The Prime
Minister will be meeting with east coast gas producers this afternoon to try to
thrash out some sort of arrangement to ensure adequate gas supplies for the
domestic market.
The fact is,
the Commonwealth holds all the cards if it has the spine to play them. It could
have export controls on gas in place by the time the meeting starts, simply by
using the Customs Regulations to place gas under export controls. Gas would
become a prohibited export, unless the exporter had permission in writing from
the Minister. It would then be up to the relevant Minister to grant to each
producer permission to export part or all of its gas. Permission could be given
shipment by shipment, or yearly, or monthly, as the situation warrants. The
intent would be to grandfather most if not all current arrangements, but the
matter would be firmly and clearly under Commonwealth control.
The use of
the trade and commerce power in this way is very flexible, and it has been
thoroughly tested in the High Court (see Murphyores
Pty Ltd vs Commonwealth 1976).
A week or so ago I was interviewed on the telephone by Keri
Phillips of ABC Radio National for a Rear
Vision program which was to explore the parallels between the efforts of
the 1970s Whitlam Government and the Rudd/Gillard Government to secure for the
public a greater share of the economic benefits of Australia’s mineral wealth.
The program went to air on Sunday 20 May, with the title Labor, Mining and Scandals, and it contained
quite substantial slabs of that pre-recorded interview. More importantly, it is
a good piece, well worth a listen.
Live audio of the broadcast, or a download of the podcast,
are accessible here.
The question of whether or not the purchase of Australian farmland by foreign governments or foreign government agencies or enterprises, or indeed by any foreigners at all, will have an impact on Australian food security continues to bubble along in the nation’s political discourse. Associated with these concerns are claims that the purchase of Australian assets by foreign government owned agencies or companies involves a loss of Australian sovereignty.
The two hot items currently giving momentum to this debate are the purchase of farmland in Western Victoria by a Qatar Government-backed entity, and the purchase of 43 farms outside Gunnedah by the Chinese Government-controlled Shenhua Watermark Coal Corporation, whose interest in these farms is clearly the coal that lies under them.
One of the latest contributions to the debate is an opinion piece by CIS Research Fellow and Senior Lecturer in Economics at UTS Business School Stephen Kirchner, in The Weekend Financial Review, 2-3July 2011.
Kirchner sees no problem in foreign investment in our farm sector – he says it will enhance our food security – and he sees only base motives in those who wish to “meddle” in commercial transactions and thereby prevent Australian farmers from getting the highest sale price they can for their farms:
What unites politicians on this issue is not so much xenophobia but their conviction they have the right to meddle in commercial transactions they don’t like.
….
Xenophon’s proposed national interest test is more prescriptive than the existing national interest test under the Foreign Acquisitions and Takeovers Act, which is deliberately open-ended.
Ironically, this would open the door to administrative and judicial review of the Treasurer’s unbounded discretion to reject foreign acquisitions that fall within the terms of the act.
This may not bother Xenophon, but it certainly bothers other politicians and Treasury, who want to preserve their ability to meddle without scrutiny by the courts.
…
The FIRB is just a fig-leaf of bureaucratic respectability for political decisions to interfere in commercial transactions and deny the resident owners of Australian equity the right to realise its full value by selling to the highest bidder.
There is some silly ideological stuff here: Kirchner appears to believe that nothing should be permitted to get in the way of a “commercial transaction” – being “commercial” puts it off limits, apparently – and his imputation of base motives to anyone who believes otherwise almost obscures the key policy point he makes in his article:
In the unlikely event of a serious international conflict or crisis, foreign-owned assets in Australia can be nationalised or exports of food restricted.
There are some important issues to be considered in relation to large scale foreign investment in Australia, but as Kirchner’s comment immediately above indicates, they have little do with either food security or sovereignty.
To deal with the latter point first, investment in Australia by sovereign entities or sovereign-owned or –controlled entities involves no compromise to Australian sovereignty. This is because, while the entity might exercise the powers of the sovereign in its own country, it can only be present in Australia as an Australian natural or corporate person, its actions within the Australian jurisdiction entirely subject to Australian law. Foreign entities farming in Australia, for example, are subject to the same rules about land clearing, control of noxious weeds, plant and animal health, use of agricultural chemicals etc. as everyone else, and to tax laws including those relating to transfer pricing.
Similarly, any entity, sovereign or not, wishing to convert farmland for purposes of mining will be subject to the approval of the responsible State and Commonwealth authorities. There is a debate to be had about whether or not 43 farms outside Gunnedah should be made over for coal mining, but that debate has nothing to do with the fact of the 43 farms now being owned by a Chinese Government-owned company.
Unlike Mr Kirchner I do not believe that nothing should be permitted to get in the way of a commercial transaction and I think that from time to time particular transactions raise important matters of national interest for consideration by the Government of the day.
Nor do I share his view that Treasury officials are motivated in this matter by a desire to meddle. In the days when I was directly involved in advising on foreign investment in mining (1970s-80s, as a senior officer of the Department of Trade and Resources) I was far more often concerned by the desire of Treasury officials not to meddle in transactions that I saw as raising serious national interest questions. This was particularly the case when John Howard was Treasurer; to my recollection John Howard never saw a foreign investment proposal he didn’t like, and most of the relevant Treasury officials were of a similar view.
The principal reason [why the application should be declined] is not, as often asserted in the media, the fact that Chinalco is a state owned enterprise (SOE), and might not therefore behave in accordance with normal commercial considerations. The most important reason is that Chinalco is a major player in its own right in the international minerals market, which is why it wishes to increase its stake in Rio Tinto, and likely to become more so. Either now or in the future, its commercial interests as a buyer and investor elsewhere might well diverge from the Australian national interest as a seller. We should examine carefully for its potential impact on the national interest every proposal for a major foreign purchaser of minerals to take a stake in the Australian minerals industry.
Issues raised by proposed investments which establish foreigners in a position on both sides of the commercial negotiating table are:
- Transfer pricing issues
- Access through taking a minority stake to commercially sensitive price information – very important in relation to monopsony buying practices of the Japanese steel industry before market conditions put market power in the hands of the producers rather than the consumers.
- Issues to do with foreign government coordination of purchasing by enterprises within their jurisdiction, public or private. Two examples will suffice:
(1) In the late 1970s when the contracts were being negotiated, the sum of the amounts that the nine Japanese power utilities wished to take from the Northwest Shelf LNG project was vastly in excess of the amounts that the project would produce. Having secured from the NW Shelf consortium a rather unwise undertaking that they would not sell any of the gas to other than Japanese customers, the Ministry of International Trade and Industry then proceeded to allocate amounts determined by it to the individual power companies, so that suddenly Japanese demand was equal to Australian supply, and there was no price auction. I will leave it to the reader to judge what impact this may have had on the project’s revenue stream.
(2) In 1986, when China ceased buying all its wool through a single government agency (Chinatex, represented at the Australian wool auctions by the formidable Mme Zhu Youlan) and four separate agencies began to compete with each other in the market, there was a major spike in the Australian wool price – a fact which Mme Zhu in conversation with me attributed to the inter-agency competition. Clearly the reduced coordination in China was good for Australian woolgrowers.
- The willingness of foreign executives to abide by Australian Government policy (very difficult in my experience with US companies which for entirely understandable reasons put US laws such as the Trading with the Enemy Act and the extraterritorial reach of US antitrust law ahead of Australian law).
The above examples should be sufficient to indicate that large-scale foreign investment does indeed raise national interest questions which it is proper for governments to consider. To those who find it troublesome that the national interest is nowhere defined in legislation, and believe that it ought to be, my response would be that determination of the national interest is properly a matter for the elected government of the day, in the circumstances at the time, and the capacity of a present or future government to determine the national interest should not be constrained by an attempt to define it in advance in legislation at a particular moment in time. There was a time when State Governments felt that it was in the public interest to legislate that no Asian person can own an interest in a mining lease or a boat, and sooner or later such legislation can become, well, downright embarrassing. As a 1963 article in Time magazine noted (see here):
Whim Creek. The White Australia policy is often carried to absurd, esoteric extremes. Recently, five Japanese technicians employed by a Japanese-controlled mining concern—at, of all places, Whim Creek in Western Australia—were convicted of violating an obscure 1904 law specifying that "no Asiatic or African alien shall be employed in any capacity whatever in or about any mine claim." As a result, Western Australia's state legislature last week repealed the law, but virtually negated its action by adopting an amendment specifying that Asians must still get government permits to work in the mines.
As for those governments who believe that they are increasing their resource or food security by investing in production in Australia, my advice would be that the investment achieves very little by way of security over and above that which can be obtained simply by signing a commercial contract with an Australian-based supplier.
On the one hand, contracts are enforceable at law, and there is every reason for the buyer to expect them to be performed if at all feasible. On the other hand, the Australian Government has clear power under the Constitution to prevent or control exports, and nothing written into a commercial contract will prevent an Australian Government from exercising that power if it saw it as being in the national interest to do so. In the unlikely event that Australia ever faced food shortages, it is hard to imagine an Australian standing idly by and permitting food supplies needed in the home market to be exported.
There can be all sorts of valid reasons for foreign governments and their controlled entities to invest in Australia, but security of supply is not really one of them.
There can be all sorts of reasons for Australian Governments to decline to approve proposed investments by foreign government entities, but loss of sovereignty is not one of them.
At last there is what looks like a settlement of the mining tax row. That is to the good, and at least the Government has salvaged something from the wreckage of what has to be the most incompetently conducted public policy process since the now-abandoned attempts to introduce an emissions trading scheme.
But what a demeaning process it has been. Instead of giving the miners a decent hearing and then making its own decisions about the design and parameters of the tax, the sovereign Government of Australia got itself into a situation where it had to submit its thinking to the major miners for approval – in effect, “Would it be alright if we did this?”, and “How would it be if we did thus and so?”. Not one of the finer moments in the history of Australian public administration.
Forests have been clear felled to provide the paper on which to print all of the commentary that has been published in the last few days about the collapse of Kevin Rudd’s Prime Ministership and the election of Julia Gillard to lead the Australian Labor Party. I don’t intend to try to cover all of the ground, but for what it is worth, here are some of the principal things that strike me:
(1) There has been a lot of silly and uninformed commentary, including from Kevin Rudd, Tony Abbott and Julia Gillard, all of whom ought to know better, about Kevin Rudd having been elected Prime Minister, and Julia Gillard not having been as yet.
The Australian Constitution provides for a Westminster system of government, as a result of which we do not elect our political leaders directly. Kevin Rudd became Prime Minister of Australia as a result of three conditions being fulfilled. First, he was elected to a seat in the House of Representatives, as the local member for the Brisbane seat of Griffith. Second, in the 2007 general election the party which he led achieved a majority of the seats in the House of Representatives, and in accordance with our constitutional practice was entitled to form a government. Third, prior to the 2007 general election, he had been elected by his parliamentary party to lead it, and not surprisingly, he remained the leader after the election.
So unless, dear reader, you are on the electoral role as a resident of the Federal Electorate of Griffith, or are a member of the Parliamentary Labor Party, you had no say whatever in Kevin Rudd’s ascension to the Prime Ministership, except to the extent that you contributed to the election of a Labor majority in the House of Representatives.
(2) The leadership of the Labor Party being a matter for the Labor Party itself, there is nothing inappropriate about the Party deciding to change its leader. The transition was organised by elected members of the Parliamentary Labor Party, and the only people who had a say in it were elected Parliamentarians. We will get our chance to express a view on this come election day.
(3) For all of Opposition Leader Tony Abbott’s silly hyperbole about “Sussex Street Death Squads”, even the machine men of the NSW Right cannot organise a change of leadership unless the party is crying out for it. The principal architect of Kevin Rudd’s misfortunes was Kevin Rudd himself. Put another way, Julia Gillard was not a solution looking for a problem; Kevin Rudd was a problem crying out for a solution.
(4) Kevin Rudd liked to think of himself as a “policy wonk”, and someone who understood the workings of government. He was neither, and in fact was very much the type of politically aligned operator that has reduced public administration to desperate incapacity in just about every jurisdiction in the land. His sole experience of Federal Government was as a very junior diplomat on a posting to Beijing, a position which gives neither leverage over, nor insights into, the policy development process – or for that matter program implementation. He then became chief of staff to Queensland Premier Wayne Goss, and subsequently the head of the Queensland Cabinet Office. Both of these positions are close to the centre of power, but they confer on their occupant power without responsibility, and are remote from what goes on inside the government departments that are at the beck and call of the political leadership.
(5) The problem with this kind of career trajectory, of which we have seen no small number of examples since the 1984 Dawkins reforms of the Commonwealth Public Service, is that the chosen ones can go straight to the top without the discomfort or inconvenience of running a major organisational unit of a government department. The typical career path is from middle management to chief of staff or senior adviser, followed by appointment as a department secretary, or perhaps warehousing as a deputy secretary until a suitable vacancy at the department head level turns up.
This career path flies in the face of a very substantial body of management literature (see for example the work of Canadian organisational psychologist Elliot Jacques) which holds that no-one, no matter how talented, can be an effective senior manager without having matured as a manager at lower levels. One learns to manage great complexity by first learning how to manage programs and projects of lesser, but steadily increasing complexity. Armed forces understand this well, but not modern politicians. If you seek explanation for the poor quality of government services (including infrastructure planning and development) that surrounds you, and the extraordinary levels of waste and mismanagement, seek no further than this.
(6) Among the many things that Kevin Rudd did not understand was the value of an effective Cabinet process. Clear evidence of how central the Cabinet process is to a Westminster system of government is the fact that it has endured for centuries, without ever being mentioned in legislation or, in Australia’s case, the constitution. The central principal of Cabinet government in our system is that, while Ministers are each commissioned by the Governor-General to administer certain enactments as defined in the Administrative Arrangements Order, there are some things that an individual Minister could do that would have the potential to bring the Government down. Accordingly, for these strategic issues, it is a matter of basic survival to ensure that these strategically significant issues are discussed by the whole leadership team, with a collective decision being made as to whether any given proposal is or is not a good idea.
Beyond that core issue, there is the question of ensuring, in relation to any idea that the Government wishes to proceed with, that all of the downsides and risk factors have been considered, and the requirements for successful implementation have been thought through. The standard model for achieving that in Australian Federal Cabinet practice is to require any Minister seeking significant policy change to place a submission before Cabinet. Cabinet submissions are required to be succinct (usually not more than seven pages), with clear recommendations, and costings agreed by the Department of Finance. The proposing Minister’s department is required, in the course of drafting a submission, to consult all other departments upon whose responsibilities the proposal could have an impact, and to include in the submission a succinct statement of each department’s “coordination comments”. The submissions are then supposed to be lodged with the Cabinet Secretariat in time to be circulated to all members of Cabinet ten clear business days ahead of the meeting at which they are to be considered.
It doesn’t always work like that (I have known times when the ten day rule has been more honoured in the breach than the observance) but at least this standard model provides for the orderly conduct of government business, and for Ministers to take informed decisions based on thorough briefing from all relevant departments and agencies.
(7) In this context it is useful to contrast the decision-making process which led to the RSPT debacle with the process by which the Fraser Cabinet deliberated on the taxation of the mining industry in about 1976, in response to an Industries Assistance Commission report which the Whitlam Government had commissioned in 1975. In the circumstances of the day the Treasury (at that time having the functions of both the Treasury and the Department of Finance) was extremely powerful, and the former officers of Rex Connor’s Department of Minerals and Energy, of whom I was one, were treated in some quarters with considerable suspicion. But thanks to a properly run Cabinet process, the Department of National Resources was able to achieve a substantial reversal of the Whitlam Government’s ill-advised decision to move from immediate write-off of capital investment in the mining industry to write off over forty years or life of mine, whichever was the less. It is ironic to think that if the Treasury had had its way back then, mining investment would have continued to be written off at 2.5% per annum, and we wouldn’t be agonising about super profits in the mining industry because we would barely have a mining industry.
(8) A more subtle benefit of an effective Cabinet process is the opportunity it provides for the training of the next generation of public servants. You can send public servants off to all the courses in the world, and there is a place for some of that, but there is no substitute for junior and middle level officers having real responsibilities, and real opportunities to contribute to the major issues of the day, under the supervision of experienced senior officers. That level of junior officer engagement and supervision takes a little more time, but it is an investment in the future of public administration in our country. If the Prime Minister demands that everything be done by yesterday, it can only be done by very senior staff who can get it right first time – there is no time for any reworking. The result of that is overworked senior staff, and bright young people beneath them whose talents are being neither utilised nor developed.
(9) No-one who read the article about Kevin Rudd by Scott Prasser, co-editor of Corruption and Reform: The Fitzgerald Vision, published in the 11 January 2007 edition of The Australian (see Scott Prasser: Rudd’s ruthless style entrenched Labor) can have been surprised either by the style of the Rudd Government or the way it ended. The key content is:
... aided and abetted by partisans such as Rudd and others recruited from academe and elsewhere, the Goss government implemented a new political fix of increased centralised control, partisan appointments across the public service, media management, continued executive dominance of Queensland's unicameral legislature and skilful containment of Fitzgerald's anti-corruption watchdogs such as the Criminal Justice Commission.
Where the Fitzgerald report suggested the public service needed to be able to "provide independent, impartial, expert advice" and to operate in an environment "without concern for the political or personal connections of the people and organisations affected by their decisions", the Goss reforms ensured greater political control through increased politicisation and centralised processes of a more competent administrative machine.
A few days ago US President referred to BP, the company at the centre of the Gulf of Mexico oil spill, as “British Petroleum”, much to the consternation of the British Government and others.
It was a cheap shot. British Petroleum formally changed its name to BP plc in 2001. It is a global energy company which is listed on the New York Stock Exchange as well as the London Stock Exchange. Having over the years taken over Burmah-Castrol, ARCO and Amoco, it has almost as many US shareholders as UK shareholders on its share register (39% and 40% respectively).
It was a cheap shot in another way. While BP owns the Deepwater Horizon project and must take ultimate responsibility for the ongoing disaster, let us not forget that the wonderful US icon Halliburton was the company that did the physical work and must have something to answer for.
And if we want to play the game of calling BP by historical names, I have a much better idea. Having on 12 June just passed the first anniversary of the stolen election in Iran, and while the air is still ringing with the cheers of those find something to celebrate in the strengthening of sanctions against Iran, why not go the whole hog and refer to BP as the Anglo-Iranian Oil Company (AIOC). Then we could all be reminded of the events which set relations between Iran and the West on their current trajectory.
It needs to be remembered that it was on behalf of the then British Government-owned AIOC that CIA’s Tehran station chief Kermit Roosevelt (now there is a good Democrat family name) organised the 1953 coup that, with the backing of the British Government and the complicity of the Shah, overthrew the democratically elected government of Mohammed Mossadeq, who had had the temerity to nationalise the Iranian oil industry – meaning, in effect, nationalise AIOC.
The coup came after the British Government had unsuccessfully contested the nationalisation at the International Court of Justice in The Hague.
It is not as though the Americans had not sought to avoid the circumstances which triggered the nationalisation. The Iranian Government was resentful of how little benefit Iran was receiving from AIOC’s lucrative business exploiting its finite reserves of oil – a position that Australians ought to empathise with while Prime Minister Rudd is banging on about the need for a super profits tax on the Australian mining industry. No skills were imparted to Iranians – the British did not wish to take the risk that Iran would one day be able to run its own oil industry – and Iranian oil industry workers not only worked for a pittance, they worked and lived under appalling conditions.
The Americans politely suggested to the British that they really should do something about the Iranian Government’s concerns and the plight of AIOC’s workers, only to be told rather patronisingly that Britain had far more experience at dealing with “natives” than the US did, and knew what it was doing.
And so tumult in the Iranian oil industry ultimately became tumult in the streets of Tehran, and culminated in the CIA-led, British-backed coup, following which the Shah got rid of all that silly democratic stuff about electing governments, and AIOC was re-privatised, except that this time around the original AIOC was only permitted to own 40% of the new company – that was part of the US-UK deal.
So we really do have a lot to be thankful to “British Petroleum” for.
As a sweetener to the Western Australian public Prime Minister Kevin Rudd has promised Western Australia $2 billion for infrastructure development to be funded from the proceeds of his proposed resource rent tax on the mining industry. He has made a similar promise to Queensland.
Two comments:
(1) The merit of a tax has nothing to do with all of the wonderful things that a government could spend the money on. The merit of taxes is all about tax principles and tax design, a key aim of the latter being to raise revenue without distorting business decisions.
(2) Things being as they are, a Kevin Rudd promise is not exactly a bankable document.
There is a fun thought experiment you can conduct on the basis of a recent remark by distinguished economist John Freebairn, Ritchie Professor of Economics at Melbourne University (see Melbourne University profile of Professor Freebairn here), who was one of the key consultants in the design of the resource super profits tax (RSPT).
A piece in The Weekend Australian Financial Review, 29-30 May 2010, (Why an economist loves this tax... by Patrick Durkin) states:
Freebairn guesses only half-a-dozen experts and economists in Australia would intimately understand the workings of the super profits tax.
The fun is in considering who these cognoscenti might be, and who might be left outside that charmed circle.
First, consider the fact that Freebairn was a signatory to a statement by 20 economists that came out in support of the tax during the preceding week (see text of Statement and list of signatories here). Freebairn seems to be saying that at least fourteen of his co-signatories did not really understand what they were signing.
Second, let us try to figure out who the six cognoscenti are. Presumably Freebairn himself is one, and Ken Henry another. Apart from Ken Henry there were four other members of the Tax Review Panel. If we include all of them there would be no room for anyone else.
That leaves no room for the Prime Minister, the Treasurer, Resources Minister Martin Ferguson, Finance Minister Lindsay Tanner or Deputy Prime Minister Julia Gillard. They wouldn’t try to sell us something they didn’t really understand, surely?
And what about the senior Treasury official, Executive Director (First Assistant Secretary) David Parker, who is chairing the Government’s consultation panel?
And the people at KPMG Econtech who did the modelling that showed that the resource industry would grow after this substantial tax was imposed on it?
We seem rapidly to run out of room, and can only conclude that numbers of people who have played a key role in the design of this tax, and the decision making and advocacy thereon, do not really understand what they are doing.
Shortly after the Government revealed to a startled world its thinking about the particular form that a resource rent tax might take, an old Treasury colleague of mine commented to me that the fight that had broken out with the mining industry was no accident – it was a fight that Kevin Rudd wanted to have.
That is certainly the view of Sydney Morning Herald political editor Peter Hartcher, for whose views I have a great deal of respect; see Big miners gave Rudd the fight he was looking for, Sydney Morning Herald, 29 May 2010.
Hartcher begins:
One of the most mistaken ideas to take hold in politics in recent weeks is that Kevin Rudd has somehow been shocked that the big miners are reacting ferociously to his proposed new mining tax.
To believe this, you'd have to think Rudd some sort of moron. He certainly did not decide to spring a big new tax on the richest companies in the country, just before an election, in the expectation that they would calmly invite him to tea to negotiate.
Rudd wanted a fight. That's the whole point.
In explaining what the Prime Minister wants to achieve in taking on such a large and well funded industry, Hartcher says:
First, it is designed to make him look strong. Second, it is set up to position him as the champion of the values of Australian fairness against the miners' self-interest. Third, it makes Rudd a fighter on behalf of "working families".
...
And fourth, a fight generates its own publicity - it is filling the national political headspace on the subject of Rudd's choosing. Stories about ceiling insulation bungles and school hall rip-offs are bumped in the face of this titanic struggle.
I am inclined to think that there is also an element of political incompetence involved in this. As I commented in Resource rent tax: what happened to the nemawashi?, the Government would have been well advised to publish the Henry Tax Review the day it was delivered to them, accompanied by a statement that this was an independent review, and the Government would consider it carefully and announce its decisions in due course after consultations with affected parties and relevant experts. This would have given the Government the opportunity to gauge the reactions to all of the recommendations of the report, to gain a broader spectrum of expert opinion on each of them, and to design a suite of policies that it could both explain and sell. But I can just hear the inexperienced spin doctors counselling the Prime Minister not to put the report “out there” until he had all the answers – otherwise “you will only encourage speculation and might lose control of the debate”.
If it is true that this is a war of choice – and I am sure the Prime Minister is happy to have the fight – we really do need to talk about Kevin (see We need to talk about Kevin) it would have to stand both as one of the greatest acts of irresponsibility and one of the greatest acts of narcissism in modern Australian political history.
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.
In its editorial today The Australian Financial Review comments:
The only honourable course for the government now is to release all of its RSPT-related modelling so the public – aided by independent experts – can decide.
While it is about it, the Government might like to explain to us why it chose to use a General Equilibrium model (the KPMG Econtech model) rather than an input-output model like Treasury’s own PRISMOD model on which Treasury normally undertakes its tax and price effect modelling.
I am no econometrician but I do know a little about mathematics. What I know about mathematical models like a GE model is that they are, in mathematicians’ terms, models of complex non-linear systems in which everything is connected to everything else, leading to feedback loops all over the place. Classic examples of such systems are ecological systems, weather systems and economic systems. They are chaotic in a strict mathematical sense, leading to the mathematics of these systems being known in the popular literature as “chaos theory”.
One of the defining characteristics of these complex non-linear systems is acute (and I mean acute) sensitivity to initial conditions, leading to the notion that the beating of a butterfly’s wings in the Amazon can trigger a tornado in Texas. This phenomenon was discovered by meteorologist Edward Lorentz in 1961. He was running weather simulations and decided to check something that was occurring part of the way through a particular simulation. He re-started the calculation by feeding the output from his simulation as data for the new run, and noted to his surprise that the simulation very quickly diverged from the simulation he was checking. On considering what was happening he realised that, whereas his normal input data was to six significant figures, the model’s output data was only to three significant figures. If you restart the model with a number like 0.493 instead of 0.493127, the whole simulation goes off course.
It should be noted that these models are completely deterministic – there are no random elements in them, and you can calculate a unique set of results from the data input. The problem is that a tiny variation in the initial data can produce a quite different unique set of results.
GE models have their uses, which mainly revolve around understanding the processes going on in the system – a small change in A produces a big change in B but only a modest change in C – but they are almost useless as predictive tools because they are so sensitive to the data they are fed. That is why we can never hope to predict the weather more than a week (at best) in advance – we can feed more and more data into bigger and bigger super-computers, but it will never be enough.
To return to the specific subject of the KPMG Econtech modelling of the RSPT, acute sensitivity to “initial conditions” includes of course acute sensitivity to the assumptions which are fed into the model. AFR journalist John Kehoe has some interesting things to say about that on page 6 of today’s Australian Financial Review:
It is believed Treasury directed KPMG Econtech to assume the 40 per cent RSPT would not distort mining investment and the modelling projections were arrived at independent of key design features of the tax, including the rate, uplift factor, depreciation allowances and transition arrangements.
These design features are all assumed to be “perfect” so only pure resource rents are taxed by the RSPT.
Of course what those of us in the real world want to know is whether or not the tax will in fact distort mining investment. We want to see modelling which demonstrates that, not modelling which assumes it.
To turn to the PRISMOD model, this was the model which was developed by the young Ken Henry and his team on the instructions of Treasurer John Kerin at the end of the Hawke era, and which was used to such devastating effect in the Keating era by Treasurer John Dawkins to destroy John Hewson’s Fightback! package.
So I would like to see what that traditional Treasury tool, the PRISMOD model, would show us about this proposed tax, and I would like to know why the KPMG Econtech model was chosen in preference to it.
Distinguished ANU economist George Fane does a brilliant demolition job on the Government’s proposed Resource Super Profits Tax (RSPT) in today’s edition of The Australian (see Reputation of the nation on the line here).
Fane comments:
The resource rent tax looks like the answer to a Treasurer's prayer: a non-distorting tax that allows the community to share equitably in the value of resources that rightfully belong to the community. Unfortunately, it is a chimera.
Later in the piece:
If the guarantee that future tax credits will be refunded is really cast-iron, the Treasury should issue the bonds needed to pay cash refunds to the companies for initial losses in the year when they are made. The companies would presumably prefer the cash to the promise, so everyone would be better off. The only benefit to the government from not cashing the credits arises because the guarantee is not cast-iron.
This is obviously the case, since the RSPT rules are so complicated that they could be changed with negligible electoral consequences. To adapt an aphorism attributed to Ed Murrow, anyone who is not confused by the RSPT cannot have understood it. The accounting rules are too hard for economists, the economics is too hard for accountants and it is all too hard for everyone else.
There is plenty more, and the article is well worth reading in full – access it here.
Today the whole nation is riveted, as well it might be, on the Government’s outrageous intention to spend $38 million of taxpayers’ money selling its unsaleable Resources Super Profits Tax (RSPT). As a former Treasury colleague of mine would have said, you can feed a lot of widows and orphans for $38 million. You could probably even buy a few demountable classrooms.
What is outrageous about the mining ads is that they almost certainly will not meet the only test of respectability that I would regard as acceptable – they will not contain what people in the intelligence world would call “actionable intelligence”.
Put into everyday English, what I am saying is that the only time the Government is justified in spending your money in advertising to you is when there is information you need in order to inform an action that you need to take – and I am not referring here to informing your voting intentions – or an action that you need to avoid taking.
For example, if a government decides to offer free flu shots to all people over 65, then it is perfectly proper to promote that fact in order that the relevant members of the population know about and can decide what to do. The advertisements should not contain any gratuitous pats on the back for itself, but advertising the core information is perfectly proper.
The Government argues that its ads are necessary to counter disinformation from the mining industry. Stripped of the hostile and emotive language, what the Government is really saying is that we have suddenly discovered what we should have known all along, that we should explain this difficult policy, and that is what the advertising campaign is for.
That doesn’t meet any worthwhile test of respectability. Explaining policy is the core business of Ministers. The problem is that they cannot explain it because like the rest of us they find it very difficult to understand. Respected Melbourne University economist John Freebairn, a consultant to the Henry Review, was quoted in the Weekend Australian Financial Review, 29-30 May 2010, as guessing that there would be only about half a dozen experts in the whole of Australia who would intimately understand the workings of the super profits tax.
The forthcoming mining ads are not the only Government advertising that fails the test I have proposed. Last night on SBS Television I saw an Australian Government sponsored advertisement for “Health Reform”. In the light of the current debate about the mining tax advertisements I watched it very carefully for actionable intelligence. It contained none. It told me that the Commonwealth is to become the dominant funder of our hospital system and that as a result everything will be so much more wonderful than before. It contained no information upon which I could act – it was purely and simply an advertisement promoting the current Federal Government.
