Thursday, June 10, 2010

"Resource companies will leave Australia only when there are no more minerals and energy to extract"

Ian Verrender, who is less polite than I am, in today's Herald:

"Enough is enough. If one more person looks me in the eye and talks about sovereign risk and the new resources tax, I swear I'll strangle them.

Let's get it straight. Even by the loosest definition, modifying the tax system in the manner proposed by the federal government does not in any way endanger the national ability to repay debt.

Nor will it endanger the ability of resources companies to meet their commitments.

And that, dear reader, is the definition of sovereign risk.

As with many developed nations, Australia has become more exposed to sovereign risk as the global banking system was bailed out with taxpayer funds, the consequences of which are playing out at this very moment in Europe.

In our case, taxpayers underwrote $100 billion of offshore borrowing for our big banks, lifting our risk profile.

But raising the rent for a bunch of tenants profiteering on the back of resources they do not own does not increase sovereign risk. It is simply an owner exercising ownership rights...

Joseph Goebbels, the master of propaganda, noted: 'If you tell a lie big enough and keep repeating it, people will eventually come to believe it.'

And so we have the current scare campaign, being waged by a sector of the economy that has suddenly found itself in the midst of a boom, the likes of which it could never have imagined possible, not even in the wildest dreams of the most optimistic of speculators, less than a decade ago.

Earnings have grown in spectacular fashion, at a pace few have scarcely believed. And there is almost universal agreement this trend will continue.

The old cumbersome state-based royalty system, calculated on the volume of dirt rather than dollars, has meant that the overall profit share from mining has turned dramatically in favour of resources companies. For the proof, see the bottom line of their annual accounts.

Not surprisingly, with the stakes so high, truth has been cast aside. The ever more hysterical arguments from industry spokesmen are so intellectually bankrupt, so bereft of reason, they defy description.

The truth of the matter is this. The big resources companies certainly pay large licks of tax. But they do not want to pay more. They want to capture the windfall gains for themselves, for the executives to pay themselves ever bigger bonuses and their shareholders ever greater returns.

That is a perfectly understandable and legitimate argument. That is the essence of capitalism. That is what companies are supposed to do. That is what executives are paid to do. It also is the reason Xstrata is headquartered in Zug, Switzerland, a nation not ordinarily known for its mining potential.

But you won't get too far using that logic in argument such as this.

And so, from the industry's viewpoint, the focus is on employment, while the profit side of the equation has been cleverly shoved into the background. Listen to the rhetoric. They don't refer to a Resources Super Profit Tax. Instead it has been modified to the far more politically charged Resources Super Tax.

The other great lie in this debate is the notion that the new tax is retrospective. Look up the definition. Don't worry, I'll do it for you.

'1. Directed to the past; contemplative of past events'.

The new tax applies to future earnings. It does not impose penalties or an impost on past earnings and cannot be considered in any way retrospective.

But the argument has been twisted: because it applies to projects that are already in operation, this somehow means it is retrospective.

Apply that argument to personal income tax. If a pay rise catapults you into a higher tax bracket, try arguing that you shouldn't have to pay because you've had the same job for years and that it should apply only to new employees.

The reason the new tax applies to existing mines, particularly the Pilbara iron ore deposits being exploited by BHP Billiton and Rio Tinto, is that they yield fabulous riches to the operators. Development costs were written off decades ago when iron ore prices were a mere fraction of current levels.

Well-funded fear campaigns, bolstered by arguments such as these, have become regular events over the years within the mining industry.

The gold tax was supposed to wipe out gold mining in Australia, leaving thousands unemployed as miners rushed offshore. Indigenous land rights legislation in the wake of the Mabo decision was going make Australia a laughing stock.

In both cases, the threatened mining exodus failed to eventuate.

Why? The answer is simple. Australia has world-class resources. It has first-class infrastructure. It has a highly educated population. It has a transparent government and efficient bureaucracy. It is located geographically within the fastest growing economic region on earth.

Resource companies will leave Australia only when there are no more minerals and energy to extract.

The federal government could be accused of many things in this debate: naivety, poor presentation, insufficient consultation.

And while Ken Henry's resources super profits tax is ''elegant'' from a structural and economic viewpoint, you have to wonder why on earth the federal government simply didn't extend the resources rent tax that has been operating for decades on our offshore petroleum industry.

Politically, that would have been far simpler to sell. And we might have had a debate based on logic rather than fear."

Related Posts

. Wednesday column: No way back, no way out - the miners don't want a deal

. Who wins? Who loses? This is worth reading

. Henry: "Frankly there is more than enough investment in train in the mining sector"

. Three of the best things written about the Resource Super Profits Tax