The new State of the Sector report from the Queensland Resources Council confirms the struggling position of the mining sector, and it must have the Queensland Treasury considering further royalties revenue write downs. It also makes me wonder whether the QRC might now prefer a resource rent tax (i.e. a mining super profits tax) to the current royalties regime. QRC CEO Michael Roche noted in the report that:
“…we need to be having a conversation about the fact that the state government is collecting royalties from resource operations which aren’t even covering their cash costs.”
I agree this is a conversation that needs to be had, because the QRC CEO has correctly pointed out the problem with royalties, that they are not related to profitability and can discourage efficient extraction of a resource. Royalties typically appear at the top of the list of bad taxes (see my 2011 post Inefficient State taxes). So it would be desirable, for the economy and arguably the mining sector, too, to cut royalties and make up the revenue with a resource rent tax, which would tax the super profits of mining companies (i.e. meaning they would pay much less tax in difficult times such as these, and more in the good times). However, the sector has previously opposed such a tax, and the limited resource rent tax that was implemented by the Gillard Government was ultimately repealed by the Abbott Government. The sector may now be regretting it was not more open to a resource rent tax.
You are right to point out the inconsistencies of the QRC approach on this (didn’t want resource rent royalties in the good times, but want them in the price downturn).
I’m a bit concerned about the claims of the QRC (all doom and gloom for a third of the mines). But they are talking about a third of the operators (the smaller and high cost (inefficient) ones), not a third of production or jobs. Furthermore, the State Of The Sector report admits that the spot prices (the revenue comparator that they use for their analysis) don’t necessarily reflect revenue due to the medium and longer-term sales contracts in place and the outlook is not actually that bad (for existing producers a least – just don’t expect any new developments).
The QRC are beating up the crisis a bit (or a lot).
I agree that a rent-based royalty system is more efficient, but it really looks like the mining sector are just trying to socialise the investment risk from some pretty dubious (high cost) mining and energy developments to me. Their solution would appear to be a royalty holiday, subsidies on inputs (e.g. ports) and slashing regulations designed to protect the interests of the community. Presumable these freebies would be enjoyed by all producers.
Why would the State Government underpin investors’ risk by changing the royalty regime now given the attitude of the sector in the past?
Great point about the distinction between share of operators and share of jobs/activity. Thanks, Jim.
Gene I think you will find that the minerals council backed a profits based tax in their Henry review submission. What Rudd initially proposed though was so unworkable they opposed. Remember the big miners ended up supporting a resource rent tax with Gillard. It of course rose basically no money and it did not replace state royalties as you are proposing here.
Thanks for the comment, Matt. Yes, that’s an interesting fact about their Henry review submission that one tends to forget given the vigorous campaign they ended up waging against the tax. I always thought they changed their mind on a resource rent tax once it was no longer a hypothetical, but something real they would have to and didn’t want to pay. Of course, as you suggest, there were problems with the design of Rudd’s proposal. And the way it was introduced, as a fait accompli, was extremely poor politics.
On supporting the Gillard version of the tax, I think the miners realised they would have to come to some arrangement with the government, and did so reluctantly. As they had a major role in designing the Gillard govt’s mining tax it’s unsurprising it didn’t raise much revenue. Certainly the goal is that a resource rent tax should replace state royalties.
Gene I thought the QRC criticism of local govt rate increases smacked of desperation and clearly indicates the lack of respect they have for the local communities living near the mines. These mining companies have burdened the local ratepayers with millions of dollars of damage to local roads and infrastructure. Now to add to that burden they deliberately embark on a campaign to increase the use of FIFO labour in the mines, this erodes the overall rate base that councils rely on to service the local communities. The less people in the towns, the less rates coming in to council which is compounded by dropping land valuations. The only recovery option for the councils is to increase rates charges to the mines. So in effect the mining companies have by their own actions bought the higher rates charges on themselves, the same thing they have done with the royalties. It would appear many of them don’t think too far ahead.
Thanks, Glen. Good point about the costs imposed on local communities (e.g. through road and other infrastructure use) by the industry.