Pre-Budget Submission - Minerals Council of Australia

MINERALS COUNCIL OF AUSTRALIA PRE-BUDGET SUBMISSION 2015-16

FEBRUARY 2015

TABLE OF CONTENTS OVERVIEW ................................................................................................................................ 3 1

2

3

PERFORMANCE OF AUSTRALIA’S MINERALS INDUSTRY ........................................ 10 1.1

Safety ..................................................................................................................... 10

1.2

Production and exports .......................................................................................... 11

1.3

Prices ..................................................................................................................... 14

1.4

Investment and exploration .................................................................................... 16

1.5

Employment, skills and wages ............................................................................... 17

1.6

Taxation and government assistance .................................................................... 18

1.7

Environmental performance ................................................................................... 19

1.8

Corporate social responsibility ............................................................................... 20

OUTLOOK, CHALLENGES AND IMPERATIVES............................................................ 21 2.1

Global growth outlook ............................................................................................ 21

2.2

The Australian economy ........................................................................................ 22

2.3

Long-term outlook for commodity demand ............................................................ 24

2.4

Challenges and imperatives ................................................................................... 28

POLICY PRIORITIES ....................................................................................................... 33 3.1

Fiscal policy ............................................................................................................ 33

3.2

Taxation.................................................................................................................. 37

3.3

Energy and climate change.................................................................................... 41

3.4

Workplace relations ................................................................................................ 45

3.5

Regulatory reform .................................................................................................. 47

3.6

Land use and environmental approvals ................................................................. 50

3.7

Water access and use ............................................................................................ 52

3.8

Infrastructure .......................................................................................................... 54

3.9

Skills development and labour mobility .................................................................. 56

3.10 Indigenous economic development ....................................................................... 60 3.11 Occupational health and safety .............................................................................. 64 3.12 Innovation ............................................................................................................... 66 3.13 Trade and investment ............................................................................................ 68 3.14 Maritime transport .................................................................................................. 70 3.15 Exploration ............................................................................................................. 72

Minerals Council of Australia HP TRIM ID 2014/002399

OVERVIEW Strong contribution despite more subdued industry conditions Australian miners face renewed global economic uncertainty and intense competition in commodity markets at the start of 2015. Increased supply relative to demand weighed heavily on prices for key commodities in 2014 and no early upturn in market conditions is expected. Capital, operating and exploration budgets remain under pressure from tighter cash flows. A lower dollar is providing some relief, but companies remain on the hunt for improvements in cost competitiveness and productivity. The industry has moved decisively into the production and export phase of the Millennium Mining Boom as investment has declined. Higher mineral export volumes helped sustain growth in Australia through 2014, though declining terms of trade cut into nominal GDP and incomes growth. Australia’s minerals exports reached $164 billion in 2013-14 off the back of higher volumes, with iron ore ($74.8 billion) and coal ($40 billion) remaining the nation’s two largest export earners. Mineral commodities continue to account for around half of Australia’s export earnings, up from roughly one third of total exports a decade ago. Mining’s role as a foundation of national prosperity was underlined by research published by the Reserve Bank of Australia in August 2014 which compared Australia’s economic outcomes with a ‘counterfactual’ of no mining boom. The study found that by 2013 the boom had raised real per capita income by 13 per cent, raised real wages by 6 per cent and lowered the unemployment rate by about 1.25 per cent. More than 200,000 Australians are employed directly in the minerals industry. While down from peak levels of mid-2012, industry employment is still 15 per cent above the average of the past decade. Mining produces more gross value added per unit of labour than any other industry in Australia – almost double the second highest (the finance sector). Each worker employed in the mining sector generates around $515,000 for the economy. Deloitte Access Economics estimates the industry’s direct revenue contribution via mineral royalties and company tax at $22 billion in 2013-14. Survey data shows a rising industry tax ratio since 201011, with roughly half of every dollar in profit paid either as royalties or company tax. Analysis by the Productivity Commission in 2014 again affirmed that the mining industry receives negligible assistance from government. As part of membership of the Minerals Council of Australia (MCA), mineral resource companies commit to continuous improvement in their financial, social and environmental performance beyond regulatory requirements. Industry standards will be refreshed in 2015 with the revision of Enduring Value – The Australian Minerals Industry Framework for Sustainable Development. Long-term growth opportunities if challenges can be addressed The global economy continues to offer long-term growth opportunities for Australia’s minerals industry, despite cyclical weakness and more moderate regional growth after the ‘boom decade’ from 2003-04. Emerging economies like China and India are still urbanising and industrialising, and off a much larger economic base than at the turn of the century. The United Nations expects the world’s urban population to increase by 2.4 billion by 2050, with 95 per cent of that growth occurring in less developed regions (and 83 per cent in less developed regions excluding China). Further catch-up growth, urbanisation and industrialisation will support future commodity demand, albeit with varying growth trajectories across different commodities. Demand from the expanding Asian middle class, and associated growth in urban infrastructure, will require more and better houses, office buildings and transport systems, as well as a range of consumer goods. While energy and steel consumption in emerging economies has grown rapidly in the past decade, many of these countries still have considerably lower energy and steel usage rates compared with advanced economies.

Minerals Council of Australia | 3 HP TRIM ID 2014/002399

When energy and steel intensities in emerging economies eventually plateau, there will be new growth for copper, aluminium and a range of other minerals and metals as the developing world’s burgeoning middle class demands more sophisticated products that are nonetheless resourceintensive in production and use. Whether Australia’s minerals industry will be positioned to take up new market and resource development opportunities as they arise is an open question. Many challenges – geological, technological, commercial, socio-political and policy-specific – must be overcome to underpin future success. •

Mining projects are becoming larger, more capital intensive and more complex

•

Ore grades are declining and, in many cases, energy demands are increasing

•

Costs for labour and a range of intermediate inputs are relatively high

•

Community demands and expectations continue to rise

•

A new breed of anti-mining activists has emerged, often with ‘absolutist’ goals of stopping Australian resource projects in their tracks

•

Governments have become accustomed to loading new burdens on the industry without regard either to commercial realities or to sound policy principles.

The mining boom gifted Australia a ‘once in a century’ economic windfall. Yet it also gave Australia’s political class greater latitude to pursue policies and agendas that can damage investor confidence and erode industry competitiveness. That buffer is now gone. Repair and reform: MCA priorities for the 2015-16 Budget Commonwealth Budgets need to pass both macroeconomic and structural reform tests. Policy settings – expenditure, tax, structural and regulatory – all need to support strong economic growth and create an environment conducive to increased productivity, cost competitiveness and enterprise flexibility. Reducing uncompetitive policy burdens and removing roadblocks to growth is vital, especially for industries like mining that are proven areas of competitive strength and large export earners and that cannot pass on additional costs to customers due to global competition. Reformist budgets are, at their best, instruments of both efficiency and fairness. Fiscal repair is necessary to preserve Australia’s capacity to respond to global economic uncertainty and to ensure future generations are not saddled with unsustainable demands from current generations. And as th Australia’s reform era of the late 20 century demonstrated, productivity-enhancing structural reform is entirely consistent with a fair society. The repair and reform challenge in Australia begins with the Federal Government, but by no means ends there. All parties and all members of Parliament share responsibility for ensuring Australia’s democratic system can respond to today’s economic challenges in a way that fosters growth and shared prosperity. Four broad policy imperatives provide the focus for this 2015-16 Pre-Budget submission by the MCA: The first imperative is long-term fiscal repair. The scale of Australia’s budgetary challenge means the Government has no option but to stay the course on fiscal repair, while sensibly letting budget stabilisers work in the near term. In light of the impact of falling commodity prices and weaker incomes growth for businesses and households on government revenue, the Treasurer wisely noted at the time of the Mid-Year Economic and Fiscal Outlook (MYEFO) that: to try and recover these falling revenues now, through new or higher taxes would unquestionably harm the Australian economy.


Fiscal settings should foster a stable and competitive investment environment and ensure taxation arrangements do not discourage efforts to work, invest, save and take risks. The focus of efforts to close the fiscal sustainability gap should be on controlling and better targeting government spending. The second imperative is no new taxes. The Government’s White Paper on tax reform is the right place to consider and deliberate on changes to the taxation system. Accordingly, the Government should make an early commitment ruling out higher taxes on business and wage earners in the Budget. Ritualistic attacks by the anti-mining lobby on fuel tax and exploration tax arrangements should be ignored, as they have been by the major parties in the past. The third imperative is building national competitiveness. Fiscal repair is only one element of a wider and deeper reform program required to improve Australia’s long-term growth prospects and enhance our international competitiveness. It needs to be interwoven with a comprehensive and coherent structural agenda encompassing reform of the tax system and the Federation, competition policy, transport, energy and environmental regulation, health and education services and workplace relations. The 2015-16 Budget should outline a national competitiveness agenda for the next decade. It should identify core goals, outline a plan to engage the community on Australia’s competitiveness challenge and detail a work program that can help to build reform momentum. The Department of Prime Minister and Cabinet, the Treasury and the Productivity Commission should be charged with coordinating and delivering on this work program. The Government has made a strong start in lowering business costs and improving competitiveness, principally through the repeal of the carbon tax and the mining tax, new trade agreements and its red tape reduction program. But there is a large amount of untouched or unfinished reform business to be tackled. Areas where the Government needs to lead community debate include: •

Improving the competitiveness of Australia’s taxation system for individuals and businesses

•

Streamlining Federal and State environmental regulation to secure the Government’s ‘one stop shop’ reforms

•

Reforming those parts of Australia’s workplace relations framework that have compromised workplace productivity and undercut the foundations for current and future high-wage jobs

•

Tackling the unfinished business of energy and transport reform to improve the cost competitiveness of the Australian economy.

In 2014, the MCA released a landmark report by Professor Tony Makin on Australia’s international competitiveness. The report highlighted a serious deterioration in Australia’s competitiveness over the past decade and linked this declining competitiveness to lower rates of economic growth. On the World Economic Forum competitiveness ranking, for example, Australia has slipped from being st ranked in the top 10 most competitive countries in the early 2000s to now rank 21 . Makin concludes that Australia’s escape from the worst of the global financial crisis (GFC) bred complacency about this underlying competitiveness problem. Greater benchmarking of Australia’s competitive performance can assist policy-makers in understanding our economic strengths and weaknesses and in building constituencies for reform. In laying out the minerals industry’s priorities for regulatory reform in 2014, the MCA recommended the Australian Government establishes a systematic, regular program of benchmarking the nation’s policies and performance in key areas – including health and education, energy, transport, telecommunications, taxation and trade and investment. The fourth imperative is expanding economic opportunities.


The boom decade boosted living standards and created new economic opportunities for thousands of Australians working in the mining industry, including in regional and remote communities. A singular achievement has been the growth in employment opportunities and economic empowerment for a large number of Indigenous Australians, our most disadvantaged citizens. More subdued industry conditions underscore why good policy and long-term partnerships between government and industry are needed now more than ever, to both build on what has been achieved to date and to ensure more Australians (including Indigenous Australians) can aspire to high-skill, highwage mining jobs. •

The industry strongly supports the move towards industry-led training packages, with training funds linked to employment outcomes. The Australian Government should also continue reforms geared towards improving the quality of Australia’s vocational education and training (VET) system via an outputs-based, market-driven approach.

•

Improving policy frameworks so Indigenous Australians enjoy expanded opportunities for employment, economic development and wealth creation is an abiding focus of the Australian minerals industry. The 2015-16 Budget should focus in this context on: -

Investing in the capacity and competence of service providers as part of the development of a demand-driven employment model under the Remote Jobs and Communities Program

-

Adopting the Indigenous Community Development Corporation (ICDC) model for the improved management of payments and benefits negotiated by Indigenous communities and groups, including from land access-related agreements.

The Treasurer Joe Hockey has nominated 2015 as a ‘year of reform’. The reality is that Australia this year will test the proposition that says we sharpen up our act when times get tough. The 2015-16 Budget can and should be the circuit-breaker that highlights what needs to be done to sustain the growth and shared prosperity which mining has helped to underpin. The imperative for long-term fiscal repair and productivity-enhancing structural reform is now stark. Repair and reform offer the only viable path to boost economic growth, support sustainable government service delivery into the future and enhance the job security for working Australians. Summary of key points and recommendations Fiscal policy •

The Government must stay the course on fixing the structural weaknesses in the Commonwealth Budget.

•

Because higher taxes impede growth and reduce incentives to work and invest, the focus of efforts to close the fiscal sustainability gap should be on the spending side of the ledger.

•

Further steps can be taken to improve public spending decisions and performance as part of a broader productivity and competitiveness agenda.

Taxation •

The minerals industry’s revenue contribution to governments in Australia remains large reaching more than $40 billion over the two years to June 2014 despite steep falls in prices and profitability. Australia is a relatively high tax mining jurisdiction, even after the abolition of the Minerals Resource Rent Tax (MRRT) and the carbon tax. The industry tax ratio is now at 47.1 per cent, with nearly half of every dollar in profit made being paid as royalties or company tax.

•

A central focus of the White Paper on the Reform of Australia’s Tax System should be to improve the system’s competitiveness for businesses and individuals. The Government is


sensibly developing options in tandem with consideration of State and Territory Government revenues, roles and responsibilities. Extensive consultation with industry on tax reform will also be essential. •

Efficient, stable and competitive fiscal arrangements for fuel tax and exploration are vital to industry competitiveness and to maintaining economic activity in regional Australia. The Australian Parliament should continue to support the fuel tax credit regime and pass legislation on the Exploration Development Incentive.

Energy and climate change •

Access to low cost, reliable energy, a traditional source of economic strength for Australia, should be an important national priority. While the abolition of the carbon tax is a major step forward, further reform of national energy markets and the Renewable Energy Target (RET) is urgently required, with the RET adding between 9-15 per cent to the energy costs of average mining operations.

•

Australia’s new climate policy framework should support industry competitiveness. The minerals sector looks forward to close consultation on the implementation of the safeguard mechanism contained in the Direct Action policy. Australia’s target for post 2020 emissions reductions should be based on a fair economic burden.

•

Australia should continue to provide energy security to regional nations and play to its strengths on low emissions technologies. Australia should continue to invest in the development of technologies that build upon Australia’s national endowment of reliable, affordable energy.

Workplace relations •

The Productivity Commission review of Australia’s workplace relations framework provides a critical opportunity to address systemic flaws in the Fair Work Act that have impeded productivity and the capacity of firms to adjustment to changing market conditions.

•

The way different provisions interact means the damaging consequences of the current regime are greater than the sum of its problematic parts.

•

Proposed reforms by the Abbott Government in such areas as greenfields agreements, union right-of-entry and individual flexibility arrangements constitute sensible steps towards a more balanced workplace relations system. But they should not be the limit of reform ambition.

Regulatory reform •

Notwithstanding the Abbott Government’s strong start on regulatory reform, there is still a large outstanding agenda critical to future growth in living standards.

•

Regulatory reform priorities for the minerals industry in 2015 include environmental approvals, workplace relations and coastal shipping, all of which have seen costly additional burdens put in place in recent years.

•

The Australian Government should benchmark our regulatory performance more systematically.

Land use and environmental approvals •

The proposed ‘one-stop shop’ reforms for environmental approvals (through implementation of bilateral agreements with all States and Territories) will improve Australia’s investment climate while not diminishing environmental standards.

•

State and Local Government assessment and approval processes should be streamlined to address regulatory complexity and to improve coordination between government agencies.


Water access and use •

The ‘water trigger’ for coal seam gas and coal projects within the EPBC Act should be removed or, alternatively, amended to allow for accreditation of State processes under bilateral approvals agreements.

•

Water access arrangements should be streamlined with State and Commonwealth regulatory requirements.

Infrastructure •

Governments have a responsibility to foster open, transparent and competitive infrastructure markets while also being alert to how differing industry characteristics can give rise to specific regulatory challenges.

•

The MCA recommends that in tandem with the Australian Government’s asset recycling program there needs to be consideration as to whether existing regulatory arrangements are appropriate to ensure efficient provision of infrastructure services by the private sector.

•

Governments at all levels face important social infrastructure responsibilities in regional and remote Australia. The Northern Australia White Paper provides an opportunity to trial new and innovative approaches to the provision of infrastructure services.

Skills development and labour mobility •

The industry supports the passage of the Government’s higher education reforms to ensure sustainable funding into the future and to provide certainty for students and the sector.

•

With the industry spending more than $1.15 billion on training annually, the minerals sector has a keen interest in the quality of the VET system. Further reforms are needed to ensure the training sector is responsive to industry requirements.

•

Labour mobility is an important part of the success of Australia’s mining industry. Strategies such as Fly-in, Fly-out (FIFO) arrangements and an effective skilled migration program provide the flexibility that allows Australia to secure major resource investments.

Indigenous economic development •

The minerals sector continues to be a major driver of Indigenous economic development as the largest private sector employer of Indigenous Australians and with procurement from Indigenous businesses estimated at 55 times that of the Australian Government.

•

A number of policy reforms will further enhance this contribution. The Australian Government should implement the recommendations of the Taxation of Native Title and Traditional Owner Benefits and Governance Working Group, including the proposed ICDC entity.

•

A systematic review of the Aboriginal Lands Rights (Northern Territory) Act 1976 should be undertaken to overcome barriers to minerals investment in the Northern Territory and to deliver improved outcomes for Indigenous Australians.

•

On the other hand, the Native Title Act 1993 has experienced a high level of legislative and regulatory churn and a degree of stability would aid stakeholder confidence.

Occupational health and safety •

The MCA supports the Model Work Health and Safety Act and urges its consistent adoption across all jurisdictions in Australia.

•

There remains further scope to reform Australia’s mining health and safety legislation.


Innovation •

Australian mining spends more than $4 billion per annum on R&D, some 22 per cent of total business expenditure on R&D.

•

Some policies adopted in recent years (e.g. on R&D tax concessions) appear designed to discourage a culture of innovation in the mining industry.

Trade and investment •

The MCA welcomes the successful conclusion of Free Trade Agreements (FTAs) with China, Japan and South Korea which will eliminate a range of tariff and other barriers to a combined minerals and energy trade worth more than $120 billion annually.

•

A major focus of Australia’s trade policy in 2015 should be the conclusion of a free trade agreement with India and the conclusion of the negotiations on a Trans-Pacific Partnership (TPP) agreement with 11 other trading nations.

Maritime transport •

The Coastal Trading Act 2012 introduced a burdensome and anti-competitive new licensing system on top of costly changes to wage rules for foreign crew operating in Australian waters. These changes have increased domestic transport costs and made it more difficult to source coastal shipping services when they are needed.

•

The MCA welcomes the Government’s proposal to introduce a single Coastal Trading Permit that treats Australian and foreign ships equally and looks forward to further consultation on the details.

Exploration •

Expenditure on minerals exploration has fallen almost 50 per cent since 2012 with longer term trends showing a decline in Australia’s share of global exploration expenditure. The Productivity Commission has identified rising costs, lower productivity and a long list of regulatory burdens which have together impeded exploration activity in recent years.

•

The Government should resist moves to curtail legitimate deductions for exploration expenditure. Passage of legislation on the Exploration Development Incentive will benefit Australia’s exploration effort.


1

PERFORMANCE OF AUSTRALIA’S MINERALS INDUSTRY •

The minerals industry is working to improve its safety performance, including through greater sharing by companies of approaches to fatality prevention.

•

Export volumes rose strongly in 2014 led by iron ore, though the broader global supply response weighed heavily on prices of a number of commodities.

•

New investment and exploration activity are well down from levels of recent years due to weaker market conditions.

1.1

Safety

The minerals industry’s number one value and commitment is the safety and health of its workforce, where everyone who goes to work in the industry returns home safe and healthy. The industry has set itself the ambitious goal of becoming free of fatalities. MCA member companies maintain that: •

All fatalities, injuries and diseases are preventable

•

No task is so important that it cannot be done safely

•

All hazards can be identified and their risks managed

•

Everyone has a personal responsibility for the safety and health of themselves and their work mates.

Over recent decades, the industry’s safety performance has improved markedly. However, this positive long-run trend was broken in 2013-14 with 16 lives tragically lost in work-related incidents (Figure 1). That six additional fatalities have occurred so far in 2014-15 has only underlined the need for an uncompromising focus on threats to workforce safety. The MCA brought industry leaders, senior operational managers and safety experts from across the mining industry together at a safety workshop in August 2014 to identify concrete steps to improve the safety of mining workplaces. The workshop established a platform for cross-industry engagement and created new opportunities to share approaches to fatality prevention amongst both MCA and nonMCA members with a view to improving the industry’s performance. Figure 1: Fatalities in the minerals sector 20 18 16 14 12 10 8 6 4 2 0

Source: MCA


1.2

Production and exports

Australian miners face renewed global economic uncertainty and intense competition in commodity markets at the start of 2015. Increased supply relative to demand weighed heavily on prices for key commodities in 2014 and no early upturn in market conditions is expected. Capital, operating and exploration budgets remain under pressure from tighter cash flows. A lower dollar is providing some relief, but companies remain on the hunt for improvements in domestic cost competitiveness and productivity. As investment has declined, the industry has moved decisively into the production and export phase of the Millennium Mining Boom. Higher mineral export volumes helped sustain growth in Australia through 2014, though declining terms of trade cut into nominal GDP and incomes growth. Australia’s minerals exports reached $164 billion in 2013-14 off the back of higher volumes, with iron ore ($74.8 billion) and coal ($40 billion) remaining the nation’s two largest export earners. Mineral commodities continue to account for around half of Australia’s export earnings, up from roughly one third of total exports a decade ago (Figure 2). Figure 2: Minerals exports $bn 180

Coal

Iron ore

160 140 120 100 80 60 40 20 0

Other minerals

Share of minerals in total exports (RHS)

% 60 50 40 30 20 10 0

Source: Department of Industry and Science

Data from the Department of Industry and Science shows production volumes of metals and other minerals increased by almost 29 per cent in 2013-14, led by rapid growth in iron ore output. Production of energy commodities increased by 5.3 per cent (Figure 3). Recent trends by commodity are outlined in Table 1. Iron ore production rose to 683 Mt in 2013-14, 23 per cent above the previous financial year, supported by record output from Pilbara mines. Production is forecast to increase by a further 13 per cent in 2014-15 to reach 774 Mt. Among other bulk commodities, metallurgical coal production increased by more than 13 per cent in 2013-14 to 181 Mt. A further increase to 189 Mt is forecast for 2014-15, with new mines and increased capacity at existing mines more than replacing capacity lost due to closure of some high cost mines. Following growth of 11 per cent in 2012-13, thermal coal production rose 3 per cent to 245 Mt in 2013-14 with production expected to reach 250 Mt in 2014-15. Minerals Council of Australia | 11 HP TRIM ID 2014/002399

Figure 3: Volume of production index (1997-98 = 100)

Index 1997-98=100 220

Energy

Metals and other minerals

Total resources and energy

200 180 160 140 120 100 2007–08

2008–09

2009–10

2010–11

2011–12

2012–13

2013–14


Table 1: Minerals production by commodity Minerals production by commodity – volume Metallurgical coal Mt Thermal coal Mt Iron ore Mt Gold t Uranium t Aluminium Bauxite Mt Alumina kt Aluminium kt Copper Mine production kt Refined, primary kt Zinc Mine production kt Refined kt Nickel Mine production kt Processed ore kt Lead Mine production kt Bullion kt Refined kt Manganese ore kt Silver Mine production t Refined t Tin Mine production t

2010-11 146.7 202.1 447.0 264.7 7069

2011-12 146.9 215.9 503.8 254.5 7657

2012-13 159.5 238.9 555.5 255 8936

2013-14 180.7 245.1 682.7 275 5710

Est. % change (y-y) 13.3 2.6 22.9 7.8 (36.1)

68.8 19041 1938

72.9 19283 1938

78.9 21645 1788

80.3 21532 1773

1.8 (0.5) (0.8)

952 485

926 486

970 454

985 505

1.6 11.2

1479 499

1567 505

1507 496

1499 492

(0.5) (0.8)

195 236

235 276

242 285

225 253

(7.0)

697 133 190 6784

633 144 174 7104

639 148 159 7402

738 133 183 7434

15.5 (10.1) 15.1 0.4

1792 712

1862 847

1696 1057

1893 1066

11.6 0.9

18410

8150

6637

6536

(1.5)



Figure 4 shows the longer run growth in export volumes with further gains expected in coming years, albeit at a slower rate. Figure 4: Minerals exports volume index Index 2003-04 = 100

Iron ore

Thermal coal

Metallurgical coal

Other minerals

500 450 400 350 300 250 200 150 100 50


While the industry faces a more constrained environment compared with the ‘boom decade’, it is important not to lose sight of the gains secured from a larger mining industry and the extent to which these gains endure. The mining industry (including oil and gas) accounted for around 11 per cent of Australia’s GDP in 2013-14, up from less than 8 per cent in 2003-04. Between 2003-04 and 2013-14, the industry grew more than any other industry in Australia with gross value added increasing by $72 billion – more than 50 per cent higher than the second largest contributor to growth. By 2015-16, the mining capital stock will be nearly four times higher than what it was at the start of the mining boom. This higher capital stock will produce higher levels of production and exports for decades to come. As the Bureau of Resources and Energy Economics (BREE) noted in April 2014: The investment phase of the mining boom is winding down but the shift to the output phase is now in full swing. Furthermore, while the investment phase lasted for around five years the output phase will last for decades and deliver an ongoing stream of economic benefits such as employment, royalties and ongoing 1 operating expenditure in Australia.

Identifying the resources sector as one of the economy’s ‘strong foundations’, the Deputy Governor of the Reserve Bank of Australia Philip Lowe noted in November 2014 that while investment has declined ‘we should not lose sight of the fact that this extra export revenue, which has been made possible by the investment in extra capacity, has made us better off and has created opportunities 2 that we would otherwise not have had’. Research released by the Reserve Bank of Australia in August 2014 further underlined mining’s role as a foundation of Australia’s modern prosperity. It compared Australia’s economic outcomes over the past decade with a ‘counterfactual’ of no mining boom. It found that by 2013 the boom had raised

1 2

Bureau of Resources and Energy Economics, Resources and Energy Major Projects, April 2014, p. 26. Philip Lowe, ‘Building on Strong Foundations’, Address to the ABE Annual Dinner, 25 November 2014.


real per capita income by 13 per cent, raised real wages by 6 per cent and lowered the 3 unemployment rate by about 1.25 per cent.

1.3

Prices

Commodity prices for most commodities declined in 2014. Among bulk commodities, the average price for iron ore fell almost 50 per cent, thermal coal declined 26 per cent and metallurgical coal declined 17 per cent over the 12 months to December 2014. Among base metals, notable price falls were experienced by silver (down 17 per cent), copper (down 11 per cent) and lead (down 10 per cent). Going against this trend, prices for zinc (up 10 per cent), aluminium (up 10 per cent) and uranium (up 7 per cent) all rose in the 12 months to December 2014. Figure 5: Commodity prices Iron ore

US$/t 210 190 170 150 130 110 90 70 50

US$/t 360

Metallurgical coal

320 280 240 200 160 120 80

US$/t 140

Newcastle spot

Thermal coal

Japan contract

130 120 110 100 90 80 70 60

3

Peter Downes, Kevin Hanslow and Peter Tulip, The Effect of the Mining Boom on the Australian Economy, RBA Research Discussion Paper No. 2014-08, August 2014.


US$/oz

1800

Gold

1700 1500

8000

1400 1300

7000

1200

6000

1100

US$/t

Nickel

27000 23000

2200

19000 17000

2000

15000

1800

13000

Silver

US$/t

2500 2300

3500

2200

3000

2100

2500

2000

2000

1900

1500

1800

2800

Aluminium

US$/lb

70

2600

60

2400

50

2200 2000 1800 1600

Zinc

2400

4000

US$/t

Lead

2400

21000

USc/oz

US$/t

2800 2600

25000

4500

Copper

9000

1600

29000

US$/t

10000

Uranium

40 30 20

Source: ANZ, LME


1.4

Investment and exploration

Investment in the minerals industry has declined steadily from the very high levels recorded a few years ago. BREE estimated that in October 2014 there were 29 minerals mining and infrastructure projects at a committed stage of development with a total value of more than $30 billion (Figure 6). Of these, 14 were coal projects and nine were iron ore projects valued at $12.5 billion and $14.7 billion, respectively. Investment on committed projects has declined almost 60 per cent since October 2012. There were 177 minerals mining and infrastructure projects at the publicly announced or feasibility stage in October 2014 with total potential value of up to $185 billion. These are projects for which a final investment decision has yet to be made. The value of feasibility stage projects at $155 billion is down one third compared with two years earlier. The value of publicly announced projects has 4 declined by a similar percentage to total $69 billion as at October 2014. Figure 6: Minerals mining and infrastructure projects pipeline

$bn 200

Oct-12

160

142.9

140

100

Oct-14

180.9

180

120

Oct-13

124.9

115.1

101.2

80

73.2

69.4

60

44.8 30.3

40 20 0 Publicly announced

Feasibility stage

Committed

Source: BREE

Weaker commodity prices have also seen exploration expenditure decline sharply. Nominal exploration expenditure declined 31 per cent in 2013-14 to total $2.1 billion. As shown in Table 2, declining exploration expenditure was recorded across all commodities and all States and Territories. The largest falls were for copper (down 45 per cent), silver, lead, zinc (down 43 per cent) and nickel, cobalt (down 40 per cent). Western Australia continues to account for the largest share of total exploration expenditure (almost 58 per cent) followed by Queensland (almost 21 per cent). Iron ore accounted for a third of total minerals exploration expenditure in 2013-14 with gold exploration expenditure next highest at 20 per cent. Compared with the previous financial year, exploration expenditure on new ‘greenfield’ deposits fell 33 per cent to $682 million while expenditure on existing ‘brownfield’ deposits fell 30 per cent to $1.4 billion. In original terms, metres drilled fell 15 per cent for existing deposits and 42 per cent in areas of new deposits.

4

Figure 6 is drawn using the upper level of the value range estimated by BREE.


Table 2: Minerals exploration expenditure – by mineral sought Mineral

2011-12 ($m)

2012-13 ($m)

2013-14 ($m)

% decline (y/y)

Copper

442.6

319.3

176.8

44.6

87.5

79.8

45.8

42.6

Nickel, cobalt

265.4

164.5

99.4

39.6

Gold

768.0

661.8

434.3

34.4

1150.6

1011.3

710.6

29.7

N/A

37.8

28.9 (est.)

23.6

Uranium

153.6

69.5

43.9

36.8

Coal

834.3

544.0

398.7

26.7

Other (includes diamonds)

202.5

167.5

164.7

1.7

3953.0

3055.4

2108.8

31

Silver, lead, zinc

Iron ore Mineral sands

Total Source: ABS, MCA estimates

1.5

Employment, skills and wages

Direct employment in the minerals sector was 208,200 persons in November 2014 based on Australian Bureau of Statistics (ABS) data. While employment was down 12 per cent over the previous 12 months, it remained well above the average for the last decade (Figure 7). Figure 7: Minerals industry employment quarterly (‘000 persons) '000 persons 300

Mining employment

Average of the decade

250 200 150 100 50 0

Source: ABS, MCA estimates

Mining produces more gross value added per unit of labour than any other industry in Australia – almost double the second highest (the finance sector). Each worker employed in the mining sector generates around $515,000 for the economy. Minerals Council of Australia | 17 HP TRIM ID 2014/002399

Average wages in mining are much higher than in most other industries. Average (full-time) adult total earnings were $2,551 per week in May 2014, 68 per cent higher than the all industries average 5 (Figure 8). Figure 8: Average weekly wages, by industry

Source: Australian Bureau of Statistics

The minerals industry spends around 5.5 per cent of payroll on training activities, with one in 20 6 employees either an apprentice or a trainee. The industry also makes a major contribution to higher education, with the MCA-operated Minerals Tertiary Education Council (MTEC) contributing $40 million to tertiary minerals disciplines since 1999. Employers also fund a myriad of other training-related activity, for example Indigenous preemployment programs, work experience internships, university chairs, employee tools and training materials and grants and/or equipment for local TAFEs. In addition to external training, approximately 65 per cent of companies employ staff whose role is primarily training, coaching or mentoring.

1.6

Taxation and government assistance

Deloitte Access Economics estimates the industry’s direct revenue contribution via mineral royalties and company tax at $22 billion in 2013-14. Survey data shows a rising industry tax ratio since 201011, with roughly half of every dollar in profit paid either as royalties or company tax. Section 3.2 provides more detailed focus on the industry’s taxation data. Analysis by the Productivity Commission in 2014 again affirmed that the mining industry receives negligible assistance from government. The Trade and Assistance Review 2012-13 found that mining accounted for just 3.9 per cent of net industry assistance (combining budgetary assistance and net 7 tariff assistance). The main items of budgetary assistance continue to relate to research and development tax concessions (an economy-wide program) and funding for the Commonwealth Scientific and Industrial Research Organisation (CSIRO).

5

ABS, Average Weekly Earnings Australia, Cat 6302.0, May 2014. National Centre for Vocational and Education Research (NCVER), Training and Education Activity in the Minerals Sector, March 2013. 7 Productivity Commission, Trade and Assistance Review 2012-13, Productivity Commission Annual Report Series, June 2014. 6


1.7

Environmental performance

The industry’s approach to environmental management is one of continuous improvement, with MCA members committed to delivering environmental outcomes beyond requirements for legal compliance. The industry’s approach to environmental management has several pillars: •

Land: The minerals industry’s footprint of mined and related lands occupies only 0.3 per cent 8 of Australia’s land mass. The industry is committed to ensuring mined lands are available both for alternative land uses consecutively with mining (including for biodiversity conservation) and to support alternative post-mining uses (including agriculture).

•

Water: A high-value, low-volume water user, mining accounts for less than 3 per cent of 9 Australia’s water consumption. Mining operations seek to utilise low quality water not suitable for other industrial uses (including hyper-saline waters and primary-treated sewage) and to maximise the reuse efficiency of each water unit on site.

•

Energy: The industry is pursuing the use of low emissions technologies and energy-efficiency measures, integrating operational needs with the commitment to sustainable development.

•

Emissions management: The industry is actively minimising risks to occupational, community and environmental health through emission, transmission and exposure management for approved releases to land, air and water.

•

Biodiversity: The industry’s approach to biodiversity assessment and management centres on prevention and management of biodiversity impacts from mining and the identification of opportunities to enhance biodiversity conservation. The minerals industry has contributed to the recovery of a number of threatened species and provides extensive data and resources to national biodiversity research.

•

Great Barrier Reef: The industry is committed to the protection of the Great Barrier Reef and supports a range of scientific and conservation initiatives.

•

Materials stewardship: The industry encourages responsible product design, use, re-use, recycling and disposal of our products. It is also engaged in numerous whole-of-life product management and certification schemes in line with leading global practice.

Specific MCA initiatives to give practical effect to this management approach include:

8 9

•

Advocating reforms to the EPBC Act so that it focuses on key threatening processes to the environment, while delivering industry certainty and efficiency

•

Development of frameworks for land use assessment and natural resource management to deliver transparent, science-based and sustainable decision-making processes so as to better support the coexistence of mining, agriculture and conservation

•

Adoption of a nationally-consistent industry water accounting framework to promote transparency and water use efficiency

•

Development of a leading practice approach to the identification and management of cumulative impacts

•

Supporting global harmonisation of chemicals and hazardous substances management to ensure comprehensive, effective protection of the environment and community health

•

Ongoing investment into breakthrough technologies across all energy sources, most notably low emissions coal technologies.

ACLUMP, Land Use Summary Australia, Australian Collaborative Land Use and Management Program, 19 October 2009. ABS, Water Account, Australia, 2012-13, Cat. 4610.0, 27 November 2014.


1.8

Corporate social responsibility

Earning and maintaining a social licence to operate and the practical implementation of sustainable development principles are defining features of modern mining operations. The Australian minerals industry is acutely aware that: •

It is under increasing scrutiny from local, regional and global stakeholders with rising expectations of industry performance

•

The industry can and should play a leading role in creating opportunities for Indigenous Australians to participate in the mainstream economy

•

-

The minerals industry is the largest private sector employer of Indigenous Australians 10 with more than 6 per cent of its workforce identifying as Indigenous.

-

The industry invested more than $2.2 billion in Indigenous procurement in 2011-12.

-

The industry contributed $3 billion in native title related payments in 2011-12.

11

12

Communities expect to share in the benefits derived from resource development and those benefits must balance economic growth, responsible social development and effective environmental management -

In addition to the industry’s taxation, royalties and employee related payments, more than $34.7 billion was directly spent on community infrastructure, Indigenous contractors, local 13 suppliers and other related activities in 2011-12.

Since 2006, members of the MCA have been required to commit to Enduring Value – The Australian Minerals Industry Framework for Sustainable Development. Signatories are required to report annually on their site level performance across those environmental, social and safety and health aspects relevant to their operation. In December 2014, the MCA Board endorsed a revised suite of industry guidance for Enduring Value to ensure that it remained contemporary and reflected emerging international standards on issues such as human rights and materials stewardship. The revised guidance provides clarity for industry and for external stakeholders on the industry’s commitment to sustainable development. It includes: •

A description of the role of Enduring Value as a continuous improvement tool for industry sitting above legislative requirements

•

Identification of the industry’s sphere of control (i.e. within the mine gate) in managing issues relative to its sphere of influence (i.e. within the supply chain) and the implications this has for setting boundaries around expectations on industry performance

•

Guidance on the implementation of the 10 Sustainable Development Principles and Elements developed by the International Council of Mining and Metals (ICMM) which provide the fundamental underpinnings to the framework with, for example: -

Verifiable outcomes – guidance on what high-level performance outcomes could be expected at sites operating consistently with ICMM Principles and Elements

-

Cross Referencing and reference documents –links to relevant tools which can be used by companies seeking detailed information on specific social and environmental issues, as well as cross-mapping to other sections of Enduring Value.

10 Boyd Hunter, Monica Howlett and Matthew Gray, The Economic Impact of the Mining Boom on Indigenous and NonIndigenous Australian (Working Paper 93), CAEPR, 2014 11 Banarra, The Value of Community Contributions in the Australian Minerals Industry, A report for the Minerals Council of Australia, September 2013. 12 Figure derived from a sample of MCA Member audited accounts, 2011-12. 13 Banarra, Op. Cit.


2

OUTLOOK, CHALLENGES AND IMPERATIVES •

Growth in the global economy remains modest, though with greater divergence among major economies. Weaker demand growth in emerging Asia (including China) alongside robust global supply growth has placed new pressure on commodity exporting nations.

•

Growth in Australia is below trend given lower mining investment, subdued non-mining investment and relatively weak incomes growth. Resource export volumes remain strong.

•

Australia’s strong comparative advantage in mining and further growth and industrialisation in emerging economies offer positive opportunities in the longer term, but a number of critical domestic challenges and policy imperatives need to be addressed.

2.1

Global growth outlook

Most assessments of global growth prospects are cautious. Growth has been slower than expected for several years with many advanced countries still recovering from financial fragility caused by the GFC. Growth in emerging economies has also moderated. Along with strong global supply growth, this has helped to depress commodity prices in 2014 and early 2015. Accommodative monetary policies remain a key policy feature of the world economy, but with increasing divergence across major economies. Further volatility in financial markets is possible given this divergence. Table 3: Growth forecasts for select economies (real GDP) Economy

World

China

Japan

United States

India

Euro Area Australia’s major trading partners

Source

2015

2016

World Bank IMF Treasury World Bank IMF Treasury World Bank IMF Treasury World Bank IMF Treasury World Bank IMF Treasury World Bank IMF Treasury

3.0 3.5 3.75 7.1 6.8 6.75 1.2 0.6 1.0 3.2 3.6 3.0 6.4 6.3 5.5 1.1 1.2 1.0

3.3 3.7 4.0 7.0 6.3 6.5 1.6 0.8 0.75 3.0 3.3 3.0 7.0 6.5 6.0 1.6 1.4 1.5

Treasury

4.75

4.5

Sources: World Bank, Global Economic Prospects: Having Fiscal Space and Using It, January 2015, Washington DC, p. 4; International Monetary Fund, World Economic Outlook Update, 29 January 2015, Washington DC, p. 3; and Commonwealth of Australia, Mid-Year Economic and Fiscal Outlook 2014-15, 14 December 2014, Canberra, p. 8.


Among key developments in the global economy are: •

A pronounced decline in oil prices (55 per cent since September 2014) and continuing softness in other commodity prices

•

A stronger than expected recovery in the United States, which is expected to result over time in some tightening of global financial conditions

•

Gradual deceleration of growth in China, in line with a managed slowdown

•

Weaker than expected growth in the Euro Area and Japan.

The IMF has pointed to the potential boost to demand from lower oil prices as the main upside risk to global growth, while highlighting uncertainty about the persistence of the oil supply shock. Downside risks relate to shifts in sentiment and volatility in global financial markets, especially in emerging 14 economies, alongside concerns around further stagnation in the Euro Area and Japan. Forecast growth by Australia’s major trading partners continues to be around its long-run average and well in excess of expectations for global growth. China (which accounts for around one third of Australian exports) is expected to remain the fastest growing of Australia’s trading partners despite 15 downward revisions to growth in 2015 and 2016. While weakness in the Chinese property market is considered an ongoing source of uncertainty for growth prospects and for commodity demand in the 16 near term, China remains on course for durable growth of close to 7 per cent.

2.2

The Australian economy

Australia’s economy grew below its long-run average rate in the second half of 2014 and private and public forecasters have tended to shave estimates for growth in 2015. Mining investment which has been a strong driver of growth continues to fall, while investment activity outside the mining sector remains subdued. Other domestic demand indicators were patchy at the start of 2015, with dwelling construction as the main exception. Surveyed business conditions and confidence deteriorated over the second half of 2014 and consumer spending has remained soft. A continuation of below-trend growth has seen the unemployment rate rise to 6.4 per cent in January 2015. Both wage cost growth and inflation were low at the start of 2015 and are expected to remain so. The Reserve Bank’s decision to reduce interest rates at its February 2015 Board meeting reflected a revised assessment that growth would remain below trend for longer than previously anticipated, with higher unemployment, lower inflation and fewer signs that non-mining investment is compensating for the ongoing decline in mining investment. Falling mineral commodity prices have induced a sharp decline in the terms of trade, albeit from very high levels (Figure 9). This has reduced the purchasing power of national income and is expected to constrain income growth further in the period ahead. Resource export volumes have grown strongly and are expected to remain at high levels. The resources sector will therefore continue to make an important contribution to growth even as investment continues to decline from historical peaks. The Australian dollar has decreased markedly against a rising US dollar, though the Reserve Bank continues to view the exchange rate as above its fundamental value (given significant declines in key commodity prices) and to signal that a lower exchange rate is likely to be needed to achieve more robust growth in the economy.

14

International Monetary Fund, World Economic Outlook Update, 29 January 2015, Washington DC, p. 1f. Commonwealth of Australia, Mid-Year Economic and Fiscal Outlook 2014-15, 14 December 2014, Canberra, p. 8. 16 Reserve Bank of Australia, Statement on Monetary Policy, February 2015. 15


Figure 9: Australia’s terms of trade Index 2012/13 = 100

Index 2012/13 = 100

120

120

100

100

80

80

60

60

40

40

20 1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

20 2014

Source: Reserve Bank of Australia


2.3

Long-term outlook for commodity demand

Notwithstanding near-term pessimism based on the commodity cycle, the long-term prospects for global minerals demand remain positive. Emerging economies will continue to drive global growth and commodities demand, even though growth trajectories will vary across different mineral commodities. Highly populated emerging economies are still urbanising and industrialising. The United Nations expects the world’s urban population to increase by 2.4 billion by 2050; that is, by around 68 million people a year. Roughly 95 per cent of that growth is set to occur in less developed regions and 83 per cent in less developed regions excluding China (Figure 10). The United Nations projects that the largest urban growth will take place in India (11 million people urbanised a year), followed by China (8 17 million) and Nigeria (6 million). Figure 10: Millions of urban dwellers, 2015 and 2050 millions of people

2015

2050

1600 1343

1339

1400 1200

1050

1000

600

814

779

800 472

674 420

400

795 503

200 0 Africa

China

India

Other developing Latin America and Asia Caribbean

Source: United Nations

In 1990, there were ten ‘mega-cities’ with 10 million inhabitants or more. In 2014, there were 28 mega-cities worldwide. The United Nations expects that number to rise to 41 by 2030, with mega18 cities in developing countries becoming more prominent. Demand for commodities continues to grow as countries move from low to upper-middle income levels. Consumption of energy and metals typically grows together with income until real GDP per capita reaches about $15,000 to $20,000 (purchasing power parity adjusted US dollars) as countries go through a period of industrialisation and urbanisation. This development drives demand for minerals and energy commodities used in the construction of housing, buildings, bridges and 19 transport systems, as well as a range of consumer goods. As economies move to upper-middle income levels, demand for metals used in infrastructure and housing (such as iron ore and copper) slows, while demand for metals used in elaborately transformed manufactures (such as aluminium,

17

United Nations Population Division, Department of Economic and Social Affairs, World Urbanization Prospects: The 2014 Revision, File 3: Urban Population at Mid-Year by Major Area, Region and Country, 1950-2050 (thousands). 18 United Nations, World’s population increasingly urban with more than half living in urban areas, 10 July 2014, New York. 19 Cf. McKinsey & Co., Resource Revolution: Tracking global commodity markets, Trends survey 2013, September 2013, p. 14.


nickel and zinc) accelerates. Demand for energy rises with income growth until high levels of per 20 capita GDP. While energy and steel consumption in emerging economies have grown rapidly in the past decade, many of these countries still have considerably lower energy and steel usage rates compared with advanced economies. China’s energy consumption per capita is currently equivalent to those levels seen in South Korea and Singapore in the late 1980s. McKinsey projects that by 2030 China will 21 reach an energy intensity achieved by those economies in the late 1990s. This is the same year in 22 which the International Energy Agency (IEA) expects China’s coal demand to peak (Box 1). In line with policy objectives, China’s growth has moderated and is expected to become relatively less resource-intensive and more reliant on domestic consumption as incomes rise. Demographic change will also drive a moderation of China’s growth. However, these trends need to be put into perspective. China is the second economy to record output exceeding US$10 trillion, a milestone it achieved in 2014 – only fourteen years behind the United States. China’s economy is now five times bigger than it was a decade ago. Accordingly, China’s 2014 growth rate of 7.4 per cent generated almost the 23 same additional GDP as its 2007 growth rate of 14.2 per cent (Figure 11). Figure 11: Levels and growth rates of China’s GDP, 2002 to 2016 billions rmb 1,400

Y/y increase in China's GDP (LHS) 1,330

1,200

1,053 14.2 1,080 1,030

1,000

844

800 600 400

617 514

685

Y/y growth rate (RHS) % 1,333 1,315 1,323 1,308 1,294 15 1,281 1,182 13

12.7

11

11.3

10.0 10.1

9.1

10.4 9.6

9.2

9

9.3 7.7

200 0

7.7

7.4

7 6.8

6.3

5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f 2016f Source: International Monetary Fund

The Reserve Bank of Australia has drawn attention to China’s continuing importance as a market of Australian commodities, notwithstanding slower growth: Chinese GDP growth has been easing from the rapid pace seen over the past decade or so to a little less than 7½ per cent. Unless productivity growth is particularly strong, supply-side factors such as the declining working-age population will make it harder for China to maintain this growth over time. This will affect the demand for commodities produced in Australia and elsewhere. Yet, even if the sustainable growth trajectory for the Chinese economy gradually declines over the medium term, the economy is much larger than it was and is still growing. This implies there will continue to be a huge appetite for commodities of many kinds. Some of this demand can be satisfied by local Chinese production, but given the competitiveness of Australian production in a number of commodities China is likely to be a large market for Australian resource 24 exports for some time to come.

20

HSBC Bank Australia, More Super, Less Cycle: An update on global commodities, 10 September 2014, p. 7f. McKinsey & Co., Resource Revolution: Tracking global commodity markets, Trends survey 2013, September 2013, p. 14f. 22 International Energy Agency, World Energy Outlook 2014, released on 12 November 2014, Paris, p. 172. 23 ‘China’s slowdown from a very big base’, The Economist, 20 January 2015. 24 Alexandra Heath, The Domestic Outlook and the Role of Mining, address to the NSW Mining Industry & Suppliers Conference, NSW Parliament House, Sydney, 21 November 2014. 21


Box 1: Has China’s coal demand peaked? Some commentators claim that China is rapidly moving away from coal and that its coal demand has 25 peaked. This view is not shared by leading energy forecasters. The IEA forecasts that China’s coal 26 demand will increase by 2.6 per cent a year to 2019; i.e., by more than 100 million tonnes a year. The IEA finds that Chinese coal demand could only peak before 2019 if one of the following unlikely changes occurred: •

China’s GDP growth fell by more than half to 3 per cent from 2015 onwards. Since 1978, the lowest growth rate in China was 3.8 per cent in 1990

•

China produces 2,500 TWh of additional power generation from renewables, gas or nuclear. This additional output is equivalent to:

•

-

four times global wind generation; or

-

18 times the world’s solar photovoltaic generation in 2013; or

-

a 250 per cent increase in China’s consumption of natural gas; or

-

the commissioning of 300 additional nuclear reactors to 2019, in addition to the 30 already expected.

A dramatic reduction in the energy intensity of the Chinese economy.

27

The IEA makes clear that any peak coal scenario for China necessitates significantly lower GDP growth or dramatic changes in power generation or energy intensity, and that ‘nothing even close’ to these developments has been observed in recent history. Rather, ‘China will be the coal giant for 28 many years in the future.’ Looking further ahead, the IEA projects that China will consume more coal than the rest of the world put together over the next two decades; and its coal demand will only peak at around 2030. China’s imports in 2040 remain above current levels on these projections (accounting for 18 per cent of world 29 coal trade). Note that these projections are made under the IEA’s ‘New Policies Scenario’, not a 30 ‘business-as-usual’ scenario. Similarly, Australia’s official forecaster expects coal ‘to play a large role in the world electricity generation mix’ pointing to the fact that China has 70 GW of coal-fired generation capacity under 31 construction or approved (Australia’s total installed generation capacity is 55 GW). BREE states that: While growth in coal use will slow, particularly towards the end of the projection period [2019], the growth in other energy sources is unlikely to be sufficient to meet the increase in China’s energy 32 demand, let alone reduce the need for coal. BREE projects that China’s imports of thermal coal will increase at an average annual rate of 2.6 per 33 cent to 290 million tonnes in 2019.

25

For example, Professor Ross Garnaut argued in September 2014 that China’s demand for thermal coal may have aleady peaked and will decline 0.1 per cent a year through to 2020. Professor Garnaut has stated that ‘Chinese analysts are now saying it looks like it peaked in 2013’. See Ben Potter, ‘China cuts thermal coal use by 3pc’, Australian Financial Review, 27 January 2015. 26 International Energy Agency, Medium-Term Coal Market Report 2014, released on 15 December 2014, Paris, pp. 13, 63. 27 Ibid., p. 75. 28 Ibid., pp. 13, 75. 29 International Energy Agency, World Energy Outlook 2014, pp. 180, 184, 191. 30 The IEA’s core ‘New Policies Scenario’ takes into account those energy and climate change policies already adopted, as well as those announced but not yet implemented. 31 Bureau of Resources and Energy Economics, Resources and Energy Quarterly, September 2014, p. 47. 32 Ibid., p. 48. 33 Ibid., p. 49.


Some 56 per cent of China’s population currently resides in cities and this share is projected to rise to 34 76 per cent by 2050. While the pace of China’s urbanisation will moderate, it will continue to lift demand for steel, energy and food. China’s railway network is still shorter than that of the United th 35 States in the 19 century. Further, the steel intensity of Chinese construction has been increasing over time, owing to the building of taller structures with more features such as underground car parks. For example, a 50-floor building requires roughly double the amount of steel per square metre as a 36 15-floor building. Consumer demand will also become more steel-intensive. In particular, car ownership in China is only a small fraction of that in the United States, so as cities and incomes grow, demand for cars is 37 likely to become an important source of steel demand (Figure 12). Figure 12: Indicators of steel use in selected economies 38

HSBC Bank Australia affirms that the number of countries that are at the ‘commodity-intensive’ stage of development has increased substantially over the past decade, with growth in global GDP now dominated by these countries. HSBC’s view is that ‘for most metals we see little risk of significant 39 oversupply, despite the recent mining investment boom’. In summary, the cyclical downturn in commodity prices is not expected to alter the broader trend of rising minerals and energy demand or the long-term opportunity for resource-rich nations. A more open question concerns Australia’s capacity to seize future opportunities.

34

United Nations Population Division, Department of Economic and Social Affairs, World Urbanization Prospects: The 2014 Revision, File 2: Percentage of Population at Mid-Year Residing in Urban Areas by Major Area, Region and Country, 19502050. 35 HSBC Bank Australia, More Super, Less Cycle: An update on global commodities, 10 September 2014, p. 11. 36 Alexandra Heath, The Domestic Outlook and the Role of Mining, address to the NSW Mining Industry & Suppliers Conference, NSW Parliament House, Sydney, 21 November 2014. 37 ibid. 38 Tim Atkin and Ellis Connelly, ‘Global Demand and the High Exchange Reserve Bank of Australia’, Reserve Bank Bulletin – June Quarter 2013; Alexandra Heath, The Domestic Outlook and the Role of Mining, address to the NSW Mining Industry & Suppliers Conference, NSW Parliament House, Sydney, 21 November 2014. 39 HSBC Bank Australia, More Super, Less Cycle: An update on global commodities, 10 September 2014, p. 1.


2.4

Challenges and imperatives

A number of challenges – geological, technological, commercial, socio-political and policy-specific – need to be overcome if Australia is to capture its share of the opportunities on offer from the next phase of global resource development. •

Mining projects are becoming larger, more capital intensive and more complex

•

Ore grades are declining and, in many cases, energy demands are increasing

•

Costs for labour and a range of intermediate inputs are relatively high

•

Community demands and expectations continue to rise

•

A new breed of anti-mining activists has emerged, often with ‘absolutist’ goals of stopping Australian resource projects in their tracks

•

Governments have become accustomed to loading new burdens on the industry without regard either to commercial realities or to sound policy principles.

These challenges are by no means confined to Australia with a decline in mining productivity, 40 pressure on costs and rising community expectations common across mining jurisdictions. Even so, it has been clear for some time that Australia’s competitors are increasing in number and quality by virtue of improved policy settings, new technologies and new sources of investment. As a major report for the MCA by Port Jackson Partners concluded in 2012, the ‘speed and methods by which 41 new rivals are emerging, and their quality when they emerge, is not widely appreciated’. The minerals industry is a ‘price taker’ in highly competitive global markets characterised by strong competing sources of supply (Figure 13). The geographic distribution of mineral resources means there is no shortage of opportunity for the strategic deployment of capital. The industry is highly capital intensive and characterised by high-risk exploration outlays, large upfront capital commitments, long-life assets, sophisticated technologies and long lead times to profitability. Its capital, people and technology are globally mobile. Figure 13: Australia’s share of global production – selected minerals, 2013 %

0

5

10

15

Iron ore 8

Gold

Nickel

25 20

Black coal

Copper

20

9 6 9

Zinc

11

Uranium

11

Source: Geoscience Australia

40

Deloitte, Tracking the trends 2015, 2015. EY, Business risks facing mining and metals 2014-15, 2014. Port Jackson Partners, Opportunity at risk: Regaining our competitive edge in minerals resources, Report commissioned by and prepared for the Minerals Council of Australia, September 2012. 41


These characteristics (high regulation, high globalisation and trade exposure and high commercial risk) underscore the industry’s vital interest in efficient, stable and risk-based policy and regulatory systems that meet policy objectives without imposing unnecessary cost burdens – costs that cannot simply be passed on to customers. The competitive challenge and the constraints under which mining businesses operate have been described aptly by one industry leader: Using our systems I can identify that it costs our business approximately 1.5 times more for a truck operator in the Bowen Basin compared to the same truck in Mexico in the USA. This highlights the productivity and cost challenge we have in Australia. We must always remember that the world sets our prices and Australia sets our costs.

42

The mining boom gifted Australia a ‘once in a century’ economic windfall. However, it also gave Australia’s political class greater latitude to pursue policies and agendas that can damage investor confidence and erode industry competitiveness. That buffer is now gone. Companies require the agility to move in new directions as economic circumstances change. The easy assumption that Australia will inevitably be a competitive minerals supplier and the location of choice for new investment because of our natural endowment can no longer be sustained. Repair and reform: MCA priorities for the 2015-16 Budget Commonwealth Budgets need to pass both macroeconomic and structural reform tests. Policy settings – expenditure, tax, structural and regulatory – all need to support strong economic growth and create an environment conducive to increased productivity, cost competitiveness and enterprise flexibility. Reducing uncompetitive policy burdens and removing roadblocks to growth is vital, especially for industries like mining that are proven areas of competitive strength and large export earners and that cannot pass on additional costs to customers due to global competition. Reformist budgets are, at their best, instruments of both efficiency and fairness. Fiscal repair is necessary to preserve Australia’s capacity to respond to global economic uncertainty and to ensure future generations are not saddled with unsustainable demands from current generations. And as th Australia’s reform era of the late 20 century demonstrated, productivity-enhancing structural reform is entirely consistent with a fair society. The repair and reform challenge in Australia begins with the Federal Government, but by no means ends there. All parties and all members of Parliament share responsibility for ensuring Australia’s democratic system can respond to today’s economic challenges in a way that fosters growth and shared prosperity. Four broad policy imperatives provide the focus for this 2015-16 Pre-Budget submission by the MCA. The first imperative is long-term fiscal repair. The scale of Australia’s budgetary challenge means the Government has no option but to stay the course on fiscal repair, while sensibly letting budget stabilisers work in the near term. In light of the impact of falling commodity prices and weaker incomes growth for businesses and households on government revenue, the Treasurer wisely noted at the time of MYEFO that: to try and recover these falling revenues now, through new or higher taxes would unquestionably harm the 43 Australian economy.

42

Dean Dalla Valle, President BHP Billiton Coal, CEDA speech, Brisbane, 2 April 2014. The Hon Joe Hockey MP, ‘Release of the 2014-15 Mid-Year Economic and Fiscal Outlook’, Media release, 15 December 2014.

43


Fiscal settings should foster a stable and competitive investment environment and ensure taxation arrangements do not discourage efforts to work, invest, save and take risks. The focus of efforts to close the fiscal sustainability gap should be on controlling and better targeting government spending. The second imperative is no new taxes. The Government’s White Paper process is the right place to consider and deliberate on changes to the taxation system. Accordingly, the Government should make an early commitment ruling out higher taxes on business and wage earners in the Budget. Ritualistic attacks by the anti-mining lobby on fuel tax and exploration tax arrangements should be ignored, as they have been by the major parties in the past. The third imperative is building national competitiveness. Fiscal repair is only one element of a wider and deeper reform program required to improve Australia’s long-term growth prospects and enhance our international competitiveness. It needs to be interwoven with a comprehensive and coherent structural agenda encompassing reform of the tax system and the Federation, competition policy, transport, energy and environmental regulation, health and education services and workplace relations. The 2015-16 Budget should outline a national competitiveness agenda for the next decade. It should identify core goals, outline a plan to engage the community on Australia’s competitiveness challenge and detail a work program that can help to build reform momentum. The Department of Prime Minister and Cabinet, the Treasury and the Productivity Commission should be charged with coordinating and delivering on this work program. The Government has made a strong start in lowering business costs and improving competitiveness, principally through the repeal of the carbon tax and the mining tax, new trade agreements and its red tape reduction program. But there is a large amount of untouched or unfinished reform business to be tackled. Areas where the Government needs to lead community debate include: •

Improving the competitiveness of Australia’s taxation system for individuals and businesses

•

Streamlining Federal and State environmental regulation to secure the Government’s ‘one stop shop’ reforms

•

Reforming those parts of Australia’s workplace relations framework that have compromised workplace productivity and undercut the foundations for current and future high-wage jobs

•

Tackling the unfinished business of energy and transport reform to improve the cost competitiveness of the Australian economy.

In 2014, the MCA released a landmark report by Professor Tony Makin on Australia’s international 44 competitiveness. The report highlighted a serious deterioration in Australia’s competitiveness over the past decade and linked this declining competitiveness to lower rates of economic growth. On the World Economic Forum competitiveness ranking, for example, Australia has slipped from being st ranked in the top 10 most competitive countries in the early 2000s to now rank 21 (Figure 14). Alternative exchange-rate based competitiveness measures show a deterioration of between 25 and 30 per cent over the past decade. Makin concludes that Australia’s escape from the worst of the GFC bred complacency about this underlying competitiveness problem. He argues that Australia will not durably improve its competitiveness without serious fiscal and structural reform, including labour market reform. Greater benchmarking of Australia’s competitive performance is one tool that can assist policymakers in understanding our economic strengths and weaknesses and in building constituencies for

44

Tony Makin, Australia’s competitiveness: Reversing the slide, A public policy analysis for the Minerals Council of Australia, 06 September 2014.


Figure 14: World Economic Forum Global Competitiveness Index – Australia’s ranking Rank 1 5 9 13 17 21 25 Source: World Economic Forum, Global Competitiveness Report (various issues)

reform. In laying out the minerals industry’s priorities for regulatory reform in 2014, the MCA recommended the Australian Government establishes a systematic, regular program of benchmarking the nation’s policies and performance in key areas – including health and education, energy, transport, telecommunications, taxation and trade and investment. Regular benchmarking provides a framework for learning about policy successes and failures across jurisdictions. By enhancing transparency and community understanding of today’s economic challenges it can be a ‘reform catalyst’, allowing policy-makers and others to make sensible comparisons and to evaluate gaps that need to be bridged in order to improve competitiveness and support future prosperity. The fourth imperative is expanding economic opportunities. The boom decade from 2003-04 boosted living standards and created new economic opportunities for thousands of Australians working in the mining industry, including in regional and remote communities. A singular achievement has been the growth in employment opportunities and economic empowerment for a large number of Indigenous Australians, our most disadvantaged citizens. More subdued industry conditions underscore why good policy and long-term partnerships between government and industry are needed now more than ever, to both build on what has been achieved to date and to ensure more Australians (including Indigenous Australians) can aspire to high-skill, highwage mining jobs. •

The industry strongly supports the move towards industry-led training packages, with training funds linked to employment outcomes. The Australian Government should also continue reforms geared towards improving the quality of Australia’s VET system via an outputsbased, market-driven approach.

•

Improving policy frameworks so Indigenous Australians enjoy expanded opportunities for employment, economic development and wealth creation is an abiding focus of the Australian minerals industry. The 2015-16 Budget should focus in this context on:


-

Investing in the capacity and competence of service providers as part of the development of a demand-driven employment model under the Remote Jobs and Communities Program

-

Adopting the ICDC model for the improved management of payments and benefits negotiated by Indigenous communities and groups, including from land access-related agreements. 45

The Treasurer Joe Hockey has nominated 2015 as a ‘year of reform’. The reality is that Australia this year will test the proposition that says we sharpen up our act when times get tough. The 2015-16 Budget can and should be the circuit-breaker that highlights what needs to be done to sustain the growth and shared prosperity which mining has helped to underpin. The imperative for long-term fiscal repair and productivity-enhancing structural reform is now stark. Repair and reform offer the only viable path to boost economic growth, support sustainable government service delivery into the future and enhance the job security for working Australians.

45

The Hon Joe Hockey, Media conference – National Accounts, 3 December 2014.


3

POLICY PRIORITIES

3.1

Fiscal policy •

The Government must stay the course on fixing the structural weaknesses in the Commonwealth Budget.

•

Because higher taxes impede growth and reduce incentives to work and invest, the focus of efforts to close the fiscal sustainability gap should be on the spending side of the ledger.

•

Further steps can be taken to improve public spending decisions and performance as part of a broader productivity and competitiveness agenda.

Budget repair task cannot be shirked The MYEFO for 2014-15 revealed a substantial weakening in Commonwealth Government finances, with a revised forecast of deficits that are $43.7 billion higher across the four years to 2017-18. The 2014-15 deficit is now forecast to be $40.4 billion, up from $29.8 billion as forecast in the May 2014 Budget. A fall in tax receipts – mainly from company tax and income tax – accounts for around threequarters of the budget deterioration ($31.6 billion). The Government has stopped short of announcing significant savings in the near term, arguing that the Budget must be used as a ‘shock absorber’ to cushion the decline in the terms of trade and to prevent additional job losses. The average annual pace of fiscal consolidation in the 2014-15 MYEFO forward estimates nonetheless remains at the 2014-15 Budget level of 0.6 per cent of GDP. The basic story of Australia’s Commonwealth Budget problem is not especially complicated. As outlined by the Deloitte Access Economics Budget Monitor of November 2014: … a boom in China and commodity prices first delivered a bonanza to the Budget, and then removed it once 46 again. … What weren’t temporary were politicians’ promises – they turned out to be permanent.

The legacy is one of continued budget deficits and higher public debt in the absence of policy change. Longer term pressures from the increasing cost and usage of health and aged care and the impact of population ageing on the workforce will see Australia’s Budget position worsen further. The terminology used – ‘crisis’, ‘emergency’ or ‘challenge’ – is secondary; the simple reality is that the nation’s fiscal repair task is huge. The Government has no option but to stay the course on fixing the structural weaknesses in the Budget, even though political bargaining may change the specific measures to be taken. Controlling Commonwealth spending (not higher taxes) should remain core focus The core of the Government’s fiscal strategy is to slow the rate of Commonwealth payment growth through time, largely through changing indexation arrangements, with the biggest payoff in the Budget ‘out years’ rather than over the forward estimates. This is sensible on two fronts: first, because of the near-term economic headwinds Australia is experiencing from the decline in mining investment and lower commodity prices and, second, because hiking taxes will damage long-term growth prospects for the economy. The means by which fiscal sustainability is achieved has a major bearing on investment, growth and job creation. Higher taxes reduce incentives to work, save and invest. Every additional dollar of tax raised means one less dollar invested by the productive private sector, with the deadweight efficiency 47 costs and administrative burdens of taxes on top of that. The MCA urges the Abbott Government to

46 47

Deloitte Access Economics, Budget Monitor, ‘Temporary boom, permanent promises’, Issue 86, November 2014, p. iii. Macroeconomics, Mid-Year Budget Bulletin, ‘The great crunch of 2015: Fiscal repair and income recession’, p. 7.


make a clear and early commitment not to raise corporate or income taxes in the Budget, especially given the White Paper review of the tax system already announced. Claims the Abbott Government did not inherit a spending problem (only a revenue problem) are disingenuous. The former Treasury Secretary Dr Martin Parkinson outlined the case for action on the spending side in a speech to The Sydney Institute in April 2014 based on an analysis of real growth in Commonwealth payments relative to real GDP (capturing the share of real resources being used by 48 government). This showed that even with the withdrawal of GFC stimulus measures by the end of 2012-13, real spending growth (40 per cent) was significantly more than real GDP growth (34 per cent). The analysis also showed the degree to which underlying growth in spending on social programs will place added pressures on fiscal sustainability over the decades ahead. Figure 15: Real Growth in Commonwealth payments and GDP cumulative change %

70 60 50

Real payments

Real GDP

cumulative change %

60 50 40

40 30 30 20

20

10

10

0

0

Source: Treasury

According to Treasury projections, total Commonwealth expenditure on health is set to rise from $64.7 billion in nominal terms in 2013-14 to $74.6 billion in 2016-17 and to $116 billion in 2023-24. Without remedial action, the nation’s three main pension payments – the aged pension, disability support pension and carers’ payment – are set to grow at an annual rate of 6 per cent per annum in nominal terms over the forward estimates, adding around $13 billion to annual payments by 2016-17 and another $39 billion to annual payments by 2023-24. Of this nearly $52 billion in additional payments in 2023-24 compared with 2013-14, more than half is a result of indexation. As outlined by the National Commission of Audit, the Abbott Government inherited a situation where real growth in Commonwealth payments was set to accelerate to 3.7 per cent per annum from 201617 to 2023-24. In this context, the previous Government’s commitment to constrain spending to 2 per cent real growth until a surplus of 1 per cent of GDP was achieved has been labelled ‘an empty

48

Dr Martin Parkinson, Secretary to the Treasury, ‘Fiscal sustainability and living standards – The decade ahead’, Speech to The Sydney Institute, 2 April 2014.


promise’ and a ‘con’ by respected Budget watchers; one that assumed a decade of (unspecified) belt49 tightening which implied cuts to promised policies of $100 billion per year by the end of the decade. Debate over individual budgetary measures is, of course, entirely legitimate. What should not be in question, however, is the need for concerted action to curb and to better target Commonwealth spending in the first place. Further reforms can improve spending decisions Improved budget policy can and should be sold as part of the wider competitiveness and productivity agenda. The Government has taken some steps in this direction, but more remains to be done. For example, Stephen Anthony of budget modelling firm Macroeconomics has proposed using the Productivity Commission to benchmark the fiscal performance of Australian governments using scorecard indicators. Why not benchmark every government department, agency and business against each other and see how they stack up in terms of efficiency. Why not measure the policy performance of each state jurisdiction against the federal government and recognise good performance. Transparent reporting of effectiveness and efficiency benchmarks can help to create an environment of competitive federalism which encourages higher standards of service delivery and better policy outcomes. The Productivity Commission already does 50 this in a form with its Report on Government Services.

Other specific recommendations include introducing high-level program reporting to increase public sector accountability of program expenditure and introducing cost-sharing incentive contracts into public procurement processes to reduce and better target annual public procurement outlays.

49 50

Deloitte Access Economics, Op. cit., p. 4. Macroeconomics, Op. cit., p. 13.


Box 2: The mining boom and the Commonwealth Budget The negative impact on Commonwealth finances of falling mineral commodity prices (especially for iron ore) has received widespread attention of late. The (less remarked) flip-side is the degree to which Canberra enjoyed a massive revenue windfall from the earlier boom. As Chris Richardson of Deloitte Access Economics has observed: ‘The biggest beneficiary of the 51 resources boom wasn't the miners, or Western Australia, or Queensland. It was the federal budget.’ According to figures from Macroeconomics, between 2004-05 and 2013-14 the commodity boom tipped more than $228 billion in ‘windfall revenues’ (above that based on historical average prices) into the Commonwealth Budget. The claim at the time of the 2010 mining tax dispute that Australia’s mineral resource tax regime was unresponsive to higher prices and profitability has been confirmed as a furphy. Prior to 2010, Kevin Rudd and Wayne Swan spoke regularly about the ‘rivers of gold’ flowing into government coffers from the mining boom. They did so for good reason. Company tax is a profits-based tax that taxes ‘rent’ as well as ‘normal profit’. Royalties are generally struck as a percentage of the value of commodities sold and mining States moved swiftly to increase royalty rates as commodity prices rose. That Commonwealth and State Budgets have come under pressure due to lower commodity prices should not be a surprise to anyone. Figure 16: Windfall revenues to Commonwealth Budget from commodity price boom $bn 40 35 30 25 20 15 10 5 0 2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

Source: Treasury and estimates by Macroeconomics

51

Chris Richardson, ‘Australia can’t handle the economic truth’, Australian Financial Review, 6 February 2015.


3.2

Taxation •

The minerals industry’s revenue contribution to governments in Australia remains large reaching more than $40 billion over the two years to June 2014 despite steep falls in prices and profitability. Australia is a relatively high tax mining jurisdiction, even after the abolition of the Minerals Resource Rent Tax (MRRT) and the carbon tax. The industry tax ratio is now at 47.1 per cent, with nearly half of every dollar in profit made being paid as royalties or company tax.

•

A central focus of the White Paper on the Reform of Australia’s Tax System should be to improve the system’s competitiveness for businesses and individuals. The Government is sensibly developing options in tandem with consideration of State and Territory Government revenues, roles and responsibilities. Extensive consultation with industry on tax reform will also be essential.

•

Efficient, stable and competitive fiscal arrangements for fuel tax and exploration are vital to industry competitiveness and to maintaining economic activity in regional Australia. The Australian Parliament should continue to support the fuel tax credit regime and pass legislation on the Exploration Development Incentive.

The minerals industry continues to make a large revenue contribution in Australia, notwithstanding steep falls in prices and profitability. The direct contribution from company tax and royalties alone has increased roughly four-fold over the past decade. Deloitte Access Economics estimates the total contribution from both instruments to be $156 billion between 2004-05 and 2013-14. Figure 17: Minerals industry company tax and royalties (2004-05 to 2013-14) $m 30,000

Royalties

Company tax

25,000 20,000 15,000 10,000 5,000 0

Source: Deloitte Access Economics

Federal company tax paid by the minerals industry rose from $3.4 billion in 2004-05 to an estimated $12 billion in 2013-14. State mineral royalties have risen from around $2 billion in 2004-05 to almost $10 billion in 2013-14. Survey data shows the industry tax ratio has averaged 42.5 per cent between 2007-08 and 2012-13. In 2012-13, the ratio reached 47.1 per cent – in other words, nearly half of every dollar in profit made by the industry is paid either as royalties or company tax (Figure 18). Lower prices and profitability and increases in State royalty rates mean that the ratio is expected to increase further in 2013-14. Minerals Council of Australia | 37 HP TRIM ID 2014/002399

Figure 18: Total tax take on mining 50% 45%

47.1% 42.1%

40%

40.6%

42.1%

39.8%

43.2%

35% 30% 25% 20% 15% 10% 5% 0% 2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

Source: Deloitte Access Economics

At the same time, international comparisons show that Australia is a relatively high tax mining jurisdiction, even after the abolition of the MRRT and the carbon tax. A 2013 study by Goldman Sachs found that the tax take from Australian mining companies is within the top 25 per cent of mining jurisdictions (Figure 19). Major resource-rich competitors like Brazil, Indonesia, Canada, Peru and South Africa – as well as large producers such as China and the United States – all have lower tax rates on mining. Figure 19: Total tax take for major mining companies by nation %

Corporate tax

Average royalty

70 60 50 40 30 20 10 0

Source: Goldman Sachs


White Paper on Tax provides opportunity for genuine tax reform The White Paper on tax reform provides a renewed opportunity for a sensible debate about long-term tax reform in Australia, guided by the Australian Government’s objective of lower, fairer and simpler tax. A core focus should be to improve the competitiveness of Australia’s tax system for businesses and individuals. Australia’s tax system is heavily weighted toward direct taxes on personal and corporate income, despite the reductions in corporate and personal tax rates that have taken place over recent decades, along with the introduction of the Goods and Services Tax. Moreover, under current policy settings that reliance will continue to increase, as will the economic cost of raising tax from the current tax mix, as taxes on corporate and personal income impact more acutely on individual work effort, investment 52 and growth. Globally competitive and predictable taxation and royalty arrangements are critical if Australia is to maintain its place as competitive supplier of mineral resources and a premier destination for future investment. Notwithstanding near-term weakness in commodity prices, the longer term growth potential of emerging economies, especially in the Asian region, continues to offer new resource development opportunities. At the same time, competition from other resource-rich economies to capture these opportunities will be intense. Higher taxes act as a barrier to growth and uncertainty over tax arrangements erodes confidence and impairs or delays investment decisions. The MCA considers that some clear principles should guide this process: •

Tax reform proposals should look to enhance Australia’s productivity growth and international competitiveness by encouraging future private sector investment, recognising that global capital is increasingly mobile

•

Tax reform proposals should be, as far as possible, prospective to ensure appropriate stability and predictability in tax arrangements and in order to avoid creating perceptions of sovereign risk

•

Tax reform proposals should reduce tax complexity and minimise administrative and compliance burdens

•

There should be extensive consultation with industries and other stakeholders directly affected by tax reform proposals.

The Government has rightly recognised that sensible, lasting tax reform can only be pursued in concert with consideration of the roles, responsibilities and revenue bases of the States and Territories; hence, the parallel White Paper on Reform of the Federation. Industry stakeholders will also be keen to ensure strong consultation processes are in place as tax reform options are developed through the White Paper process. It should avoid the errors which characterised the Henry Tax Review where a punitive, new mining tax (with a major direct bearing on State revenue raising capacity) was announced as a fait accompli without any prior consultation with industry or with State governments. The former Treasury Secretary Dr Martin Parkinson sounded an important cautionary note regarding Canberra’s technical capacity in this area when he remarked last year that: Proposals which work in a textbook but fail to recognise commercial realities (particularly in business tax) will eventually be found out. Their purported benefits may well prove illusory, the costs they impose may be 53 greater than assumed, and they might be difficult, if not impossible, to implement.

52

Dr Martin Parkinson, Secretary to the Treasury, ‘Enhancing our living standards through tax reform’, BCA/PwC Tax Reform forum, 11 September 2014. Dr Martin Parkinson, Secretary to the Treasury, ‘Challenges and opportunities for Australia over the next decade’, Speech to the Association of Mining and Exploration Companies, 2 July 2014.

53


Fuel tax credits scheme is based on sound tax principles Australia has soundly-based tax arrangements for business fuel inputs. The fuel tax credit (FTC) regime (known widely as the ‘diesel fuel rebate’) is vital to the mining industry’s cost competitiveness and its ability to compete in overseas markets. More generally, the scheme underpins jobs and economic activity across regional and remote Australia. There were more than 690,000 separate claims for fuel tax credits in 2012-13, the largest number coming from agriculture, forestry and fishing (45 per cent), transport, postal and warehousing (21 per cent) and construction (12 per cent). Any removal or reduction in existing tax arrangements would amount to a massive new tax hike on economic activity and jobs in regional and remote Australia. The FTC regime ensures business inputs are not taxed – the same principle that underpins the GST. Diesel accounts for up to one quarter of operating costs at some mines. With miners operating on privately-built roads and off the electricity grid, it has long been recognised that taxing fuel inputs is inefficient and inequitable. This applies equally to others (including farming, fishing, forestry, tourism, as well as remote area government services and households) which rely on the FTC scheme. The MCA welcomes the support shown for the FTC regime by the vast majority of Parliamentarians in the face of baseless attacks that the scheme is a ‘subsidy’. The Finance Minister, Senator the Hon Mathias Cormann, outlined the clear rationale for the scheme in the Senate in December 2014: Let us be very clear: the government does not consider the diesel fuel rebate as a subsidy at all. … It is recognition that you should not charge businesses an effective road user charge if they do not use public 54 roads.

In the same debate, ALP Senator Doug Cameron highlighted both the policy logic of the scheme and why deliberate attempts to disadvantage the mining industry would be economically damaging: Carving out particular industries will distort the fuel tax credit system that provides for a rebate on fuel where 55 it is used as a business input.

Attacks by the Greens calling the scheme a ‘subsidy’ fly in the face of repeated statements by the Australian Treasury outlining the FTC scheme’s rationale. Treasury has stated, for example, that: Fuel Tax Credits are not a subsidy for fuel use, but a mechanism to reduce or remove the incidence of excise or duty levied on the fuel used by business off road or in heavy on-road vehicles. … the purpose of this scheme is not to subsidise fossil fuels but rather to avoid the incidence of a consumption tax on certain business inputs. This is consistent with Australia’s tax system generally and is 56 similar to the treatment of GST on business inputs.

Exploration tax arrangements are vital to industry activity Exploration activity is the nursery of future Australian mining projects. Deductibility of exploration expenditure in the year that expenditure is incurred has been a consistent feature of Australia’s income tax laws over several decades, providing important stability for what is a high-risk activity. At the same time, it has long been recognised that an asymmetry exists by virtue of the fact that most junior explorers do not have taxable income and are therefore not in a position to secure the benefit of immediate deductibility. The move to establish an Exploration Development Incentive for junior explorers is a positive step that addresses this asymmetry, at least partially. The measure is designed to encourage Australian residents to invest in junior exploration companies who spend capital funding on domestic greenfields exploration. The MCA urges the Parliament to pass the Excess Exploration Credit Tax Bill 2014 to help ensure a healthy pipeline of mining projects in Australia.

54

Senate Hansard, 2 December 2014. Ibid. 56 Treasury QTB, Treasury Freedom of Information Disclosure Log, Document 19, AFR article: G20 commitment on fossil fuel subsidies, 28 February 2011. 55


3.3

Energy and climate change •

Access to low cost, reliable energy, a traditional source of economic strength for Australia, should be an important national priority. While the abolition of the carbon tax is a major step forward, further reform of national energy markets and the Renewable Energy Target (RET) is urgently required, with the RET adding between 9-15 per cent to the energy costs of average mining operations.

•

Australia’s new climate policy framework should support industry competitiveness. The minerals sector looks forward to close consultation on the implementation of the safeguard mechanism contained in the Direct Action policy. Australia’s target for post 2020 emissions reductions should be based on a fair economic burden.

•

Australia should continue to provide energy security to regional nations and play to its strengths on low emissions technologies. Australia should continue to invest in the development of technologies that build upon Australia’s national endowment of reliable, affordable energy.

The importance of access to reliable, affordable energy The minerals sector welcomes the reforms related to energy and climate policy that have been implemented or secured over the past year, particularly the repeal of the carbon tax and the MRRT, good progress on the red tape reform agenda and the conclusion of free trade agreements with South Korea, Japan and China (which together account for 64 per cent of Australia’s energy trade). These reforms reverse a series of deliberate policy interventions that have eroded Australia’s access to affordable energy. Until the repeal of the carbon tax last year Australian exporting and importcompeting companies faced average electricity costs up to 130 per cent higher than those prevailing 57 in other advanced economies. Barriers to low cost, reliable energy continue to exist. The Renewable Energy Target (RET) remains an inefficient and expensive form of infant industry assistance that should not continue in its present form (see Box 3 overleaf). National energy market reforms have also stalled. Regulated prices and poor price transparency in select jurisdictions continue to threaten the efficient operation of the east coast National Energy Market (NEM) and gas markets. Barriers to resource access have further distorted emerging east coast gas markets. Reservation policies on the west coast discourage long-term investment. A lack of investment also hampers the smooth operation of the Northern Territory’s domestic market. New climate policy framework and international competitiveness The minerals sector supports the Direct Action policy’s emphasis on promoting investment in new low emissions technologies through incentives rather than a punitive tax. A key area of focus in 2015 will be the finalisation of the so-called safeguard mechanism that will apply a soft cap on the emissions of approximately 180 Australian companies. It is imperative that the design of the safeguard mechanism takes account of the specific circumstances of the minerals sector, which faces unique challenges due to deeper ore bodies which are more difficult access, declining ore grades and highly variable and often unpredictable fugitive emissions.

57

CME, Electricity Prices in Australia: An International Comparison, report to Energy Users Association of Australia, 2012, p. 14.


Australia’s contribution to global action Australia has been wrongly cast, both in Australia and abroad, as a laggard in efforts to slow the growth of greenhouse emissions. Australia was one of the few nations that fully met (or exceeded) its obligations under the first commitment period of the Kyoto Protocol. Moreover, independent research by the world’s most respected economists demonstrates that Australia’s 2020 target represents a fair and equitable contribution to the global emissions reduction effort. Box 3: How the Renewable Energy Target is increasing energy costs The RET involves a transfer of wealth from electricity consumers to a select group of producers. This cross-subsidy is measured by the government’s own independent panel at $22 billion over the next 15 years, in addition to $9.4 billion so far. This is in line with other assessments by Principal Economics (at about $21 billion) and Deloitte ($17 billion). The loss of that $20 billion by households and business, distorts investment, at a compounding cost of up $28 billion in lost economic activity and over 5,000 jobs by 2030. The projected $22 billion will only bring forward $15 billion of new investment, according to the RET Review Panel. An examination of monthly electricity bills reveal the RET’s actual cost burden on six coal mine operations in New South Wales and Queensland – more than $15 million in the past two years. The numbers show that the RET adds between 9 and 15 per cent to energy costs of typical Australian mining operations. Another case study examines the cost impact on a mineral processing operation, which receives some relief from the ‘partial exemption certificates’ issued to a small number of ‘emissions intensive, trade exposed’ businesses. Even after this support, the net cost of the RET is still significant – $26 million for the past three years. The cost of the RET is not shared by Australia’s competitors in global markets. Energy costs should be an aspect of Australia’s competitive advantage in international markets, not a source of disadvantage. In the absence of changes to the scheme, the RET will continue to represent a major burden on Australian export and import-competing businesses. Carbon abatement from the RET has come at a very high cost. For the large scale (mostly wind) operation of the scheme, the costs of avoided emissions are projected to be in the range of $32 to $62/t C02-equivalent by 2030. For small-scale solar, the cost ranges from around $95/t C02-e to more than $175/t C02-e. Not only is the RET inefficient; it is also regressive. The Climate Change Authority has acknowledged 58 that low-income households are particularly disadvantaged by the scheme. Recent work led by former senior Clinton Administration official Jeffrey Frankel and a colleague at Harvard University assessed the various targets made by developed and developing nations and 59 looked to determine whether nations are doing their ‘fair share’. Drawing on a range of objective criteria, it was found that Australia’s 2020 target represents a comparable burden to that of the USA and superior to that of the European Union and many other developed and developing nations. This finding is consistent with earlier work by Professor Warwick McKibbin as well as the Australian Treasury which concluded that a 5 per cent reduction by 2020 off 2000 levels would result in gross national product (GNP) 1.1 per cent lower than the ‘business as usual’ reference case. This is

58

Climate Change Authority, Renewable Energy Target Review: Final Report, December 2012, pp. ix, 23. V. Bosetti and J Frankel, ‘A Pre-Lima Scorecard for Evaluating which Countries Are Doing their Fair Share in Pledged Carbon Cuts’, Viewpoints, Harvard Project on Climate Agreements, November, 2014. 59


considerably higher than comparable economic impacts on the United States (0.7 per cent lower GNP) or the European Union (0.4 per cent lower GNP). The industry endorses the Government’s position on its future commitments as outlined by the Foreign Minister, Julie Bishop, at the UNFCCC conference in Lima in December 2014: This action must deliver real cuts in emissions and not put countries at a competitive disadvantage. And it 60 must work alongside countries’ plans for strong economic growth, jobs and development.

A critical role for Australian coal and uranium in meeting energy security needs Australia’s energy policy should always take account of the critical role Australia plays as premier supplier of energy minerals to rapidly growing developing countries, particularly in the Asian region. For example, Australia already accounts for more than a quarter of the global seaborne thermal coal trade. Between 1990 and 2010, 1.7 billion people secured access to electricity for the first time. More than 1.27 billion people secured access to electricity powered by fossil fuels. By comparison, 65 million people secured access to electricity for the first time from renewable energy sources. This means 19 people gained access to energy from fossil fuels for every one person who secured access via renewable energy sources. A further 1.3 billion people who have no access to energy and another two billion people who have only limited access will be looking to coal and uranium in the suite of 61 energy sources to promote development. The International Energy Agency projects that the global coal trade will grow by 40 per cent by 2040, with Australia providing 40 per cent of that growth in coal demand (and lifting its market share from 27 62 per cent to 33 per cent of seaborne trade). The outlook for uranium is also strong, with use expected to grow by 90 per cent by 2040. The number of nations using uranium for nuclear energy generation will grow from 31 to 36 and there will be strong growth in existing nuclear nations including China, India, Korea and Russia. There are currently 71 reactors under construction in 14 countries, including 27 in China, 10 in Russia and six in India. In addition, there are 174 reactors planned in 26 countries, and a further 301 reactors 63 proposed in 36 countries using a combination of existing and new designs. There is much potential in modern small modular reactors (SMRs) which could offer long-term stable electricity supply to underpin household and industrial use in mining and remote towns. Market conditions in Australia do not support the development of a domestic nuclear power industry today. Nonetheless, the Australian Government should remove the ban on nuclear power as a first step in opening up the option of possible future nuclear power in Australia. Low emissions and coal use are not mutually exclusive Gains in technology are dramatically reducing the carbon footprint of coal-fired generation technology. Conventional technologies – supercritical, ultra-supercritical and next generation advanced 64 supercritical – are rapidly reducing the carbon footprint from coal fired power generation. There is also strong progress being made in the deployment of carbon capture and storage (CCS). The Global CCS Institute estimates there are currently 22 large-scale CCS projects in operation or construction around the world with a combined capacity to capture up to 40 million tonnes of CO2 per annum. Nine of these involve geological storage. The launch in September 2014 of the first large60

The Hon. Julie Bishop MP, Minister for Foreign Affairs, Australian National Statement, United Nations Framework Convention on Climate Change Conference, Lima, 10 December 2014. 61 Ibid. In the IEA’s most aggressive emissions reduction scenario, consistent with the goal of limiting the global increase in temperature to 2C, fossil fuels will still provide 59 per cent of primary energy in 2040. 62 International Energy Agency, World Energy Outlook 2014, Paris, 2014, p 184. 63 http://www.world-nuclear.org/info/Facts-and-Figures/World-Nuclear-Power-Reactors-and-Uranium-Requirements/ 64 Supercritical and ultra-supercritical are terms relating to the internal thermal dynamics of generation plants. These types operate at much higher temperatures than conventional (subcritical) plants which were the mainstay of generation in the previous century. Higher temperatures mean greater energy release per tonne of fuel.


scale power plant to capture and store carbon dioxide at SaskPower’s Boundary Dam in Canada was a critical milestone. The Australian coal industry is committed to playing its part in the global CCS effort. In partnership with government, the Australian coal industry has so far committed $300 million under the COAL21 Fund to a portfolio of projects covering geological storage, methane abatement in coal mines and research, development and demonstration of CO2 capture as a contribution to the international effort. If Australia is to meet our energy emissions targets at the lowest cost, then it is vital that the development and extensive deployment of CCS receives continued bipartisan support. The deployment of CCS will be central if the world is to reach emissions targets at lowest cost. The Intergovernmental Panel on Climate Change, for example, has forecast that a global solution to 65 climate change without CCS will be 138 per cent more costly than other options. Australian Governments (including State governments) rightly support greater collaboration between industry and research centres of excellence to encourage breakthroughs that benefit the economy and the broader community. The industry-led Leadership Roundtable for the development of Low Emissions Technologies, announced in October 2014, will play an important role in sharing information here and abroad and identifying current gaps and future needs. In the 2014-15 Budget, the Australian Government announced savings to many programs but kept the core of its low emissions agenda intact: the Carbon Capture and Storage Flagships and the National Low Emissions Coal Initiative. While the Budget cuts were disappointing, preservation of existing funding arrangements allows for maintenance of research and development efforts in critical areas such as CCS, emissions reduction programs (like fugitive emissions capture) and hybrid renewables projects (for example, renewable energy supplementing base-load power at mining sites).

65

IPCC, 2014: ‘Summary for Policymakers’, In: Climate Change 2014, Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlomer, C. von Stechow, T. Zwickel and J.C. Minx (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA. p. 16.


3.4

Workplace relations •

The Productivity Commission review of Australia’s workplace relations framework provides a critical opportunity to address systemic flaws in the Fair Work Act that have impeded productivity and the capacity of firms to adjustment to changing market conditions.

•

The way different provisions interact means the damaging consequences of the current regime are greater than the sum of its problematic parts.

•

Proposed reforms by the Abbott Government in such areas as greenfields agreements, union right-of-entry and individual flexibility arrangements constitute sensible steps towards a more balanced workplace relations system. But they should not be the limit of reform ambition.

Fair Work Act undercuts productivity and high-wage mining jobs Australia’s workplace relations system has been re-regulated in a way that bolsters the power of trade unions and tribunals at the expense of employers and employees. The Fair Work Act has reduced choice and flexibility in employment arrangements, created a more adversarial bargaining system and dragged more and more issues within the remit of an industrial tribunal, rather than be under the sway of those with a direct stake in the success of the enterprise or workplace. The result has been to weaken a central productivity-enhancing pillar of Australia’s microeconomic reform era. An August 2013 study for the resource industry employer group the Australian Mines and Metals Association (AMMA) found that almost 90 per cent of resource industry employers surveyed report that they have not achieved any productivity gains via new workplace agreements under the Fair Work Act. Some 75 per cent say that productivity has reduced because of overregulation of 66 Australia’s workplace relations system. Under the cloak of fairness, legislative provisions have enhanced and institutionalised the bargaining power of unions. Instead of responding to changing business conditions, managers in the mining industry and elsewhere have faced a union rights agenda more akin to the pre-1990s industrial relations system. In some cases, unions have sought nothing less than an effective right of veto over operational decisions which are the responsibility (and prerogative) of management. Unreasonable claims and actions have increased project costs, compromised workplace harmony and productivity and undercut the foundations for current and future high-wage jobs in the mining industry. Ultimately, productivity gains are the only sustainable source of higher wages and job security for Australians. The former Chairman of the Productivity Commission, Gary Banks, observed in this context that “industrial relations regulation is arguably the most crucial [area of regulation] to get right”. Whether productivity growth comes from working harder or working ‘smarter’, people in workplaces are central to it. The incentives they face and how well their skills are deployed and redeployed in the multitude of enterprises that make up our economy underpins its aggregate performance. It is therefore vital to ensure that regulations intended to promote fairness in Australia’s workplaces do not detract unduly from their productivity. … If we are to secure Australia’s productivity potential into the future, the regulation of labour markets cannot 67 remain a no-go area for evidence-based policy making.

Similarly, the former Labor Resources Minister and ACTU President Martin Ferguson has called for a ‘clear-eyed assessment of the Fair Work Act’, arguing that high labour costs and low productivity are 68 ‘an unsustainable mix’.

66

Steven Kates, The AMMA Workplace Relations Research Project – A survey based analysis, Report 6, August 2013. Gary Banks, Successful Reform: Past Lessons, Future Challenges, Keynote address to the Annual Forecasting Conference of the Australian Business Economists, 8 December 2010, Productivity Commission, 2011, p. 16.

67


Current framework worse than the sum of its parts In theory, the Fair Work Act was to provide workplace relations laws that ‘are fair to working Australians, are flexible for businesses, promote productivity and economic growth for Australia’s future economic prosperity’. In practice, the Act is a case study in regulatory overreach where the adverse consequences of the whole are greater than the sum of its problematic parts. While individual provisions present particular challenges, the full impact needs to be gauged based on the nexus and interaction of various elements. Among these are: •

Provisions which mandate union involvement in workplace bargaining, beyond that commensurate with workplace representation

•

Restrictions on agreement-making options (with the neutering of flexibility arrangements in awards and enterprise agreements)

•

Expanded breadth of matters subject to bargaining and allowable in agreements, well beyond matters relating to wages and conditions of employment, backed by the threat of ‘protected industrial action’

•

Unbalanced, union-friendly clauses associated with “right of entry” rules and “adverse action”/general protection provisions

•

Mandatory union involvement in greenfield negotiations.

Government reform proposals are sensible first steps In line with its 2013 election commitments, the Abbott Government has proposed sensible reforms designed to address some of the ‘backsliding’ that has characterised the workplace relations system under the Fair Work Act. Changes proposed in the Fair Work Amendment Bill 2014 include: •

Simpler processes for greenfield agreements with employers able to seek Fair Work Commission approval of a proposed agreement if no deal is reached after three months of negotiations

•

A less restrictive framework for individual flexibility arrangements so that non-monetary benefits could be considered in assessing the fairness of an arrangement

•

A higher threshold for union right of entry onto employer premises, including a requirement that entry for meetings with members or prospective members would depend on a union being covered by an enterprise agreement applicable to work performed at the workplace, or the union being invited into the workplace by a member or prospective member

•

Restrictions on unions taking protected industrial action in support of claims for a new enterprise agreement before bargaining has actually commenced.

Importantly, a number of the proposed changes in the Fair Work Amendment Bill 2014 relate directly to recommendations of the former Labor Government’s Fair Work Review Panel. Other bills before the Parliament include the Fair Work Amendment (Bargaining Processes) Bill 2014, which aims to incorporate 'workplace productivity' as a requirement of the processes of bargaining, and the Building and Construction Industry (Improving Productivity) Bill 2013, which seeks to restore the rule of law and a tougher compliance regime in the building and construction industry. Tellingly, Martin Ferguson has stated that while the changes are a step in the right direction, they are ‘really quite modest. I 69 would urge the Government to keep an open mind on the need for further reform in this area’.

68

The Hon Martin Ferguson AM, Chairman of the APPEA Advisory Board, ‘Competitiveness of the Australian gas industry’, Speech to CEDA, 28 February 2014. 69 Ibid.


3.5

Regulatory reform •

Notwithstanding the Abbott Government’s strong start on regulatory reform, there is still a large outstanding agenda critical to future growth in living standards.

•

Regulatory reform priorities for the minerals industry in 2015 include environmental approvals, workplace relations and coastal shipping, all of which have seen costly additional burdens put in place in recent years.

•

The Australian Government should benchmark our regulatory performance more systematically.

Regulatory reform more than cutting red tape Australia needs to move from a history of periodic reviews and incremental reforms to an embedded program of continuous improvement in regulation. The Abbott Government has made a strong start, but there is still an enormous reform agenda essential to boosting productivity and living standards. The burden of bad regulation on business and citizens is not simply a red tape, compliance or administrative cost burden. Such costs are only a fraction of the total costs of poor regulation. Even larger costs arise from the fact that poor regulation distorts decisions about inputs, stifles entrepreneurship and innovation, diverts managers from their core business, prolongs decision making and reduces flexibility. Over recent years, the regulatory burden on industry has continued to grow, with governments much more effective at increasing the stock of regulation than reducing it. The gap between rhetoric and reality has widened to a chasm with negative consequences for productivity and Australia’s international competitiveness. Between December 2007 and May 2013, some 874 new Acts were passed by the Commonwealth Parliament, while 297 were repealed – a net increase of 577 Acts. There were 18,341 new Commonwealth legislative instruments introduced over this period, while 9,294 were repealed – a net increase of 9,047 instruments. Examples of Commonwealth backsliding on regulation – where best practice principles and good process were discarded – include: •

Fair Work Act – where new measures have increased trade union power and privileges in workplaces, despite unions representing only 13 per cent of the private sector workforce, and reduced the flexibility of the labour market. Tellingly, both the original Fair Work Act 2009 and subsequent amendments were exempted by government from any regulatory impact analysis.

•

Environment Protection and Biodiversity Conservation Act – where a sector-specific ‘water trigger’ was inserted into Federal environmental legislation, duplicating existing State regulatory processes for water planning and access. This measure was also exempted from Commonwealth regulatory impact analysis.

•

Coastal Trading Act – where an onerous licensing regime for coastal shipping was introduced, one that protects domestic shipowners at the expense of end users, including export industries.

These three areas – workplace relations, environmental regulation and project approvals and coastal shipping – should be at the top of any regulatory reform priority list. The minerals industry will place particular emphasis on these areas in 2015, together with other reform priorities outlined in Box 4.


Box 4: Minerals industry regulatory reform priorities 1. Environmental approvals – ‘one-stop shop’ reforms would make project approval processes more efficient without compromising environmental outcomes. Further steps can be taken to integrate Commonwealth and State/Territory environmental approval processes using existing provisions of the EPBC Act. 2. Workplace relations – reforms to the Fair Work Act are needed to better align workplace incentives with enterprise flexibility and improved productivity. 3. Coastal shipping – the anti-competitive Coastal Trading Act should be repealed and replaced by new legislative provisions to ‘open the coast’. 4. Local content reporting – The Australian Jobs Act 2013, based on the false premise that bureaucratic intervention in company purchasing decisions is the way to support Australian jobs, should be repealed. Australian Industry Participation plans are a regulatory solution in search of a problem. 5. Energy and climate change – The RET is a costly form of industry assistance and an inefficient means of achieving emissions abatement. The Expert Panel Review of the scheme provides useful options for reform. Duplicative energy reporting requirements can be further streamlined. 6. Business taxation – The forthcoming White Paper on tax reform is an opportunity to improve consultation and the administration of Australia’s complex business tax system. 7. Skilled migration – Labour market testing imposes unnecessary costs on business. Engineering professions in particular should not be targeted. 8. Indigenous economic development – The Aboriginal Lands Rights (Northern Territory) Act 1976 requires systemic review. By contrast, the Native Title Act 1993 has experienced a high level of legislative and regulatory churn and a degree of stability would aid stakeholder confidence. 9. Water access – Clause 34 of the National Water Initiative, which recognises the unique nature of water use in the minerals industry, should be formalised and integrated with water sharing plans and other water market mechanisms. The ‘water trigger’ for coal seam gas and coal projects in the EPBC Act should be removed. 10. Occupational health and safety – Consistent implementation of the Model Work, Health and Safety regime is unfinished business. 11. Exploration – Governments should work to increase the transparency of regulatory decisions, improve target time-frames, develop appropriate accreditation of State/Territory Indigenous heritage protection regimes and ensure regulatory agencies develop least cost, risk-based measures affecting exploration activity. 12. Uranium – The regulatory framework for uranium mining in Australia can be improved without any diminution of scrutiny or safeguards. For example, the EPBC Act should be amended to remove uranium mining, milling, decommissioning and rehabilitation from the definition of ‘nuclear action’.


Greater use of regulatory benchmarking can be made Five weaknesses underscore the gap between rhetoric and reality when it comes to Australia’s regulatory performance: •

The sheer volume of regulation – existing and new

•

The extent of regulatory overlap, inconsistency and duplication across different levels of government

•

Inadequacies in the regulation making process

•

Failure to effectively monitor and review existing regulations

•

Weaknesses in the capacity and performance of regulatory bodies charged with implementation and administration.

The Australian minerals industry welcomes the Abbott Government’s commitment to a year-on-year process aimed at removing unnecessary regulation. Enduring success requires a willingness to tackle regulatory impediments that have greatest impact on business costs and economic growth, a commitment to reform across multiple levels of government in Australia and deep cultural change in the way regulations are thought about and made. In a detailed policy paper released in 2014, the MCA recommended that the Australian Government establishes a more systematic process of benchmarking the nation’s regulatory performance in areas like trade, energy policy, transport, environmental approvals and labour market regulation. The essential challenge is to ensure regulation not only is directed at legitimate objectives, but that it takes an appropriate form. The minerals industry supports the principle of ‘minimum effective regulation’, whereby regulation can both meet its policy objectives and do so at least cost. Minimising the regulatory burden on industry is not the same as minimising regulation itself. Australia’s minerals industry recognises its obligation to act in a way that assists government in maintaining efficient, stable and risk-based regulatory frameworks. Regulatory reform should not just be the responsibility of the executive branch of government. The Australian Parliament as a whole needs to be engaged to ensure regulatory reform is ‘part of the furniture’ of policy making in Australia.


3.6

Land use and environmental approvals •

The proposed ‘one-stop shop’ reforms for environmental approvals (through implementation of bilateral agreements with all States and Territories) will improve Australia’s investment climate while not diminishing environmental standards.

•

State and Local Government assessment and approval processes should be streamlined to address regulatory complexity and to improve coordination between government agencies.

Australia’s mining footprint constitues around 0.3 per cent of Australia’s land mass. This compares with 70 per cent of Australia’s total land area devoted to agriculture, 8.2 per cent for conservation and 70 1.4 per cent for forestry. Notwithstanding the very small area of land subject to disturbance, the minerals industry is subject to more regulatory requirements than most economic activities. Numerous complex and overlapping environmental approval requirements are administered by all three levels of government. A study by consultancy firm URS in 2013 identified a substantial increase in regulation affecting mining approvals over recent years. This included the enactment of six new pieces of legislation relating to environmental regulation, six replacement Acts, more than 60 sets of major amendments to primary legislation and more than 50 sets of amendments to a large range of 71 subordinate legislation. The increased regulatory burden on the industry has come at a cost, especially in terms of project delays. A 2012 report for the MCA by Port Jackson Partners found that the average Australian thermal coal project is delayed by an additional 1.3 years relative to other jurisdictions – 3.1 years 72 delay compared to 1.8 years for the rest of the world. Project delays have been increasing over the past decade. The Productivity Commission’s December 2013 report on Major Project Assessment and Approval Processes identified a range of issues with existing regulatory processes, all of which contribute to lengthy approval timeframes and delays. These include: •

Unnecessary complexity and duplicative processes

•

Lack of regulatory certainty and transparency in decision making

•

Inadequate consultation and enforcement

•

Conflicting policy objectives.

73

‘One-Stop Shop’ for Environmental Approvals The MCA strongly supports the Australian Government’s proposed ‘one-stop shop’ for environmental approvals that will accredit State and Territory planning processes under the EPBC Act to create a single environmental assessment and approval process. These reforms will simplify the approvals process and improve Australia’s investment profile without in any way diminishing environmental standards. In the last year, important progress has been made revising assessment bilateral agreements with all States and Territories. These agreements, which accredit State and Territory assessment processes under the EPBC Act, should be fully implemented. With bilateral agreements in place, State and Territory Governments will be able to undertake a single assessment and approval process that satisfies Federal requirements without diminishing environmental protection.

70

Australian Bureau of Agricultural and Resource Economics, Australian Collaborative Land Use and Management Program (ACLUMP), October 2009. 71 Update of National Audit of Regulations Influencing Mining Exploration and Project Approval Processes, URS, 2013. 72 Port Jackson Partners, Opportunity at Risk, Re gaining our competitive edge in minerals resources, September 2012 73 Major Project Development Assessment Processes: (http://www.pc.gov.au/projects/study/major-projects)


The EPBC Amendment (Bilateral Agreement Implementation) Bill introduced by the Government in 2014 contains a range of necessary reforms to enable a smooth transition to approval bilaterals. Accordingly, the MCA urges Parliament to pass the Amendment Bill and allow the implementation of approval bilateral agreements with all States and Territories. What’s at stake? Research by BAEconomics for the MCA has revealed the opportunity cost of not streamlining environmental approvals. The BAEconomics report quantifies the potential gains from a ‘one-stop shop’ approach to project approvals, driven by a sustained recovery in Australia’s global market share in key commodity exports. The modelling results show that: •

By 2025, Australia’s real GDP will be 1.5 per cent, or $32 billion higher in today’s dollars if the average delay in project approvals is reduced by one year. This increases to 2.4 per cent or $51 billion if the average delay is reduced by two years.

•

Over the 12 years from 2014 to 2025 the cumulative real GDP gains would be $160 billion and $280 billion, respectively.

•

An additional 69,000 jobs are created by 2025 if the average delay in project approvals is 74 reduced by one year.

In addition to the broader economic benefits of reducing project approval delays, a separate study by the Federal Department of the Environment revealed the implementation of the ‘one-stop shop’ will 75 lead to direct savings to Australian businesses of $426 million annually. Complementary Reforms There are a range of administrative reforms which will improve the operation of the ‘one-stop shop’ and the EPBC Act. These include: •

Development of a single nationally harmonised threatened species list

•

Development of a process for utilising outcomes based conditions for suitable projects

•

Harmonisation of Federal environmental offsets with the State and Territory requirements

•

Revision of the significant impact test to account for pre-existing land use.

In addition to EPBC reform, there is also a need to address regulatory complexity and coordination within State and Territory and local government regimes. Assessment and approval processes vary significantly between and within state jurisdictions, with some more streamlined than others. The Productivity Commission report found that environmental approvals under State, Territory and local government planning processes can also be a significant source of delay.

74

BAEconomics, The economic gains from streamlining the process of resource project approval, July 2014 Department of the Environment, Regulatory cost savings under the one-stop shop for environmental approvals, September 2014.

75


3.7

Water access and use •

The ‘water trigger’ for coal seam gas and coal projects within the EPBC Act should be removed or, alternatively, amended to allow for accreditation of State processes under bilateral approvals agreements.

•

Water access arrangements should be streamlined with State and Commonwealth regulatory requirements.

In 2012-13, the minerals sector accounted for less than 3 per cent of Australia’s net water 76 consumption, the majority of which is sourced through self-funded infrastructure (Figure 20). By comparison, agriculture consumed 65 per cent and households consumed more than 9 per cent. The minerals sector is one of the highest value water users in Australia. In 2012-13, the minerals sector water use realised around $155 million of industry gross value added per gigalitre used, compared with $23 million per gigalitre for forestry and $2 million for agriculture. Figure 20: Australian Water Consumption Other industries 5.3%

Household 9.4%

Water supply 12.2%

Oil and Gas 0.2% Electricity and gas 1.7% Manufacturing 2.7% Mining 2.9% Aquaculture, Forestry and fishing 1.0% Agriculture 64.7%

Source: ABS 77

The availability of water and security of supply is a potential constraint on minerals industry growth. The industry is a strong supporter of national water reform, including the removal of barriers to market entry and the development of water trading markets based on sound pricing principles, taking account of water quantity, quality and the needs of diverse users. The National Water Initiative (NWI) will not be successful unless it appropriately integrates water planning and accesses with the needs and characteristics of all water users, including the minerals industry. Accordingly, the MCA supports the application of Clause 34 of the NWI which recognises a range of sector-specific challenges and enables the industry to transition to the fit for purpose water access and pricing arrangements needed to provide long term certainty for industry.

76

Australian Bureau of Statistics (ABS) 4610.0 – Water Account, Australia, 2012-13. ACIL Tasman, Water Reform and Industry prepared for the (then) Department of Industry, Tourism and Resources, April 2007.

77


The minerals industry continues to experience regulatory creep, which often duplicates existing water planning and access arrangements. A prime example is the ‘water trigger’ for coal seam gas and large coal mining developments under the EPBC Act, introduced in 2013. As the Productivity Commission has noted, the water trigger amendment ‘imposes an extra layer of regulation on affected proponents’ in a situation where ‘it is not obvious that existing laws are deficient or that the particular legislative amendment adopted by the Australian Government is the best approach to deal with any 78 identified gap in the regulatory framework’. More needs to be done to reconcile these disparate regulatory frameworks and reduce unnecessary burden on industry. Specifically, the ‘water trigger’ should be removed or the EPBC Act amended to remove the restriction on accrediting the States under an Approval Bilateral Agreement. Consistent with the Government’s commitment to reduction of red tape, the MCA considers that to the extent possible, water reporting should be streamlined with data collection and reporting requirements proportional to the water management risk. The MCA has led a landmark effort to better understand the industry’s water use (and future needs) through the development of a water accounting 79 framework. The framework serves as a One Stop Shop for water information for stakeholders and should be supported and promoted through COAG processes as an example on how to reduce regulatory burdens.

78 79

Productivity Commission, Major Project Development Assessment Processes, November 2013, p. 149. Minerals Council of Australia: A Water Accounting Framework for the Minerals Industry (www.minerals.org.au)


3.8

Infrastructure •

Governments have a responsibility to foster open, transparent and competitive infrastructure markets while also being alert to how differing industry characteristics can give rise to specific regulatory challenges.

•

The MCA recommends that in tandem with the Australian Government’s asset recycling program there needs to be consideration as to whether existing regulatory arrangements are appropriate to ensure efficient provision of infrastructure services by the private sector.

•

Governments at all levels face important social infrastructure responsibilities in regional and remote Australia. The Northern Australia White Paper provides an opportunity to trial new and innovative approaches to the provision of infrastructure services.

Industry competitiveness requires timely and cost effective infrastructure While the mining boom is passing from the investment phase to the production phase, the future growth and competitiveness of Australia’s minerals industry will continue to depend on the timely and cost-effective provision of export infrastructure. If the Australian minerals industry is to sustain growing export volumes and respond adroitly to any emerging gaps in global supply, then governments must move quickly to remove unnecessary costs and delays to resource projects, and deal sensibly with infrastructure access issues. Governments have a responsibility to foster open, transparent and competitive infrastructure markets. Regulation should only be used where a market failure is evident and where there is evidence that government intervention can effectively and efficiently remedy that failure. At the same time, governments must be alert to differing industry characteristics that give rise to differing regulatory challenges and economic consequences. In the Australian minerals industry, a singular example relates to the structural differences that characterise the vertically integrated, privately owned single-user systems in west coast iron ore operations, in contrast to the multi-owner, multi-user rail and port facilities in the east coast coal industry. These differences relate to ownership structures, public sector involvement, planning arrangements and the form of regulation, as well as reflecting particular geographic factors. Moreover, there are several variants within multi-user systems that encompass track (below rail), trains (above rail) and ports. They in turn underline the need for careful analysis of the role competition policy can and should play in promoting efficient outcomes. In the east coast coal networks, the major regulatory issues have been with the management of openaccess arrangements for previously government-owned natural monopoly assets, including the setting of the terms and conditions of access. In the west coast iron ore operations, the major issues have been whether third party access should be provided at all over historically private-owned, vertically-integrated facilities. Though not directly regulated, vertically integrated, single user facilities in the Pilbara are subject to the threat of regulation through Part IIIA of the Competition and Consumer Act 2010. There have been attempts to obtain declaration of the Pilbara rail facilities, but so far the only successful application has been in respect of the Goldsworthy railway line; although this has not been followed up by any request for access. The applications in respect of the Hamersley, Mt Newman and Robe railways have not succeeded. During subsequent review processes by the Australian Competition Tribunal, it was established that open access and conversion of these facilities from single user to multi-user would have a net cost to the economy of many billions of dollars. These findings (and the lack of interest in using the Goldsworthy railway notwithstanding declaration) demonstrate that there is no public benefit in applying Part IIIA to facilities of this nature and consideration should be given to exempting single Minerals Council of Australia | 54 HP TRIM ID 2014/002399

user integrated facilities from the regime. A stronger ‘production process’ exemption – being a threshold exemption – would have helped achieve this final result far more quickly and efficiently. Former government, multi-user facilities: the practical focus of economic regulation Bottleneck challenges associated with the mining boom point to greater risk of inefficient outcomes in the case of multi-user, multi-owner infrastructure networks as compared with single-user, owneroperated, integrated infrastructure. These risks are likely to be exacerbated where formerly government-owned, multi-user assets have been corporatised or privatised without careful consideration of appropriate regulatory frameworks. The Productivity Commission made this point in its assessment of ‘asset recycling’; that is, the funding of new public infrastructure projects from the sale proceeds of existing government-owned assets: An important issue on the privatisation side of the equation is whether any necessary regulatory arrangements can be put in place before capital recycling can occur, since public infrastructure assets often have natural monopoly characteristics, or involve externalities, which means they would otherwise be underprovided by the private market. Therefore, due regard would need to be given to whether any new regulatory arrangements (including community service obligations) would be necessary to ensure service 80 delivery needs and community objectives continue to be met.

Before privatising public monopolies involved in infrastructure service provision, governments should consider carefully whether access arrangements or other regulatory provisions take proper account of long-term efficiency objectives relating to Australia’s export competitiveness. Effective governance and regulatory structures need to be in place before privatisation, as resolving regulatory failures after the fact has proven extremely difficult. Fiscal incentives when selling monopoly assets should not override long-run efficiency objectives or otherwise undermine national export competitiveness. Opportunity for more innovative infrastructure provision in Northern Australia The minerals industry is a significant economic contributor to regional and remote Australia and a critical catalyst for other economic activity. While the industry accepts that it has a key role to play in regional development, this can only be effective and sustainable as part of a long-term partnership where governments accept their responsibilities for infrastructure provision and service delivery for all Australian citizens. A 2013 study found that a select group of mining companies invested almost $92 million in community 81 infrastructure and services including childcare, housing, schools, health care and training. At the same time, the absence of effective regional planning processes, governance arrangements, service delivery and community infrastructure often limits the ability of communities to share fully in the benefits of resource development. The imminent release of the Australian Government’s White Paper on Northern Australia offers a unique opportunity to trial new and innovative approaches to infrastructure provision and service delivery in regional and remote communities. More efficient and coordinated capacity planning, supported by less constrained public/private delivery models, would assist in delivery of key power, water, transport and social infrastructure.

80

Productivity Commission, Final Report into Public Infrastructure – Volume 1, 27 May 2014, released on 14 July 2014, Canberra, p. 263. 81 Banarra, Op. cit. 2013.


3.9

Skills development and labour mobility •

The industry supports the passage of the Government’s higher education reforms to ensure sustainable funding into the future and to provide certainty for students and the sector.

•

With the industry spending more than $1.15 billion on training annually, the minerals sector has a keen interest in the quality of the VET system. Further reforms are needed to ensure the training sector is responsive to industry requirements.

•

Labour mobility is an important part of the success of Australia’s mining industry. Strategies such as Fly-in, Fly-out (FIFO) arrangements and an effective skilled migration program provide the flexibility that allows Australia to secure major resource investments.

Weaker industry conditions have resulted an easing of acute skills shortages apparent as recently as 2012. Caution on skills gaps is nonetheless warranted given the need for skilled personnel with specific experience, the cyclical nature of the industry and the prospect of substantial numbers of ‘baby boomer’ retirements from the sector. On the supply side, there have been sharp reductions in the number of commencements in key minerals disciplines and school students studying science, technology, engineering and mathematics (STEM) prerequisites. Given the inevitable volatility of the industry, skilled migration will continue to play a role in ensuring requisite skills can be sourced when they are required. Skills gaps ease but industry remains cautious about skills pipeline Through most of the past decade, skills shortages were concentrated among experienced professionals such as engineers (particularly mining engineers), geoscientists and project managers, as well experienced tradespeople and operators. These skills gaps have eased as the construction phase has tapered off and commodity price falls have necessitated a rationalisation of operational labour forces. Most forecasters predict weaker skilled demand in the next few years, though with the 82 prospect of an upturn towards the end of this decade. The industry is also concerned about the marked decline in participation in science, technology, engineering and mathematics subjects in schools over the past decade. Less than a fifth of high school students now enrol in chemistry and physics, and there has been a shift towards elementary mathematics from intermediary and advanced levels. Low participation rates in these subjects mean a dwindling pool of eligible students for requisite university courses. In response, the industry has created a national portal for high quality teaching materials on minerals-related topics (www.oresomeresources.com) and welcomes the Government’s commitment to STEM through its Restoring the focus on STEM in schools initiative. Other industry initiatives include a national ‘People for the Future’ careers portal for resources sector job seekers (www.peopleforthefuture.com.au) as well as the MCA’s Mining Careers website (www.miningcareers.com), which attracts almost 1 million visitors per annum, provide contemporary information about the industry and the variety of careers therein. The number of women employed in the industry remains at approximately 14 per cent. Numerous initiatives are in place to increase this percentage in order to deliver both skills and diversity benefits, 83 including the MCA’s Gender Diversity White Paper Strategy. The MCA supports the Commonwealth’s proposed streamlining of the Workplace Gender Equality Act regulations to encourage a more effective ‘outputs-based’ gender diversity effort on the part of companies.

82

Department of Employment Industry Outlook Mining 2014, http://lmip.gov.au/default.aspx?LMIP/Publications/IndustryReports SkillsDMC Environmental Scan (unpublished), SkillsDMC, 2015, p.6. 83 MCA, 2014 http://www.minerals.org.au/file_upload/files/resources/education_training/MCA_Gender_Diversity_White_Paper_Summary_FIN AL.PDF


Leveraging investment in higher education and training The minerals industry views the Australian Government’s higher education reform package as a necessary step towards securing a sustainable funding outlook for the higher education sector in Australia in line with market demands. The failure by previous governments to index higher education funding, coupled with the regulated caps on fees, has seen many university departments become increasingly unviable under the student numbers-based funding system, especially in minerals-related departments that traditionally have small student numbers and high teaching costs. This has resulted in a need for direct minerals industry investment to secure a future supply of professionals for the industry. Through the Minerals Tertiary Education Council (MTEC), the MCA continues to subsidise collaborative initiatives at 17 universities across Australia. MTEC builds capacity in higher education in the disciplines of mining engineering, metallurgy and minerals geoscience and partners with universities and other providers to address the skills requirements in the minerals industry. MCA member companies have invested more than $40 million of unencumbered funds over the past decade in these programs. The industry also supports higher education by providing paid vacation work and structured practical experience to undergraduates from a wide range of disciplines each year, funding professorial chairs and other academic positions and programs at universities, providing a large number of undergraduate scholarships and bursaries, as well as providing sponsorships for student site visits and field trips. Without this industry support, many schools and departments would have closed, leaving Australia without the capacity to teach and deliver its own high quality graduates (and relying on skilled migration as an avenue for these skills). The higher education reform agenda, including the deregulation of fees in the demand-driven system and the extension of the system to include subbachelor programs (including associate degrees), is intended to address the failure associated with the demand-driven student system in enabling university departments to charge the true cost of the delivery of their programs. Following the implementation of the reforms, it is important that the Government consider and monitor the impact on smaller course programs including minerals-related engineering and science degrees. The Australian Government should give further detailed consideration to how disciplines associated with small enrolments and high teaching costs will viable under proposed new arrangements, especially as the MCA’s MTEC partner universities currently allocate less than 50 cents in the dollar of Commonwealth Grant Support funding to the departments delivering minerals-related programs. Towards an industry-led VET sector The quality of the national training system is of keen interest to the minerals sector. The Australian minerals industry spends more on training per employee than most industry sectors at 5.5 per cent of payroll - in excess of $1.15 billion in 2011-12. Apprentices and trainees make up around 5 per cent of the mining workforce, with two-thirds of mining companies employing apprentices or trainees. The minerals sector does not believe, however that the VET sector is performing satisfactorily. Our members encounter variable provider quality, with consequent inconsistency in training outcomes. As a consequence the minerals sector tends to operate largely outside the publicly funded sector. In our view, these shortcomings are due to the fact that the VET sector has traditionally been dominated by a supply-driven approach than one responding to market demand. Accordingly we welcome the fact that the Abbott Government’s reform agenda is seeking to make industry central to the training quality equation. In particular, the MCA has strongly supported the Government’s emphasis on quality industry-led training, the new Industry Skills Fund and the riskbased management approach to standards for training providers and regulators. In our view, Industry Training Packages are at the heart of the quality equation because they specify the skills and competencies needed to operate safely and productively in the workplace. In the case


of the minerals sector, the Training Package has been developed by industry and is genuinely ‘industry-led’. Companies are able to map training requirements against the competencies outlined in the package and tailor training according to enterprise requirements. The MCA supports the current review of Training Package stewardship and content as an opportunity to further cement genuine industry-led training. We also support the Resources and Infrastructure Industry Training Package remaining under the stewardship of a body with the confidence of the industry, such as SkillsDMC. Labour mobility Labour mobility (including through staff relocation, FIFO employment agreements and skilled migration) has been critical in enabling the Australian minerals industry to seize the opportunities of higher global demand for minerals commodities over the past decade. In some instances, nonpermanent work practices such as FIFO or Drive-in Drive-out (DIDO) are utilised in addition to relocation opportunities to regional and remote operations. Around 25 per cent of all mining industry workers are FIFO/DIDO workers. This figure reflects a combination of factors including localised skills shortages, the availability and cost of accommodation in particular locations and, importantly, the desire of many mine personnel and their families to live in their home communities. The Reserve Bank of Australia has stated that long distance commuters (LDC) have ‘helped employers to meet their labour demand requirements given the reluctance of 84 workers to move permanently to remote areas’. Studies by the Productivity Commission and the 85 National Centre for Vocational Education Research support these findings. The Commonwealth has also supported LDC via its funding of FIFO Co-ordinators in non-mining areas. Importantly, the evidence does not support claims about the negative impact of mining growth in regional areas. A major demographic study by KPMG has shed important light on the role mining has 86 played in stimulating residential population growth crucial to sustainable communities. Far from restricting opportunities, the mining industry has boosted incomes, attracted families and reduced unemployment in mining regions. Furthermore, existing rigorous State and Federal assessment and project approvals processes provide mechanisms to assess and mitigate possible negative social, environmental and economic impacts. Ad hoc interventions to impede the natural flow of skilled labour are counterproductive, both economically and socially. Skilled migration An effective temporary skilled migration program with the capacity to respond to economic demand within a framework that ensures integrity and efficiency is another vital component of meeting the skills needs of the sector. The minerals industry employs less than 3 per cent of its workforce through temporary skilled migration and mining accounts for only 5.9 per cent of temporary skilled workers. As demand for mining labour has decreased, the demand for 457 visa holders has similarly decreased – in the 12 months to end June 2014, primary 457 visa holders in mining fell by 19 per cent (Figure 21). The minerals industry uses temporary skilled migration as a last resort after exhausting workforce sources locally and nationally. However, visa subclass 457 is an effective tool for filling areas of identified skill shortages, especially in the professional cohort. The obligations to sponsor a temporary skilled migrant under a 457 visa are comprehensive and include clear sanctions should obligations not be met. Additional burdens and regulatory complexity

84

Patrick D'Arcy, Linus Gustafsson, Christine Lewis and Trent Wiltshire, Labour Market Turnover and Mobility, Reserve Bank of Australia Bulletin – December Quarter 2012 http://www.rba.gov.au/publications/bulletin/2012/dec/1.html Productivity Commission, Geographic Labour Mobility, Productivity Commission Research Report, 2014. NCVER, ‘An exploration of labour mobility in mining and construction: who moves and why’, NCVER, 2014. 86 See KPMG, Analysis of the Long Distance Commuter Workforce Across Australia, report commissioned by the Minerals Council of Australia, March 2013 and KPMG, Analysis of the Changing Resident Demographic Profile of Australia’s Mining Communities, report commissioned by the Minerals Council of Australia, February 2013. 85


Figure 21: Minerals employment and 457 visas (2008=100) 180 160 140 120 100 Employment ('000)

80

457 visas

60 40 20 2014

2013

2012

2011

2010

2009

2008

0

Source: ABS, MCA

through measures such as labour market testing have been shown to be ineffective by the 87 Commonwealth’s Independent Review of Integrity in the Subclass 457 Visa Program. The MCA has recommended the abolition of such measures. The industry welcomes the Government’s proposal for a Short Term Mobility Visa following its review 88 of skilled migration and temporary activity visa programs. As designed, it will improve the capacity of mining companies to fill highly specialised short-term secondments and assist with corporate knowledge transfer, talent management, succession planning and workforce development, without the requirement for labour market testing.

87

Robust New Foundations – a Streamlined, Transparent and Responsive System for the 457 Visa Programme, An Independent Review of Integrity in the Subclass 457 Visa Programme, 2014 88 Commonwealth’s Proposal Paper – Simplification of the skilled migration and temporary activity visa programmes – December 2014


3.10 Indigenous economic development •

The minerals sector continues to be a major driver of Indigenous economic development as the largest private sector employer of Indigenous Australians and with procurement from Indigenous businesses estimated at 55 times that of the Australian Government.

•

A number of policy reforms will further enhance this contribution. The Australian Government should implement the recommendations of the Taxation of Native Title and Traditional Owner Benefits and Governance Working Group, including the proposed ICDC entity.

•

A systematic review of the Aboriginal Lands Rights (Northern Territory) Act 1976 should be undertaken to overcome barriers to minerals investment in the Northern Territory and to deliver improved outcomes for Indigenous Australians.

•

On the other hand, the Native Title Act 1993 has experienced a high level of legislative and regulatory churn and a degree of stability would aid stakeholder confidence.

The minerals industry has been a major catalyst for Indigenous economic development. In the Boyer Lectures of 2012, Professor Marcia Langton observed that: The Mabo case, the Native Title Act and engagement with the mining industry have changed the assumptions of that (welfare dependent) paradigm and catapulted Aboriginal people engaged in the mining industry into the mainstream economy. I have worked at mine sites and witnessed this extraordinary change…Mining offers many Indigenous populations a significant source of employment and contracting opportunities, as well as an alternative to the welfare transfers upon which many remote and regional 89 Aboriginal communities depend.

More than 60 per cent of minerals operations in Australia neighbour Indigenous communities. Much of the land on which the industry seeks to operate is subject to legal requirements under the Native Title Act or the Aboriginal Land Rights Act, as well as State and Federal Heritage requirements, all of which recognise the rights and interests of Aboriginal and Torres Strait Islander Australians in relation to lands and waters. On areas of land for which there is a weak or absent suite of legal rights for Aboriginal communities, the industry has tended to negotiate with these communities ‘as if’ they held a suite of legal rights, thereby recognising their historical and cultural connections. The industry long-standing approach has stressed that the communities most impacted by mining operations should also be the ones that benefit most from the conversion of natural resources into societal capital. Untapped opportunity exists to leverage increased economic activity associated with mineral wealth to enhance the social and economic capacity of Indigenous people so that they become long-term contributors to, and drivers of, regional and community development. The process within the minerals industry of negotiating over 1,984 land use agreements (99 per cent of which involved no legal contest of rights) has provided unprecedented wealth creation opportunities for Indigenous people in regional and remote Australia. The total value of Native Title related payments in 2011-12 alone was $3 billion, which includes land access related payments, mining 90 royalty equivalents, heritage payments, and impact benefit agreement payments. The minerals industry is the most significant industry generating Indigenous employment opportunities in regional and remote areas of Australia. In the past 20 years, employment of Indigenous Australians in the minerals industry has increased from 0.5 per cent to a national average of 6 per 91 cent. In addition, 19 per cent of the Indigenous workers in the minerals industry are women, 92 compared with 13 per cent for women generally within the minerals industry workforce. At some mine sites Indigenous workers account for up to 40 per cent of those directly and indirectly employed,

89

Professor Marcia Langton, Boyer Lecture, 2012. Figure derived from a sample of MCA Member audited accounts, 2011-12. Boyd Hunter, Marcia Howlett and Matthew Gray, Op. Cit., 2014. 92 ABS, Australian Social Trends, Cat. 4102.0, May 2014. 90 91


with many sites aiming to achieve the same proportion of Indigenous men and women in their workforce as are present in their local community. While there continues to be a commitment to directly employing Indigenous people, the minerals industry is also actively seeking to: •

Develop retention and career pathway strategies for current Indigenous employees.

•

Ensure subcontractors employ Indigenous people.

•

Support the development of local Indigenous businesses.

•

Facilitate the establishment of new industries in regional and remote areas which will employ Indigenous people.

Professor Marcia Langton noted in her address to the 2014 Indigenous Business, Enterprises and Corporations Conference that ‘the Commonwealth Government currently procures around $39 million 93 per year from Indigenous businesses’. This compares with more than $2.2 billion in annual Indigenous procurement from a sample of 25 companies in the minerals industry. The industry’s leadership in procurement has been recognised by the Aboriginal and Torres Strait Islander Social Justice Commissioner, Mr Mick Gooda, who noted that ‘you’ve got mining companies leading the 94 way’. Reforms to support economic development from land access related payments 95

Payments made under Native Title agreements constitute a foundation for the long-term investment of monies to help maximise the potential for sustainable, intergenerational benefits to Indigenous communities. It is therefore critical to ensure the underlying framework of policies and social and physical infrastructure to support Indigenous economic development exists. Anecdotal evidence suggests that $3 to 5 billion is currently being held in trusts from agreement making and Indigenous 96 communities now own up to $40 billon in assets. Unfortunately, current legislation does not easily allow for the accumulation of funds derived from native title and other related agreements. Further, long term economic and social development activities and the accumulation of benefits are effectively disincentivised. Current legislation is working against the policy objective of ‘Creating Parity’ and delivering positive intergenerational change for Indigenous people. To address this problem, the MCA strongly advocates the establishment of the Indigenous Community Development Corporation model. The ICDC is proposed as a new category of entity for tax purposes as an opt-in structure for the management of payments and benefits negotiated by Indigenous communities and groups, whether these come from the public or private sector including from land access related agreements. Specifically, the ICDC provides a registered not-for-profit entity 97 that is exempt from income tax and has DGR status. The development of the ICDC as a category of tax exempt entity would substantially enhance the effectiveness and efficiency of the existing system, including by: •

Shifting the language away from concepts of charity to broader concepts of community and socio-economic development

•

Creating greater flexibility within the taxation system for community specific approaches to managing funds for socio-economic development

93

Professor Marcia Langton, Address to the Indigenous Business, Enterprises and Corporations Conference, 1 December 2014. M Burrell, ‘Marcia Langton Lashes out at Future Fund Silence’, The Australian, 2 December 2014. 95 Between $200-$ 300 million is paid annually to Traditional owners in the Pilbara region alone. 96 S. Rose, ‘Indigenous groups’ assets opportunity for wealth advisers’ , Australian Financial Review, June 2013. 97 Taxation of Native Title and Traditional Owner Benefits and Governance Working Group, Report to Government, 3 August 2013. 94


•

Providing for a structure that encourages intergenerational and sustainable benefits

•

Creating capacity to maximise the delivery of economic and social dividends with minimal administrative burden and recognising the unique multifaceted challenge of Indigenous disadvantage, in line with Government’s commitment to ‘Closing the Gap’

•

Reducing welfare dependency, as private income streams from land-related payments and income from investing in business development are more effectively used and create real economies in remote locations.

Creating a demand driven approach to Indigenous employment and training The minerals industry supports the principle that Indigenous employment services should be demand driven (that is, that training is designed to meet employer’s needs and is directly linked to a job). Indigenous Australians are among the most trained people in Australia, however the training they have been provided with has not resulted in ‘real’ employment opportunities. The MCA participated in the former Government’s review to restructure the Job Services Network in remote Australia. Whilst the Remote Jobs and Communities Program (RJCP) is still being embedded, anecdotal feedback has been that service providers do not have the competencies to work with the minerals industry using a demand driven framework. It would appear that if longer term Indigenous employment outcomes are to be achieved, investment in building the capacity of service providers to work effectively with the private sector is required. Significant structural changes in the Indigenous employment service provider sector in recent years have resulted in agencies rebranding services without any real change in competency or service culture. It is expected that this may also be the case with a transition to the Vocation Training Employment Centre (VTEC) model as it is highly likely that the same providers will be contracted, only in a new guise. The MCA is of the view that the role of government is to develop the work readiness competencies (driver’s license, literacy and numeracy training) of Indigenous people, and the role of industry is to identify site specific technical competencies and to oversight their delivery by providers The preference of MCA members is to promote flexibility and adaptability in the design of training products that suit unique site and local community requirements. Member companies have been at the forefront of developing a range of innovative products that have delivered Indigenous employment outcomes. There also needs to be sufficient flexibility in the system to respond to future workforce demands (for example, a mine will commence operations in five years, but currently has no jobs on offer). This lead-in time provides the opportunity to prepare Indigenous people for skilled jobs. There is a need for capacity in these circumstances to coordinate the training and work experience required to optimise local skilled employment opportunities. Further, the resourcing of ‘wrap around’ services and mentoring to support recruitment and retention outcomes needs to be addressed. Improving the efficiency and operability of the native title system As mentioned earlier, through the Native Title Act 1993, Indigenous Australians have been able to negotiate benefits for their communities, including in relation to employment opportunities and heritage protection. Importantly, the Native Title Act has also provided a clear framework in which industry can engage with traditional owners to secure land access and undertake ‘future acts’. Members of the MCA are regularly involved in negotiations with native title parties and are at times involved in claim resolution processes. Accordingly, mining and minerals processing entities need certainty with respect to their rights and obligations under the native title claims process. Since its inception, the native title system has been subject to significant reforms. In practice, the high level of legislative and regulatory churn has resulted in increased litigation of new concepts, or re-


litigation of previous determinations. The result has been additional costs for industry and government; increased uncertainty for development proponents; and more contestable native title issues. Such regulatory churn has placed additional pressure on the stability and functionality of a system already stretched for resources, with over 400 native title determinations still to be made. The MCA notes the Australian Law Reform Commission (ALRC) review of the Native Title Act, and specifically our concern with the narrow focus of the Terms of Reference on the claims determination process. While this is clearly where the significant and systematic delays occur, changes in relation to the determination process may unintentionally impact negatively on the system as a whole. Importantly, we note that the proposed changes to the nature of connection may bring into review the range of non-Indigenous Land Use (ILUA) Agreements made in parallel to the Act. The MCA considers that following receipt of the ALRC recommendations, the Government should commission further work to identify key constraints in the system and to test whether the proposed reforms address these constraints. Further analysis should then be undertaken to ensure that the amendments do not have unintended consequences, and to provide the empirical business case for reform. Reforming the Aboriginal Land Rights (NT) Act 1976 Reforms to the Aboriginal Lands Rights (Northern Territory) Act 1976 (ALRA) are needed to promote investment and growth in the Northern Territory minerals industry and to deliver better economic and social outcomes to Indigenous Australians. In its current form, the ALRA acts as a significant non-financial barrier to the growth of the minerals industry in the NT. While the Territory competes globally for minerals exploration and project investment, the complex processes under ALRA, which are necessarily unique to the NT, make the jurisdiction a less attractive place to do business. The efficiency and effectiveness of the Northern Territory’s land tenure scheme is impeded by processes under Part IV of ALRA which are considered prescriptive, inflexible and costly. Mining companies are subject to lengthy and duplicative approvals processes, with up to four layers of approvals required — namely, Traditional Owner, Land Council, NT Government and the Commonwealth. The aim of Part IV of ALRA should be to deliver a legislative framework that facilitates timely and cost-effective access to resources for mineral companies, while preserving the central role of Indigenous people in the management of their land. This is critical given the strong minerals prospects of the NT, the role that mineral development can play in the Territory’s development, and the improvements the minerals industry can bring to the economic livelihoods of Indigenous Australians.


3.11 Occupational health and safety •

The MCA supports the Model Work Health and Safety Act and urges its consistent adoption across all jurisdictions in Australia.

•

There remains further scope to reform Australia’s mining health and safety legislation.

A long way from national consistency The minerals industry is firmly committed to the principle that every individual, regardless of where they work, whether as a direct employee or contractor, and whatever tasks they undertake, should have the same standard of high protection. A nationally-consistent, risk-based preventative Occupational Health and Safety (OHS) regulatory system, supported by industry-specific regulation, would deliver benefits based on greater certainty, consistency and efficiency. It would also help to ensure that compliance challenges do not detract from the practical tasks of identifying, managing and minimising risk and the continuous improvement of safety and health outcomes by companies. A 2008 COAG Inter-Governmental Agreement saw all Australian Governments agree to work cooperatively to harmonise OHS legislation and implement a national uniform OHS legislative framework, complemented by a nationally-consistent approach to compliance and enforcement policy. The original goal of a single, uniform Act has since evolved into a Model Work Health and Safety (WHS) regime. Adoption of the WHS regime has been inconsistent and remains incomplete, well past the scheduled commencement date of 1 January 2012. This threatens the significant gains this important reform would provide in terms of both enhanced safety outcomes as well as reducing the regulatory burden on business . Victoria and Western Australia have not, as yet, adopted the Model Act. Queensland has adopted the Model Act but not for the mining sector and most states have amended the Model Act to meet state-based needs (e.g., NSW retained the Industrial relations Court for some prosecutions). In addition, Western Australia, Queensland and New South Wales retain, or are planning to retain, an additional layer of mine safety legislation and regulation. The model WHS Mines Chapter (Chapter 10) which was supposed to replace this state-based supplementary legislation has still not been endorsed by Safework Australia and in some jurisdictions may be adopted (unendorsed) into separate law from other provisions of the Model WHS Act. Any chance of uniformity, or even consistency in approach to WHS legislation for mining, seems remote. Succinct and effective supporting Codes and Guidance are essential to an efficient legislative framework. Codes and Guidance material to support the Mines Regulations are still being finalised. The industry is now confronted with four different types of codes/guidance all separately authored (SWA codes, National Mine Safety Framework (NMSF) Core codes, NMSF Non-Core codes and individual state-based codes). The sheer volume of codes and guidance, their lack of consistency and the move by some regulators to enshrine archaic prescriptive elements will mean the industry may be in a worse situation as a result of the current process. Workers moving within the minerals industry (or across industries) need to be aware of different safety and health regimes with differing defintions and regulatory approaches. Similarly, contractors that work across the minerals, construction, engineering and transport sectors are required to have multiple systems in place to meet the different regulatory requirements. Industry employees are exposed to different protections, duties and expectations, while employers continue to confront multiple systems which distract effort from day-to-day safety and health management. Despite the recent work on WHS harmonisation, the industry was consistently told by mining regulators that the NMSF process and the WHS harmonisation process were not about reform, but rather about achieving consistency between regulators. This intent is clearly far from being achieved


and requires a re-prioritisation by Federal and State governments, in line with the COAG review process. Government should prioritise working with the minerals industry in 2015 to identify and prioritise key areas of reform required in Australian mining health and safety legislation. These should be complemented by joint industry and regulator workshops to collaboratively identify a process to implement these critical reforms. An improved regulatory framework is also critical to enabling mining companies to adopt world leading risk management techniques, including the management of critical controls. To this end, the the MCA is working with the ICMM to develop further these risk-based approaches and to identify regulatory reforms necessary to support their implementation. MCA members have also identified serious impediments within Australian mining regulators relating to the accessibility of health and safety data. Accordingly, MCA will be working to identify reforms that enable company access to relevant and timely health and safety data – including access to the Federally controlled (and industry funded) National Mine Safety Database which so far has failed to be delivered effectively.


3.12 Innovation •

Australian mining spends more than $4 billion per annum on R&D, some 22 per cent of total business expenditure on R&D.

•

Some policies adopted in recent years (e.g. on R&D tax concessions) seem designed to discourage a culture of innovation in the mining industry.

Innovation vital in meeting economic, environmental and social objectives The Australian minerals industry recognises that innovation is crucial to improving productivity and cost competitiveness. Australia is a global centre of mining production, research and innovation, and its mining companies have long been among the largest business investors in R&D. Australia’s mining sector has increased R&D activity substantially over the last decade and currently spends around $4 billion per annum on R&D. This accounts for 22 per cent of all business R&D investment. As well as being central to the industry’s economic performance, innovation has been vital in meeting environmental and social stewardship responsibilities. The mining industry is also a critical driver in the development of related industry sectors in Australia. Modern mining projects involve an enormous value chain ranging from exploration, resource assessment, site development, engineering design, construction, procurement and installation of plant equipment and buildings. These projects often develop local transport and energy infrastructures. Ongoing operations require a diverse range of support services, most of which are sourced locally. The development of a vibrant, home-grown mining equipment, technology and services (METS) sector also exemplifies the central role of mining in Australia’s economic, industrial and technological 98 development. Survey estimates suggest that the METS sector generates revenues of around $90 billion annually with an export component worth $15 billion per annum. The CSIRO Minerals Down Under Flagship works with more than 150 industry partners, some 25 universities and over 30 government agencies globally in supporting the growth and quality of Australia’s resource base, delivering productivity improvements for a competitive industry and global technology and service markets and ensuring that technology keeps pace with growing economic, 99 environmental and social pressures. R&D taxation incentives As a global centre of mining production, research and innovation, Australia needs competitive, stable tax arrangements to incentivise investment in R&D. Unfortunately, in recent years Australia has weakened R&D incentives. Legislation to restrict access to the R&D tax incentive passed the Parliament on 10 February 2015. The new regime places a cap of the amount of expenditure eligible. R&D expenditure in excess of $100 million from 1 July 2014 will not be eligible for the tax offset. This measure will discourage R&D spending in Australia by multinational companies able move R&D effort between jurisdictions. It would additionally have a wider impact on collaborative R&D which is performed between corporates and small to medium enterprises and Australian universities. Other nations are intensifying their innovation efforts. Globally focused companies deploy their key minerals innovations around the world. Competing countries have stepped up their mining innovation programs and are proving to be strong competition in attracting investment and talent. Chile and Brazil, for example, have increased incentives for mining R&D and innovation.

98

Don Scott-Kemmis, How about those METS? Leveraging Australia’s mining equipment, technology and services sector, A public policy analysis produced for the Minerals Council of Australia, March 2013. 99 CSIRO, Minerals Down Under Flagship, “Australian innovation for a global industry”, 2013


Excellence in Research for Australia (ERA) A second area of concern relates to current funding arrangements for universities which may work against the most effective deployment of Australia’s innovation effort. A significant share of Australian Government support for science and innovation is targeted to universities through funding for research. As research providers and trainers of highly trained engineers and scientists, Australia’s universities are the dominant publicly-funded science and technology entities. The MCA is concerned that performance measures for universities and the current structure of Excellence in Research for Australia (ERA) may drive academic research efforts away from having an innovative impact on industry (i.e., applied research). The current performance indicators (which do not consider research impact) are increasingly driving university researchers away from applied research in favour of entrepreneurial incentives (linked to financial, tenure and promotional rewards) to be published in approved journals that meet their university ERA requirements (usually in fundamental research). With Government funding for university research directly linked to the ERA (through the Sustainable Research Excellence scheme), academics in core disciplines have little choice but to prioritise career prospects to the detriment of applied, industry-relevant research. Public funding of universities purely on the basis of ERA may produce research of little or no interest to industry. A large body of research in the minerals field is undertaken by academics with poor links to the minerals value chain. This impedes the translation of clever ideas into commercially viable innovation. Additionally, commercialisation policies within universities can work against the collaboration that is needed to develop and commercialise new technology. Typically universities have arrangements for new Intellectual Property (IP) which mandate a sharing of all commercial returns in third parts to the researcher, the host faculty and the commercialisation entity. While designed to encourage entrepreneurial spirit, this arrangement can often have the opposite effect with the researcher usually reluctant to share the dividend of their discovery. At the same time, the university commercialisation entity often has unrealistic expectations of value when seeking a commercialisation partner, thus leaving an unfavourable risk-reward proposition for the investor. R&D activities undertaken by the business sector appear to have high social returns in terms of growth. A 2011 report by the (former) Department of Innovation, Science & Research stressed that Australia needs to give greater priority to connections with industry to close the gap to commercially viable innovation. It is critical to Australia’s future productivity that Australian businesses are informed by leading-edge thinking derived from excellent, market-applicable research and that they engage in steering the production of such research. Without these improved connections, there is a risk that Australia will become increasingly non-competitive and that Australian ideas will continue to make profits for overseas companies rather than the Australian community. 100 MCA members support the view that the minerals-related Cooperative Research Centres (CRC) programs have represented the best approach to supporting collaboration between business and researchers that use excellent Australian research to generate pre-competitive economic benefits. The MCA looks forward to the CRC Review findings into the efficacy of the program as well as to the Government’s response to the findings in early 2015.

100

Commonwealth Department of Innovation, Science & Research, Maximising the innovation dividend review key findings and future directions, 2011.


3.13 Trade and investment •

The MCA welcomes the successful conclusion of Free Trade Agreements (FTAs) with China, Japan and South Korea which will eliminate a range of tariff and other barriers to a combined minerals and energy trade worth more than $120 billion annually.

•

A major focus of Australia’s trade policy in 2015 should be the conclusion of a free trade agreement with India and the conclusion of the negotiations on a Trans-Pacific Partnership (TPP) agreement with 11 other trading nations.

Australia’s openness to trade and investment allows it to maximise its comparative advantages, including in minerals. The minerals industry accounts for 59 per cent of total exports of goods and 101 services (by value) from Australia. Our largest export consists of iron ore and concentrates, followed by coal. Gold is Australia’s sixth-largest export and aluminium ores and concentrates 102 (including alumina) comprise our tenth-largest export. The FTAs concluded in 2014 by the Abbott Government with China, Japan and South Korea mark a new phase in Australia’s integration with three North Asian economic powerhouses. They reinforce minerals trade worth approximately $120 billion a year to Australia. China-Australia Free Trade Agreement (ChAFTA) China is Australia’s largest export market, worth $108 billion in 2013-14 – almost one-third of 103 Australia’s total exports. Exports of minerals account for nearly three-quarters of this total ($80 billion) with iron ore alone accounting for more than half ($57 billion). China is Australia’s most 104 important market for iron ore. Once in force, ChAFTA will eliminate tariffs on minerals imports from Australia that are worth around $16 billion annually. The 3 per cent tariff on metallurgical coal will be removed on the first day of the 105 agreement and the 6 per cent tariff on thermal coal will be removed within two years. This deal is superior to that concluded under the ASEAN-China FTA, which phased out thermal coal tariffs over four years. ChAFTA will also eliminate tariffs on the following minerals products: •

Refined copper and alloys (unwrought) (currently subject to 1 and 2 per cent tariffs)

•

Alumina (8 per cent)

•

Nickel mattes and oxides (3 per cent)

•

Unwrought zinc (3 per cent)

•

Copper waste and scrap (1.5 per cent)

•

Unwrought aluminium (5 and 7 per cent tariffs)

•

Aluminium waste and scrap (1.5 per cent)

•

Unwrought nickel (3 per cent)

•

Titanium dioxide (6.5 and 10 per cent tariffs)

•

Other mineral substances (3 and 5 per cent tariffs)

101

Department of Industry, Resources and Energy Quarterly – December Quarter 2014, released on 22 December 2014, Canberra, p. 66. 102 Department of Foreign Affairs and Trade, Composition of Trade 2013-14, released in December 2014, Canberra, p. 37. 103 Ibid., p. 41. 104 Department of Industry, Resources and Energy Quarterly – December Quarter 2014, released on 22 December 2014, Canberra, pp. 67-70 105 Department of Foreign Affairs and Trade, China-Australia Free Trade Agreement – Key Outcomes, p. 2.


Importantly, ChAFTA will consolidate a growing investment relationship, with the total stock of 106 Chinese foreign investment in Australia at $32 billion in 2013, including substantial investment in the minerals sector. Japan-Australia Economic Partnership Agreement (JAEPA) 107

More than half Japan is Australia’s second-largest export market, valued at $51 billion in 2013-14. of this total ($25.6 billion) consisted of exports of coal, iron ore, aluminium and copper; and more than 108 one-quarter ($13.2 billion) was contributed by coal alone. Japan is Australia’s biggest coal customer. JAEPA strengthens the deep and complementary trade and investment relationship between Australia and Japan, by removing tariffs on a number of minerals products over ten years. These include tariffs on: •

Metallurgical coal (3.2 per cent)

•

Aluminium hydroxide (3.3 per cent)

•

Titanium dioxide (3.2 per cent)

•

Unwrought nickel (11.7 per cent)

•

Ferro-manganese (6.3 per cent)

Tariffs on the first three of these minerals imports from Australia were removed entirely when JAEPA 109 came into force on 15 January 2015. Korea-Australia-Free Trade Agreement (KAFTA) 110

Iron ore and South Korea is Australia’s third-largest export market, worth $22.5 billion in 2013-14. coal are our two largest exports to South Korea, worth $6.1 billion and $5.2 billion (respectively) in the 111 same year. Total minerals exports to South Korea are valued at around $13 billion. KAFTA began to benefit the Australian minerals industry from its commencement on 12 December 2014. While many Australian mineral and energy exports enter South Korea duty free, tariffs of up to 8 per cent are applied to a range of minerals products, including unwrought aluminium, gold, unwrought lead, cobalt mattes and articles, and titanium dioxide. Under KAFTA, South Korea will remove tariffs on all resource imports from Australia over ten years. Tariffs on unwrought aluminium 112 (1-3 per cent) and titanium dioxide (6.5 per cent) have already been eliminated. Further liberalisation of international trade and investment is imperative The World Bank observes that growth in world trade has been weak in recent years (for various reasons) and that the majority of protectionist measures taken since the Global Financial Crisis – which were supposed to be temporary – have remained in place. Of the 1,185 trade restrictions that 113 were introduced across the world since October 2008, only 251 were removed by May 2014. Given that weak trade is contributing to sluggish global growth, it is vital that the Minister for Trade and Investment continues to push for greater liberalisation and strongly opposes any new barriers to trade – whether tariff or non-tariff. 106

Department of Foreign Affairs and Trade, China Fact Sheet, December 2014. Department of Foreign Affairs and Trade, Composition of Trade 2013-14, released in December 2014, Canberra, p. 41. 108 Department of Industry, Resources and Energy Quarterly – December Quarter 2014, released on 22 December 2014, Canberra, pp. 67-70 109 Department of Foreign Affairs and Trade, Japan-Australia Economic Partnership Agreement – Key Outcomes, p. 3; Quick guide: Resources, energy and manufacturing. 110 Ibid., p. 41. 111 Department of Industry, Resources and Energy Quarterly – December Quarter 2014, released on 22 December 2014, Canberra, pp. 67-70 112 Department of Foreign Affairs and Trade, Korea-Australia Free Trade Agreement – Key Outcomes, p. 2; Korea-Australia Free Trade Agreement – Fact Sheet: Trade in Goods, p. 6f. 113 World Bank, Global Economic Prospects: Having Fiscal Space and Using It, January 2015, Washington DC, p. 172f. 107


3.14 Maritime transport •

The Coastal Trading Act 2012 introduced a burdensome and anti-competitive new licensing system on top of costly changes to wage rules for foreign crew operating in Australian waters. These changes have increased domestic transport costs and made it more difficult to source coastal shipping services when they are needed.

•

The MCA welcomes the Government’s proposal to introduce a single Coastal Trading Permit that treats Australian and foreign ships equally and looks forward to further consultation on the details.

The Australian minerals industry has a strong interest in a competitive and efficient coastal shipping trade consisting predominantly of dry bulk commodity freight. The existing regulatory regime under the Coastal Trading Act restricts competition and imposes unnecessary costs and uncertainty on endusers of coastal shipping services. Australian-flagged ships enjoy unrestricted access to coastal trade under a five-year General License. By contrast, foreign-flagged vessels only have access to a 12-month Temporary License or, in exceptional circumstances, an Emergency License (valid for no more than 30 days). The Temporary License system, which replaced the previous system of Single and Continuous Voyage Permits, imposes extensive and onerous conditions on foreign-flagged vessels. While Single and Continuous Voyage Permits required applicants to specify voyage dates and tonnage amounts and were subject to a public interest criterion, the Temporary License requires applicants to: •

undertake a minimum of five voyages during the 12-month term of the license

•

detail, at the time of application, loading dates, cargo types and volumes, as well as ports of loading and unloading, for the 12-month period ahead

•

have this information published on the website of the Department of Infrastructure and Regional Development (subject to commercial-in-confidence conditions), so that a General License holder can nominate to conduct any of the notified voyages instead (see Box 4).

In the event that a General License holder is available to conduct any of the notified voyages, the Temporary License holder is obliged to negotiate with them. This negotiation may be arbitrated by the Department, but in any case the Minister (or his or her delegate) must decide whether to grant the Temporary License within 15 days. The Coastal Trading Act has increased domestic transport and administration costs and made it more difficult to source coastal shipping services when they are needed. Information supplied to the MCA by member companies indicates that: •

The cost of shipping final product around Australia is now about the same as shipping from Asia to Australia for some dry bulk commodity producers. This has led to a situation where, for example, manganese ore is reportedly now being imported into Australia instead of being shipped from the Northern Territory.

•

Tonnage rates on a key route increased by 63 per cent between 2011 and 2012 (from $18.20 per tonne to $29.70 per tonne), whereas international operators were charging $17.50 per tonne in 2012. The same company has reported that demurrage rates rose from $14,000 per day in 2011 to $35,000 per day in 2012.

•

Freight charges in select cases have increased by more than $3,000 per day up and down the east coast of Australia.


Companies stress that the requirements of the Coastal Trading Act are particularly onerous given the minerals industry’s uncertain and constantly-changing commercial environment. Running a dynamic schedule for bulk commodities like bauxite and alumina requires full flexibility for cancellations and additions. It is extremely difficult (and unreasonable) for a bulk shipper to provide accurate information about planned voyages a year in advance. Box 4: How the Coastal Trading Act imposes costs and uncertainty The Australian Government’s options paper notes that independent of the number of contested Temporary Licenses, current processes reduce productivity and increase 114 uncertainty. One MCA member company reported that its very first Temporary License application was contested and that it spent hundreds of thousands of dollars arguing its case through lengthy court processes. The company was ultimately unsuccessful because the Full Federal Court ruled that it is procedurally incorrect for the Department of Infrastructure and Regional Development to take commercial matters (such as freight rates) into account when granting a Temporary License. Another problem is the absence of cost-effective relief when operations are disrupted through no fault of the shipper. An MCA member company had a ship due under a Temporary License with a fixed five-day loading date window. On approach to Australia, the ship encountered bad weather and other problems that delayed its arrival until the last day of the loading window. However, an Emergency License could not be sought as the situation did not qualify as an emergency as identified in the regulations. At the same time, applying for a variation to the company’s Temporary License would have exposed the voyage to contestation from a General License Holder. Had the ship arrived outside of the five-day window and before the process of contestation was completed, the company would have been left with an unlicensed ship that it would be obliged to employ at the load port. Under current arrangements, if any scheduled voyages under a Temporary License have to be varied, that variation can be contested by a General License holder, with impacts on commercial decisionmaking. For example, it has been reported that the risk of challenges to Temporary Licenses by local shippers has led some companies to advise their business units to sell through free-on-board arrangements rather than to offer cost-and-freight. The imposts associated with the current cabotage licensing system come on top of changes to wage rules for foreign crew operating in Australian waters that have substantially increased costs. The Seafarers Award imposes wage rates higher than those specified by the International Transport Federation and above general market rates. This is particularly apparent for overtime hourly rates. The Seafarers Award has two parts: Part A applies to Australian crew and Part B to foreign crew on foreign vessels passing through Australia. Part B wages across a standard-crew dry bulk vessel are around $1,500 a day higher than International Transport Federation wages under conditions set by the Fair Work Act, with adverse implications for Australia’s cost competitiveness. In February 2015, the Government put a reform proposal to industry for their consideration and advice. Under this option, the current three-tiered licensing system would be replaced by a single Coastal Trading Permit that treats Australian and foreign ships equally. At the same time, foreign ships that wished to remain on the Australian coast for more than six months a year would have to hire skilled Australian crew. While elements of the Government’s proposal – particularly the Australian crewing requirements – require elaboration in consultation with industry, the MCA 115 welcomes moves to ‘open the coast’ to greater competition.

114 115

Commonwealth of Australia, Options Paper: Approaches to regulating coastal shipping in Australia, April 2014, p. 8. Annabel Hepworth, ‘Plan to end local ships advantage’, The Australian, 3 February 2015.


3.15 Exploration •

Expenditure on minerals exploration has fallen almost 50 per cent since 2012 with longer term trends showing a decline in Australia’s share of global exploration expenditure. The Productivity Commission has identified rising costs, lower productivity and a long list of regulatory burdens which have together impeded exploration activity in recent years.

•

The Government should resist moves to curtail legitimate deductions for exploration expenditure. Passage of legislation on the Exploration Development Incentive will benefit Australia’s exploration effort.

Australia needs an expanded exploration effort to improve its competitive standing as an exploration investment destination and to ensure the development of Australia’s next generation of mineral resource projects. Over the past 20 years, Australia’s share of economically-significant greenfield mineral discoveries has declined. Australia’s share of global exploration for non-fuel mineral 116 commodities has declined from 17.6 per cent in 2002 to 13.1 per cent in 2013. As at September 2014, total exploration expenditure in Australia was down 49 per cent compared with 117 two years earlier. And while earlier years had seen strong growth in nominal expenditure, this is in part the result of higher costs. The 2013 survey of mining executives by the Canadian-based Fraser Institute indicates some overall improvement on previous years for Australian jurisdictions in its composite Policy Perception Index (which provides a comprehensive assessment of the attractiveness of mining policies in a jurisdiction). Yet on the question of ‘uncertainty concerning the administration, interpretation and enforcement of existing regulations’, more than half of the survey’s respondents cited this factor as a deterrent to investment. These results suggest the risk-profiles of lower-cost, emerging resource nations are declining and there is increasing willingness in capital markets and within the mining 118 industry to invest in such destinations. Non-financial barriers to exploration Just as natural endowment is no guarantee of success, Australia’s historical reliance on the strengths of political stability, geology and a skilled and educated workforce are no longer sufficient to secure its traditional share of global exploration expenditure. The potential for growth is great if Australia can remedy its policy settings and demonstrate a commitment to international best practice. The barriers in Australia are not unique and removing them offers the real prospect of restoring Australia’s competitive advantage. The Productivity Commission inquiry into Mineral and Energy Resource Exploration released in September 2013 identified rising costs, lower productivity and a long list of regulatory burdens as 119 impeding exploration activity in recent years. In particular, it found strong evidence that complex regulation and poor regulatory practices have contributed to unnecessary burdens on the exploration sector. This has seen a dramatic increase in the length of time taken to issue exploration licences in some jurisdictions, while duplicated assessment processes and a lack of clear guidance on the criteria used to assess exploration projects can cause unnecessary delays post licence approvals. The commercial consequences of such delays are serious. The MCA urges Governments to continue work on regulatory problems including increasing transparency of regulatory decisions and ensuring regulators set target timeframes for exploration licensing and related approvals. 116

D.R. Wilburn and K. A. Stanley, K. A., ‘Annual Review 2013: Exploration review’, Mining Engineering, Vol. 66, No. 5, May 2014, pp. 18-39. 117 ABS, Mineral and Petroleum Exploration, Australia, September 2014, Cat. 8412.0, released 1 December 2014. 118 Fraser Institute, Survey of Mining Companies 2013 http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/publications/mining-survey-2013.pdf 119 Productivity Commission, Mineral and Energy Resource Exploration, Productivity Commission Inquiry Report, 27 September 2013.


Tax treatment of exploration Taxation treatment is a crucial influence on exploration expenditure decisions. As the Colorado School of Mines has observed: Both the rate and form of taxation affect the relative attractiveness of different countries or sub-national regions for investment in mineral exploration and development… Exploration is footloose in that explorers 120 can redirect their activities to regions or countries with more favourable tax regimes.

The MCA welcomes the Government’s acknowledgement that new mineral discoveries underpin the future of the Australian mining industry and urges passage of legislation on the Exploration Development Incentive, allowing eligible junior explorers with no taxable income and their Australian shareholders to offset tax losses. More broadly, immediate deductibility of exploration expenditure plays in important role in maintaining exploration activity in Australia recognising that such expenditure is an ongoing, ordinary business expense of a minerals company, that there are high levels of risk associated with exploration and the positive spill-overs in terms of a future national investment pipeline. To ensure certainty for industry, the MCA recommends that the Australian Government affirm its commitment to Australia’s longstanding policy of immediate deductibility for exploration expenditure. The next generation of geoscience A continuing commitment by governments to ensuring high-quality geoscientific information is made available is a further component of a meeting the exploration challenge. The UNCOVER Group, established under the aegis of the Australian Academy of Science, has the goal of addressing the decline in Australian mineral exploration success from a joint research, industry and government perspective. About 80 per cent of Australia is ‘under cover’ with the presumption that greenfield exploration is non-prospective. An initial focus is to improve Australia’s capacity to undertake exploration performance in covered terrains through developing new search concepts and technologies in a new exploration work flow. The UNCOVER Group is supporting AMIRA International in looking to define a roadmap that would include the identification of fundamental new data, as well as targeted scientific and technical products. The MCA is a sponsor of stage 1 of this project. The MCA recommends that the Government support the UNCOVER Group in expanding Australia’s desirability as an attractive exploration investment destination.

120

Professor Roderick G. Eggert, Mineral Exploration Development: Risk and Reward, May 2010 http://www.un.org.kh/undp/images/stories/special-pages/mining-conference2010/docs/Mineral%20Exploration%20and%20Development%20by%20Roderick%20Eggert_Eng.pdf
