Dumb deposits and smart miners
Ore bodies are not like heavenly bodies that can be seen by all. They are more modest objects, sometimes deep within the earth, give few hints of their existence and are found only by imagination and intelligence. Yet the Commonwealth Government, rising to the challenge of its title, seeks to tax the state based mineral deposits over which it has no direct ownership but possesses the right to apply an excise tax.
The rationale for imposing a royalty on minerals is that the mineral belongs to the Crown in the first place rather than the owner of the land on which the mineral is found. So just as a state government ceded land to squatters, minerals were treated in the same way. If you found a mineral deposit you could seek a licence. Just as a land owner has rights over his land so the possessor of a miner’s right should have some certainty for development of a mine.
The modern reason for charging the miner is that the resource is non-renewable. This raises the interesting question, just as in climate change economics, how much do you charge the present for depriving the future of a benefit? Should there be a discount rate? How far into the future do you go? Can you model the future reserves of the mineral, its extraction technology, its uses and its price? The answer has to be that you cannot. So this line of reasoning does not help determine a royalty rate.
Beyond meeting the costs of regulation, royalties are a general excise tax. A profit based approach might be superior to a volume or revenue based assessment but it depends on the rate charged. As with many taxes with governments, the original purpose is long forgotten but the revenue raised has become the determining issue.
The miner’s right is similar to rights conferred on the holder of a patent for an invention. But for patents the fees paid are for regulatory certainty of exploitation and not assessed on profitability.
If you adopt a profit based approach for royalties how do you assess profit? Is it any better than present state regimes based on volume or revenue?
There are a number of problems common to all approaches to setting royalties.
The first problem is whether all mineral deposits should be subject to a tax beyond the regulatory purpose? At one extreme is the farmer whose crops extracts mineral nutrients from the soil but is never taxed while at the other extreme the mineral deposit that becomes an ore body when a use is invented for the mineral. The outstanding examples of this are the uranium ore bodies that had no value until the middle of the twentieth century and would be returned to that state if the opponents of nuclear power were successful in their crusade: so much for posterity.
The second problem is of course the inherent value of the minerals in the ore body and the technical processes needed to extract them. There are examples, such as lateritic nickel and the once intractable lead zinc deposits, that have only become ore bodies through technical innovation. How much of the value of the ore body belongs to the dumb deposit and how much to the smart miners? If you tax at the point of extraction is extraction bringing the ore out of the pit or is it after concentrating the mineral? What if the concentrate is sent overseas to release the metals like the copper-gold concentrate from Bougainville where the gold paid for the copper refining? An extreme example of this, from a quite different business, is drug development where the entire asset is a result of discovery and intelligence but the intellectual property is only subject to a regulatory tax. The gross profit on a drug may be 90%. Then you take away R & D, marketing and administration each at say 20% and you have 30% profit before tax. Would the super profits tax get you at the point of manufacture?
The ordinary company tax would seem to be the better path where there is discrimination by profitability; the more profit the more tax.
Royalties have become a major source of revenue for some states. West Australia generated $2.5 billion from royalty payments in 2008-09 where $1.9 billion came from iron ore. Queensland took in $1.3 billion in 2007-08 mainly from coal mining. The states also pick up revenue by supplying energy to the miners and refiners as well as making transport charges thus adding further to government income.
But now the federal government wants its share. This has been dressed up for political presentation in woolly clothes. In fact it is simply a rich new federal revenue stream.
The proposed regional infrastructure funds are a series of Magic Puddings that will be fed to the electorate by politicians. These matters would be better left for development by state governments and industry as the federal government has shown no competence in handling major development programmes.
The details of the proposed tax as announced were simple. However they were so broad brush that, as they say in New York, “you could not see the paint strokes”. Filling in the detail by negotiation may result in a still inequitable tax and much less revenue to the government.
It might be better to abandon this policy initiative. If the government wanted us to benefit, why not create a sovereign investment fund. It could invest $40 billion into expanding mining companies rather than an NBN.