the mining tax is expropriation

The mining tax is expropriation by any other name
Exclusive: Andrew Forrest
From: The Australian August 14, 2010 12:00AM

THE mining tax is no way to maximise the wealth of Australians.

The worst economic policy ever formulated in Australia's history, the Mining Super Tax Mark 1 (resource super-profits tax), was dropped like a bomb on the people of Australia.

Like any repugnant policy launched by government, it came complete with the propaganda package to sell it.

We all recall mining companies being called liars, foreigners and tax cheats, and the Australian people being told that the federal government, not the states, owned the resources, that these resources were about to run out, and all the rest of the community-dividing diatribe. It was a deliberate ambush s to create a wave of sentiment against the resources sector, driven by government and union advertising.

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In all quarters of the global capital markets the advertising fell on deaf ears. The government's move was seen as either incompetent or, far worse, dishonest. Such a massive move to the hard socialist Left should only have been the result of major and national consultation, certainly not an ambush without any discussion.

Among economic historians, the term "expropriation" was employed to describe the government's erratic behaviour. No doubt, adopting that term in this comment will lead to some hysterical reactions.

The term "expropriation" derives its meaning from the forced acquisition by government, normally below market value. The tax involved the acquisition of a 40 per cent economic interest by government of the entire mining and resources sector. The consideration offered was seemingly worthless promissory notes (the government's now infamous tax credit in failure or bankruptcy guarantee), that came with a substantially below-market rate of interest.

A promissory note of questionable value that no one understands? With an uncompetitive yield? In exchange for 40 per cent of the entire economics of the engine that saved Australia from the GFC. That's expropriation.

There is a dangerous irony in Kevin Rudd coming back. Rudd was already in the process of removing the RSPT when he himself was removed, allowing Julia Gillard to claim the credit. However, let's not forget Labor's and the Greens' original determination to introduce Mark 1. The surplus impact of this tax was rushed into the formal budget within days of its announcement. The Labor government was spending it before most people knew anything about its dreadful implications.

Now that Rudd is back and with the very strong support of the Greens (despite Bob Brown being fully aware of the devastation it would cause to the economy) this disastrous policy could be put back on the table. Like the secret Mark 2 deal, we can only wonder what the Greens-Labor preference deal contained.

Make no mistake, the Greens want this tax, and more, in complete ignorance of the necessity of a strong Australian economy.

Indeed, it was terrifying to see how the government, backed by the Greens, immediately returned Australia to a class-war scenario. The politics of envy was used in a crude attempt to wedge the electorate. Union and government advertising, funded through the misuse of so called "emergency powers", was mobilised even before the RSPT bomb was dropped. There never was any consultation with the mining industry.

Despite the Treasurer's (now seen to be ridiculous) claims at the time that he and the government consulted with the mining industry, they were in fact planning a co-ordinated government and union advertising campaign to cut down the very industry it was claiming to consult with. Investment in Australian resources immediately became woefully uncompetitive to global debt and equity providers the instant Mark 1 was announced. Suddenly the taxman was elevated ahead of debt service obligations, threatening the very capital that creates the profits in the first place. The underlying premise of the tax -- the government's guarantee, or promissory note, for 40 per cent of any project losses in the event of failure or bankruptcy -- was similarly immediately discredited by capital markets all around the world. While Australian banks have to tread carefully around government, they all unilaterally agreed the government's promises were as good as worthless, the tax was devoid of democratic logic and would severely disrupt the entire sector, knocking out the whole economy.

In an instant, debt financing became extremely difficult or impossible for all projects without extremely high rates of return. The Canadian Prime Minister joined other sovereign competitors to Australia in cheering our incompetence.

While the Mark 2 Super Tax may have modified the tax impost, like its original launch, the attempted defusing of the Mark 1 bomb has been shrouded in secrecy. It is an equally unfair proposal and the ability to model it, and in turn finance projects, remains debilitated by the lack of detail and transparency of the new arrangements.

We estimate that the marginal rate of tax has fallen from around 57 per cent (RSPT) to around 50 per cent (MRRT), but this remains a long way above the 40 per cent rate that is the next highest rate to be found anywhere else in the world.

The changes in the new tax are biased against infrastructure providers like Fortescue, who provide services to others, and so further handicap the market's ability to provide its own infrastructure. We'll become a nation that can't survive without the government teat. Also, Mark 2's debt finance benchmark advantages companies with large balance sheets, as opposed to start-up companies like Fortescue that rely on commercial finance to fund project and infrastructure development.

The government and the three multinational, multi-commodity resource companies negotiated a secret agreement that would absolve just those companies from paying much tax at all by way of Mark 2 for the foreseeable future. Those companies, and their associated industry representative bodies, were forced to sign secrecy agreements that prohibited them from discussing Mark 2 until after the election. Commentary with the media was banned. What could be so bad in that agreement with our government that the Australian people are not allowed to judge it until after they cast their votes?

The Mark 2 tax absolution is only enjoyed by those three in that secret room, via the capital shield provided by their respective large, long-established balance sheets and so called "mining rights". We calculate that this shield, properly and responsibly negotiated by the three global houses whose collective shareholders outnumber the members of all political parties, will effectively provide them, and them alone, a tax shelter of at least $100 billion.

How ironic! These are the same companies that bore the brunt of the government's liars, tax cheats and foreigners propaganda in their original advertising and attacks.

To make matters worse, we now have an uninformed market. Two of those companies continue to have their shares traded through the Australian Securities Exchange while they are signatories to an agreement not seen by 317 of their peer companies. Other mining companies produced humorous business cards at the time that nominated the CEOs of the three multinationals as "Unelected Directors" of their own companies.

This secret deal put in place the so called "transitional arrangements".

While the big three have been placated, the rest of the mining industry impacted by the tax, and in particular those that need to attract investment and financing for future projects, have been left carrying the burden of Mark 2 -- and its $10.5bn annual tax collection target. This is the remaining 99 per cent of companies affected by the tax. The multinational, multi-commodity companies are protected while home-grown Australian companies developing Australian assets for Australians are both penalised and exposed.

Does this sound like a fair, broad-based and simple tax to you?

With the Mining Super Tax Mark 2, we have a new tax that does not target non-renewable resources -- just iron ore and coal -- and protects just the privileged 1 per cent who were in those secret negotiations. It is a totally discriminatory tax and much more complicated than the system it was promoted as replacing.

Further, within the iron ore and coal industries, it will fall predominantly on the existing junior and mid-cap miners and all hopeful new entrants. In other words, it is likely to be hopelessly inefficient and will deter new investment while leaving the existing bigger companies largely unaffected.

Why would a government create an environment that discourages entrepreneurial risk by Australians seeking to have a go, in favour of established global behemoths? It can only lead to lessening competition and dampening the entrepreneurial Australian spirit.

A similar tax was brought into Papua New Guinea by the same people who supported this tax, only decades ago. It didn't raise a cent over all that time, but did successfully and efficiently deter investment. Unsurprisingly it was thrown out, but not before it cruelled investment in that country.

It's no surprise that since Papua New Guinea threw out its own Mark 2 mining super tax, international investment has been flowing back in and new project developments are flourishing.

In the face of that raw example, why on earth would any responsible political leader burden Australia with it now?

Further, if those involved in Canberra's taxation theory had ever exercised the maxim of "you have to get out to find out", they would find that at least in magnetite and hematite iron ores, Australia's deposits could accommodate demand for hundreds of years, definitely not "about to run out".

The sector is, and always has been, capital deficient; it has never been resource constrained.

As a country, we have great people and huge and growing resources. Why would any responsible government introduce a new tax that further impairs our inherent capital deficiency to utilise our people and our growing resources? Worse, the government is claiming that $10.5bn will be raised in 2012-13, but resource analysts simply can't reconcile those figures with their modelling of the tax impost on the big three. The most likely explanation is that in the first instance the government didn't understand how damaging the proposed tax would be.

Now it simply doesn't understand the extent of the concessions it has granted. Such was the desperation to clear the decks for an early election, to exploit a predictable honeymoon period of the new Prime Minister.

While the exact amount likely to be raised by the new tax is debatable, what is not in dispute is the creation of a new layer of complex taxation and a raft of legislation. This will take the weight of the dead hand of bureaucracy up another notch in an industry that already struggles to deal with myriad regulations. Most worryingly, the tax represents an attempt at redistribution of wealth in complete disregard of the impact on the underlying activity that is required to generate such prosperity. Remember the goose and the golden egg?

The Super Tax Mark 2 (MRRT), just like the Super Tax Mark 1 (RSPT), should not be part of any responsible government approach to maximising the wealth of all Australians. Proper tax reform is simple, broad based and enjoys wide consultation. In stark contrast, the MRRT is complex, discriminatory and narrowly focused. I ask on behalf of all in the resources sector that Mark 2, like Mark 1, be abandoned and if a replacement tax is required, it be achieved through a national consultative process.

Australia, a capital-starved country, must bring in policy to rejoin itself to a reputation of responsible economic leadership. After all, there has never been a country that has taxed its way to prosperity.

We are a nation of bright, hard-working people and we enjoy huge and unexploited resources that grow with every day of exploration.

We must ensure that whoever wins on August 21 know that they have no mandate to continue this ready-fire-aim syndrome currently plaguing national taxation policy, to the detriment of every single Australian.

Andrew Forrest is the founder and chief executive of Fortescue Metals Group