Wednesday, August 15, 2012

Olympic Dam. Why will BHP be charged so little?

Let's start with the ANU's Paul Cleary, author of the just-released Mine-Field - The Dark Side of Australia's Resources Rush

Here he is in The Australian:

"This deal is a monumental example of state government incompetence when it comes to acting as custodian of the nation's mineral wealth.

South Australia has agreed to a regime based solely on percentages and even cents per tonne of the mine's production. Mike Rann, who stands down today as Premier, has done South Australians a disservice that will cost them dearly for almost half a century.

The then premier Mike Rann and his administration should know full well that these royalties fail to capture a fair share of mining profits. This has been in the economic literature since the 1970s and was made more prominent by the Henry review. Yet the deal does not contain a single element of profits-based taxation.

The case for such measures is all the more compelling given that the mineral resources rent tax will not tax the millions of tonnes of copper, uranium, silver and gold the mine will be produce under the 45-year agreement, because the MRRT only applies to coal and iron ore.

Given that this is an agreement negotiated in the 21st century, it beggars belief the state could have agreed to a regime based exclusively on production-based royalties that hark back to medieval times.

But none of these ideas penetrated the thinking of the South Australian government when it negotiated its 45-year agreement for BHP's $30 billion expansion.

The three-tier regime involves 3.5 per cent for refined mineral products, meaning copper and gold, and 5 per cent for uranium oxide and uranium-bearing copper concentrates.

There's also 35c per tonne on extractive minerals sold to a third party, but this is not even indexed for inflation, so its value will diminish over the life of the agreement.

They were points he was making on ABC Adelaide 891 Tuesday when the man who negotiated the deal, former state Treasurer Kevin Foley rang in:

Play or CLICK THEN CLICK AGAIN to download mp3

Foley: “You don’t even understand the state-based royalty system. A royalty is a tax on the quantity of the mineral taken from a mine. It’s not a tax in a, as a profit-based tax. That can only be levied by the Commonwealth government.

Cleary: The previous government...

Foley: No that’s just not true, you don’t know what you are talking about. A royalty is what a state government can apply, a tax based on profit can only be applied by the Commonwealth government.

Cleary: That is not the case.

Foley: It is true. We don’t have access to the company profitability, it is only held by the Australian Tax Office and the national government. They are the only body by which a profits-based tax can be applied, so you don’t even know what you are talking about."

One of them had to be wrong, either Cleary or Foley.

It was Foley, the man who negotiated the Olympic Dam deal, as I outlined on Wednesday.

South Australia is perfectly capable of imposing a profits-based royalty but decided not to.

But listen in, to a conversation between Foley and me that actually gets somewhere...

18 minutes, play or CLICK THEN CLICK AGAIN to download mp3

To recap:

Our system of distributing money between the states is so warped that states that impose high royalties get almost all of their excess earnings taken away from them, and states that impose profits-based royalties (which by definition earn little money in the early years allowing projects to go ahead that otherwise would not) get penalised.

Is there a better way?

You bet.

Ross Garnaut is on the case:

Ross Garnaut, Submission to GST Review, July 2012

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