they say they could not find an Australian equity partner if they had not talked to the PMA?  And the Government would always have the option of taking an equity stake in a mining project if it felt that it was in the national interest for it to do so.

This was a high stakes game and both the mining industry and the Opposition resisted the creation of the Authority with a passion.  The legislation was frustrated in the Senate and the Petroleum and Minerals Authority Act 1973 was one of the Bills passed by the historic Joint Sitting of the two houses of the Commonwealth Parliament following the double dissolution election of 1974.

(iii) Export controls were imposed on all minerals, in order to enable the Government to maintain surveillance of prices and contract terms in long-term export contracts. The principal aim was to counter the monopoly purchasing power of the Japanese steel mills or the coordinated buying practices of the Japanese power companies; there was very light-handed regulation of commodities like silver, lead and zinc, which were traded on the London Metals Exchange.

(4)    The cries of the wounded rang out over the minerals policy battlefield throughout the three years of the Whitlam Government. Civilisation as we knew it was coming to an end, we can never do business on this basis. The foreigners hated the foreign investment restrictions, they hated the export controls, everyone hated the PMA. Foreign companies said that it would be “very difficult” for them to invest here in the future, and “very difficult” for them to go on buying from us.

(5)    Nevertheless there were some creative responses. CRA (Conzinc Rio Tinto of Australia), now Rio Tinto, was at that time about 63% owned by its British parent RTZ, with most of the rest in the hands of the Australian public.  Its CEO, Sir Roderick Carnegie, came to the Government with an interesting proposal.  He said that under the policy as it stood, CRA would always have to look for an Australian joint venture partner.  He said that CRA did not like joint ventures, and proposed to Whitlam and Connor that, in return for an undertaking to sell down the parent company’s equity over time, CRA be recognised forthwith as an Australian company.  This led to an intense period of negotiation, in which I was involved, and a deal was done.

(6)    Some other interesting things happened over time as a result of the policy. In 1975 the PMA took over 50% of Delhi Petroleum’s production interests in the Cooper Basin, and 25% of its exploration interests (from memory these were taken over by CSR when the PMA’s portfolio was liquidated).  BHP began to expand its role, acquiring Utah Mines Ltd and its major coal assets in 1984, and CSR took an increasing interest in the minerals sector. By 1986 RTZ’s equity in CRA had dipped to below 50%. BHP bumped American Metals Climax (AMAX) from its Pilbara iron ore assets in about 1990.

(7)    When the Fraser Government took over in 1975 the Petroleum and Minerals Authority was quickly despatched, but the foreign investment policy remained, and export controls were kept in place, and although controls on minor minerals and LME minerals were relinquished, the controls on iron ore, coal and uranium were maintained.

(8)    The Treasury hated, and actively subverted, the whole framework from the start.  In 1975 I attended meetings of the Treasury-chaired Foreign Investment Committee as the representative of the Department of Minerals and Energy. Treasury never saw a foreign investment proposal it didn’t like, and could never be persuaded that a proposal was non-compliant.

My former Treasury colleagues seemed to live in a parallel universe in which the government of no other industrialised country intervened in the market place – they all left everything to the wisdom of the market and so should we.  These people seemed never to have heard of the US Army Corps of Engineers, or the US Atomic Energy Commission, or the National Aeronautics and Space Administration, or indeed the US Department of Defense.  And they seemed touchingly unaware of the extent to which the governments of Continental Europe occupied the commanding heights of their respective economies, and had equity in all sorts of private-looking companies.

When the Whitlam Government fell at the end of 1975, it turned out that one of the Assistant Secretaries in the Treasury’s Foreign Investment Division had Liberal pre-selection for a Victorian Senate Seat.  Many years later Canberra Times editor Jack Waterford revealed that the Division Head had been the real “Mr Williams” who had leaked damaging information about the Loans Affair to the then Opposition, and who in return for this sterling service which contributed so much to the demise of the Whitlam Government, became a kind of protected species under the Fraser Government.

(9)    As noted above, when the Fraser Government took over the foreign investment policy and the export controls were maintained.  The export controls were administered by Doug Anthony and his Department of Trade and Resources, and Doug made valiant efforts to uphold the national interest, taking considerable political heat in the process.  It was hard yards on the foreign investment side, however, especially when John Howard was Treasurer; like the Treasury itself, Howard never believed in any of that stuff.  We worked long and hard doing the due diligence on the various petroleum and minerals proposals that came in, but it was all steadfastly ignored, and some crazy things were approved.

(10)  In the neo-liberal reformist atmosphere of the Hawke and Keating Governments the export controls were maintained after a fashion, but the foreign investment controls were increasingly symbolic – it would be a bad look to abolish the Foreign Investment Review Board, but let’s not have it say no to anybody. In 1995 the Australianisation of CRA became a dead letter with the dual listing of Rio Tinto on the London and Australian stock exchanges.

(11)  When John Howard became Prime Minister the game was up and the companies knew it. Rio Tinto completed the reversal of the Australianisation project by taking all of the strategic functions back to London, and in 2001 BHP was allowed to merge with the British-Dutch company Billiton, on terms which suggested that BHP needed Billiton more than Billiton needed BHP.  John Howard’s principal concern was that the headquarters of the merged company remain in Melbourne – seeing the icon leave the country would have been a bad look.  The one big surprise was Peter Costello’s refusal to permit Shell to take over Woodside.

The point of all of the above is to indicate that if the Australian public is not getting a fair share of the benefits of Australia’s mineral wealth, it is to a substantial extent because a succession of Australian Governments have been asleep at the wheel in relation to resources policy. There is a certain irony in the Treasury’s newfound obsession with the economic rents it sees accruing to the large mining companies.  When the rents were accruing to the Japanese steel mills through their monopsonistic purchasing practices, or to the aluminium multinationals through fancy transfer pricing tricks, they were relaxed and comfortable.

If the Rudd Government really wants a larger share of the proceeds to accrue to the Australian public, there are instruments available to it apart from a completely untested approach to resource rent taxation:

(1)    It could start taking foreign investment policy seriously. We have a Foreign Investment Review Board; why not use it? Is every foreign investment proposal that comes forward in the national interest? Really?

(2)    It could direct the Future Fund to purchase shares in BHP, Rio Tinto etc. They are traded on the Australian stock exchange, they are freely available to anyone who wants to pay the market price.  If the benefits of the assets they control are so self-evident, how could there be any objection to that?

(3)    Better still, it could establish a proper sovereign wealth fund, into which all of the Petroleum Resource Rent Tax and any resource rent tax on minerals could be paid for the benefit of future Australians, rather than paying it into general revenue and frittering it away on middle class welfare.

All of the above policies are debatable – none of this is easy. But let us have the debate and make robust, rational decisions, rather than sleepwalking into another policy debacle on the basis of an insufficiently considered new approach to taxation of one of our major industries.

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