Tag Archives: RSPT

When Was Gillard’s TV Dirty Deal Really Made?

15 Feb

On July 13 2010, journalist and radio personality Michael Smith interviewed then newly-ascended prime minister Julia Gillard to discuss “her” new mining tax deal:

“Now, the debate [with the mining companies] got bogged down in a lot of, uh, you know, some name calling, some conversations that lacked respect and good will. What I did as prime minister was got the good will back into that debate by cancelling the ads on TV…”

No doubt Gillard was here referring to her (apparent) post-ascension offer to the Big 3 miners, to cancel the government’s pro-mining tax advertising. She says that she did so as a gesture of “good will”.

In your humble blogger’s opinion, this claim does not pass the sniff test.

Three weeks prior to the Michael Smith interview, the following article appeared in the Australian Financial Review; it was the very day after Rudd’s ousting –

June 25, 2010 – Rio Tinto Ltd says it has suspended its anti-resources super profits tax (RSPT) advertising campaign and is “cautiously encouraged” by Julia Gillard’s pledge to negotiate with the sector.

Ms Gillard, who ascended to the prime ministership after Kevin Rudd declined to contest a leadership ballot, told her first press conference as parliamentary leader she would throw the doors open to negotiate with the mining sector.

She also suspended the government’s pro-RSPT advertising campaign, provided the mining sector shelved its ads against the tax.

BHP Billiton Ltd, the Minerals Council of Australia, the Queensland Resources Council and the Association of Mining and Exploration Companies Inc all pledged to immediately suspend their anti-RSPT ads.

“As a sign of good faith, we have suspended our advertising,” Rio Tinto said in a statement.

“This commitment is, of course, dependent on the government’s willingness to properly engage on the threshold issues.

In other words, their “sign of good faith” was clearly conditional on Gillard playing ball, and renegotiating (ie, “properly engage”) the core elements (“threshold issues”) of the mining tax design.

There is something else quite interesting to consider here.

Apparently it is possible to suspend a multi-million dollar TV and print media advertising campaign within 24 hours.  That is the implication from Rio’s statement “we have suspended our advertising” in swift response to new PM Gillard’s supposedly impromptu “good will” gesture.

It gets more interesting when we look at how quickly BHP Billiton, the prime mover in the anti-RSPT campaign, apparently managed to pull their advertising campaign. From ABC News, first posted June 24 2010, 12:32pm AEST:

Gillard, BHP can ads in mining tax truce

Julia Gillard will can the Government’s mining tax ads as one of her first acts as prime minister, and has called on the mining lobby to do the same.

Mining giant BHP Billiton, which is among the companies leading the campaign against the tax, has responded by suspending its ads.

The second biggest, Rio Tinto, followed later in the day…

Sky News is reporting that the mining industry’s main lobby group, the Minerals Council of Australia, is also suspending its advertising campaign.

Impressive.

Barely 2.5 hours prior, the ALP caucus had chosen Gillard to be the new prime minister.  BHP was very quick-off-the-mark to suspend their advertising in response to Gillard’s gesture of good will, wouldn’t you say?

There is a Big Question arising out of all of this.

Was there any discussion or deal made with any/all of the Big 3 – particularly BHP – to suspend their advertising prior to Rudd’s knifing by Gillard?

It is an important question.

Because some have claimed that Gillard was “given the nod” by the Big 3 foreign miners to topple Rudd, and have suggested that the issue (promise?) of the withdrawal of their anti-mining tax advertising was already on the table prior to the coup; that Gillard knew the miners would pull their TV advertising before she made the decision to challenge Rudd for the leadership:

JULIA Gillard was “given the nod” by the big three mining companies – Xstrata, Rio Tinto and BHP Billiton—to challenge Kevin Rudd’s prime ministership, knowing the advertising campaign against the mining tax “would be pulled”.

… The revelations come from an article written by Mr Rudd’s friend and actor Rhys Muldoon, published in the latest issue of The Monthly magazine. He questions whether “the party backroom boys” could “have sought tacit approval from the miners for a change at the top to seek an end to the damaging impasse” on the tax.

Does anyone seriously believe that BHP Billiton et al only decided to hastily suspend their advertising campaign in response to new PM Gillard’s immediate gesture of “good will”?

Does anyone seriously believe that Gillard and/or the ALP “faceless men” did not come to an agreement with the Big 3 miners on the specific issue of stopping their politically damaging TV advertising, prior to the knifing of the prime minister?

If Gillard knew that BHP was prepared to pull its TV advertising campaign on the condition that the mining tax be negotiated from square 1, then why not tell PM Rudd?

If Gillard knew that BHP – a foreign-owned mining corporation – was prepared to pull its TV advertising campaign on the condition that a democratically-elected PM be removed from office, why not tell PM Rudd?

Why not help the national leader to whom you had repeatedly and publicly declared your loyalty, with devising a strategy to deal with this foreign corporate “threat to democracy”? (Swan’s words, directed at Aussie miners)

Why challenge for the leadership … other than out of sheer greed and selfish opportunism, a preparedness to sell out the best interests of the nation’s citizens (and the very concepts of representative democracy and national sovereignty) for the fulfillment of your own naked ambition?

The widely-propagated story that Julia Gillard, the loyal deputy PM, the Great Negotiator, reluctantly agreed to be elevated to the prime ministership because “a good government has lost its way”, and only then made a brilliant, impromptu gesture of good will towards the Big 3 foreign-owned mining giants by suspending the government’s TV advertising and calling on them to do the same, simply does not pass the sniff test.

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More Dirt On Gillard & Swan’s Dirty Deal

14 Feb

MacroBusiness.com.au reader and commenter “Mav” draws our attention to journalist Paul Cleary’s book, “Too Much Luck”.

In it, we find more dirt on Gillard and Swan’s dirty deal with the multinational miners.  Cleary’s tome sheds new light on the collusion between ALParatchiks such as then ALP national secretary Karl Bitar and BHP Billiton, the foreign-owned miner leading the anti mining tax campaign, in overthrowing a popularly-elected prime minister:

As soon as Rudd sprang the new tax on the industry, the big three companies decided they had to kill this plan – and they decided to play dirty. When London-based Rio Tinto, Melbourne-based and London-listed BHP Billiton and Swiss-based Xstrata put their collective weight together, they are a formidable combination. Their total combined value on global sharemarkets is $450 billion, 86% of which is in foreign hands. The three companies are worth more than the size of Australia’s federal budget, about one-third the size of the entire Australian economy. Together they embarked on a savage lobbying effort to bring down the proposed tax by attacking the government and its prime minister. They began this extraordinary campaign before the proposal had even been put into legislation, and before the parliament had had the opportunity to review it.

BHP led the offensive, establishing a ‘war room’ inside its Melbourne head office. Run by senior financial executive Gerard Bond, along with senior staffers and external consultants, this team worked on the project for about seven weeks. BHP commissioned its own focus-group research, which was used to drive a $22 million TV and print-media blitz and a targeted lobbying campaign that included Geoff Walsh, a former national secretary of the ALP and former staffer to prime ministers Bob Hawke and Paul Keating. BHP spared no expense on the campaign, which reported directly to CEO Marius Kloppers.  External talent included the market-research specialist Tony Mitchelmore and the corporate strategist John Connolly. Mitchelmore had been plucked from obscurity by Labor to work on the Kevin07 campaign and had stayed on doing qualitative research before working for BHP on this campaign. He organised an intensive round of sixteen focus-group sessions, which revealed that many participants believed Rudd’s proposal had come out of left field and was likely to derail the one industry that was keeping Australia’s head above water. Realising that they had a good chance of killing the tax, the miners adopted a ‘whatever it takes’ approach…

The miners’ efforts were spectacularly successful. Seven weeks and four days after unveiling the preliminary plan, Prime Minister Kevin Rudd was deposed and so was his tax… Big Dirt, as the three companies were now known, executed regime change two months before the voters exercised their democratic rights at the ballot box. Having subverted a functioning democracy [TBI: aided and abetted by Gillard & Swan], mining executives were celebrating in airport lounges around the country…

Immediately after becoming prime minister on 24 June, Julia Gillard turned her attention to thrashing out a deal with the three multinational miners. Eight days later, she announced a breakthrough that cut the marginal tax rate from 40% to 22.5%, restricted its scope to coal and iron ore, and added some creative accounting concessions for the big miners… A raft of emails released under FOI shows that BHP was very much running the show. Its executives drafted the heads of agreement before emailing it to Wayne Swan’s office for approval.

Repeating her ‘moving forward’ mantra, Gillard announced the compromise like this: ‘It moves things forward whether you’re a coal miner in the Bowen basin, a contractor in Karratha, an opal miner in Coober Pedy or a young worker in Sydney’. In fact, the MRRT deal made life worse for smaller Australian-based miners by removing the resource exploration rebate and by awarding big miners a significantly lower tax rate. For iron-ore miners with mature projects, which means the big companies, their projects would be taxed at 36.4 per cent – close to or even below current levels – whereas small or medium-sized projects would pay an average rate of 48.9 per cent, according to modelling produced by Treasury and released under FOI. The big miners benefited from a concession that allows them to calculate deductions for tax purposes using the market value rather than the purchase price (or ‘book value’) of their assets, providing huge depreciation allowances. The small and medium Australian players were not represented in the negotiating room, and the new deal actually reversed the central and laudable aim of the RSPT – that is, reducing the tax burden on start-up operations, which are penalised by the state royalties because the impost is paid when production starts, rather than after the company actually begins to make a profit. The success of the multinational miners in securing these concessions, and in beating voters to the punch, reveals the perverse world order in which we live: an advanced country can possess enormous riches but lack the capacity to do what is clearly in its own long-term interest…

Not only did the miners change the prime minister and change government policy, they went on to brag about how their coup had stopped similar schemes from spreading around the world…

Exactly one week after Gillard announced the compromise, Rio Tinto’s American chief executive, Tom Albanese, told a group of mining executives in London that the Australian experience should send a salutary message to governments around the world. Governments should ‘learn a lesson’ from the episode, he declared. A few months later, Xstrata’s chief executive, Peter Freyberg, was still bragging…

BHP’s executives managed to avoid bragging, although this company did more than any other to bring down the tax and Kevin Rudd. The total cost of the campaign was $22 million. The Minerals Council of Australia, which is largely funded by the big three companies, spent $17.2 million, while BHP spent $4.2 million on its own and Rio $537,000. Cabinet ministers in the Gillard government say that Geoff Walsh delivered the Mitchelmore research directly to the then ALP national secretary, Karl Bitar. These claims are strenuously denied by Walsh. But the BHP research is understood to have panicked the Labor heavyweights, prompting them to move against Rudd even though he still had a commanding 4 percentage point lead in the national newspoll.

If it is true that former ALP national secretary Karl Bitar, in cahoots with Gillard and Swan, acted to overthrow a prime minister on the basis of private research data provided directly to him by BHP, a foreign-owned company demonstrably seeking to change government policy, then this is more evidence of treason on the part of key figures in the ALP.

Gillard, Swan, and Bitar should be in jail.

UPDATE:

Peter Martin has more, in the Age today:

Gathered on one side of the cabinet table were the newly-installed Prime Minister Julia Gillard, her Treasurer Wayne Swan and her Resources Minister Martin Ferguson. On the other were the heads of Australia’s three big mining companies: BHP Billiton, Rio Tinto and Xstrata.

Absent were the key people from the Treasury – the ones who really understood the tax being discussed.

As the then Treasury head Ken Henry later told a Senate committee: “We were not involved in the negotiations, other than in respect of crunching the numbers if you like and in providing due diligence on design parameters that the mining companies themselves came up with.”

Gillard and Swan consciously chose not only to exclude the locally-owned miners from the negotiations. They also chose to exclude Treasury officials – folks who just might have more of a clue than a dodgy lawyer and a career political hack with an arts degree – as well.

Conclusion? Gillard and Swan did not want any intelligent outside scrutiny of the BHP-drafted deal.

Hence their persistent “commercial-in-confidence” response cited ever since, in attempted justification of their refusal to let the details come out.

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When Frustration Over Politicians’ Deceit Spills Over

19 Apr

Regular readers know that there is far, far more to the story of the mining tax, and the knifing of popularly-elected PM Kevin Rudd, than what has been presented by politicians and the mainstream media.

[see Swan’s Anti-Australian Rant A Smokescreen For Treason; also The Galactic Hypocrisy Of Wayne Swan; also What Your TV Will Leave Out Of The Clive Palmer “CIA” Sound Bites]

Indeed, it is a veritable cesspool of international intrigue, plutocratic coercion and bribery, treason, and geopolitical manipulation.

So I am confident that many readers will, as I do, closely identify with the profound sense of frustration felt by all those who are awake to the far-reaching implications of the lies and deceit at the core of Australian politics; a frustration well enunciated here by Daily Telegraph writer Joe Hildebrand (h/t readers “Kevin Moore” and Twitter follower @Prronto for the link):

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I Wonder How Much These “Experts” Pull?

16 Feb

Back in December, your humble blogger published a comprehensive critique of the Green-Labor-Independents’ disaster-in-waiting dubbed the “Minerals Resource Rent Tax”.

Or “mining tax” for short.

Today, Professors’ Carey and Fargher of Deakin Uni and the ANU respectively, have combined their scintillating intellects to do the same.

This will all sound very familiar to regular readers.

From the Age (emphasis added):

Illustration: John Spooner | Source: The Age

Flaws in the mineral tax mean Australia may profit little from its resource wealth.

Could Australia end up with little to show for its mining boom – as an echo of what happened to Nauru once its considerable phosphate wealth was exhausted?

Close examination of the proposed minerals resource rent tax reveals serious flaws that could leave the federal government well short of the forecast revenue. It is conceivable that some large and highly profitable mining companies could reorganise their affairs to pay little or none of the tax.

The first and most obvious shortcoming of the MRRT, in terms of its revenue potential, is that it applies only to coal and iron ore. All other minerals are exempt. But it is the design of the tax as it applies to coal and iron ore miners that could leave the government facing an unanticipated multibillion-dollar shortfall.

The main problem is that the tax is based not on an objective measure such as tonnes of material mined, but on ”super profit” (mining profit less allowances). Profit at the best of times is a highly flexible concept that can allow accountants to apply creative techniques to minimise a company’s tax obligations. With the MRRT, the incentives and opportunities for creative avoidance appear even greater than those applying to company tax.

…

The minerals tax is not based on audited company profits from statutory accounts, but on a narrow portion of profits from particular mining activities. It requires the taxpayers (that is, the mining companies) to determine the amount of proceeds and costs that relate to these activities.

Ruh roh!

Does that sound familiar?

According to Carey and Fargher, the companies who are supposed to be “taxed” are the ones who will do the measuring (accounting) that determines how much tax they will pay!

That’s exactly like the Clean Energy Future “carbon tax” (see “An OSCAR For The Clean Energy Future”), where the entire scheme relies on “encouraging” the “biggest polluters” to “self-assess” their emissions … and the “audit” procedure by the government is quietly but openly admitted to be nothing more than an exercise in managing the public’s “perceptions” of compliance by the “polluters”.

This reliance on the miners themselves to determine the appropriate proceeds and costs creates a significant incentive to estimate profit from taxable activities in the most tax-efficient manner. For example, the MRRT requires the miners to split revenue between the taxable value earned to the point of producing a stock of coal or iron ore and revenue earned after that point. Transfers within the company also need to be valued. Losses can be offset between operations.

This point yielded a key insight in my detailed critique of the mining tax (see “GilSwan Conned – Mining Tax The Greens’ Pit Of Despair”).

The design of the MRRT actually creates an incentive for the Big 3 multi-nationals to buy out their smaller competitors – including loss-making junior miners and explorers. Why?

Because they can claim numerous deductions against their MRRT liabilities from existing mines, by gobbling up smaller, locally-owned competitors.

In other words, far from “spreading the wealth” of the mining boom, the design of the mining tax will actually help the Big 3 to increase their monopoly, thus sending even more profits offshore.

At numerous points, opportunities exist to reduce revenue estimates and increase costs so as to minimise the taxable profit reported. Volatility in commodity prices could also allow strategic timing of the recognition of revenue and expenses. All these factors, combined with any decline in the underlying commodity price from the record levels seen when the tax was first envisaged, could greatly reduce the expected proceeds to government coffers.

So, too, could the generous and sometimes unconventional allowances built into the tax. There are more than 50 pages of allowances that can be used to reduce a firm’s tax liability. While most allowances have their foundation in generally accepted accounting principles (e.g. royalties paid to state governments or pre-mining exploration expenditure), other are less conventional.

For example, under division 75, miners can choose between the ”book value” or ”market value” of an asset, which will be allocated against revenue over the productive life of a mine in order to calculate MRRT liability. Depreciating assets based on market valuation is not generally accepted accounting practice, yet it is allowed in the legislation. In simple terms, a mining asset that cost $100 million to bring to production might today be worth $350 million if sold on the open market. A miner could use this higher valuation to calculate depreciation, which would reduce the profit subject to the tax.

Business transactions can be complex, and legislation must therefore contain a range of provisions that require subjective interpretation. The mining tax legislation adds a further layer of complexity, which at times defies conventional accounting and can be used to aggressively minimise the amount of tax payable.

…

Even at this late stage in the process, key improvements might be made if there were full transparency in the revised revenue estimates, the underlying assumptions and, in particular, the ability of the tax office to monitor and collect the minerals tax. It is not surprising that critics have begun to question Treasury’s revenue estimates, which are based on private information supplied by the mining companies that is not on the public record.

Mining companies are entitled to make a profit, but if the nation decides it is also entitled to a return on the exploitation of national resources, then it is important to design a tax that is effective. Once the resources are gone, they are gone for good…

Well done Professors.

Better late than never.

I wonder what a “professor of accounting at Deakin University’s faculty of business and law” pulls?

Indeed, what does a “professor of accounting at the Australian National University’s College of Business and Economics” pull?

One thing’s for sure. The Big 3 multi-national mining companies pulled the wool over Swan’s eyes in their backroom, closed door deal.

Unsurprising really.

Since Wayne Swan’s intellectual power wouldn’t pull the skin off a custard.

(h/t @CaroChristie )

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GilSwan Conned – Mining Tax The Greens’ Pit Of Despair

22 Dec

See those storm clouds gathering?

Over the Pit of Despair?

I wonder how Greens’ supporters will respond, when they wake up and discover the truth.

That their party’s deal with Labor on the mining tax will have the opposite result of what they were told.

I wonder what will they say, when they discover that the Minerals Resource Rent Tax (MRRT) will not result in the kind of wealth redistribution that was touted, a “fair share of our mineral wealth for all Australians”.

That instead, it will result in the Big 3 multinational mining companies … getting bigger. And richer. And more powerful.

And the government’s budget digging even deeper into the red.

When PM Gillard and Treasurer Swan went behind closed doors with the Big 3 miners to thrash out a hasty “fix” to former PM Rudd’s Resource Super Profits Tax (RSPT) debacle, thinking folks knew it would not end well.

Except for the big miners, that is.

Rather than scoring a vital goal for her “decisive” new leadership before the 2010 election, the secretive deal always looked more likely to result in yet another decisive Labor own goal.

And indeed it has.

Especially after Gillard and Swan again went behind closed doors, this time with the Independents and Greens, to thrash out a political deal to secure passage of the legislation in the parliament.

Late last month, after the new MRRT legislation passed the lower house, mining correspondent for The Australian Andrew Burrell belled the cat:

FEWER than one in 10 iron ore and coal miners operating in Australia will earn enough profit to start paying the $11.1 billion minerals resource rent tax from next year, according to Gillard government estimates.

A spokesman for Wayne Swan said yesterday he could not provide the names of the “estimated 20 to 30″ companies that were likely to pay the MRRT in 2012-13 because it was impossible to say how many companies would earn more than the annual profit threshold of $75 million.

“We haven’t got a precise list,” the spokesman said.

“But we have said the vast bulk of MRRT will be paid by the big three (BHP Billiton, Rio Tinto and Xstrata).”

Mr Burrell went on to reference the PM’s ever-changing claim for how many miners will be impacted under her revised grand design.

A claim most noteworthy not for its credibility.

But for its familiarity.

A remarkable familiarity to her “1,000 biggest” / “500 biggest” / “more like in the order of like, 400 biggest polluters” claim.

And the “half a million” / “300,000” jobs creation claim.

And the “4%” / “3.25%” projected GDP growth claim.

And the “3.5bn surplus” / “1.5bn surplus” projected budget outcome claim.

Big Labor government claims that are always being revised … downward:

Julia Gillard said last year that 320 iron ore and coal miners operating in Australia could be eligible to pay the MRRT — down from 2500 under the original resource super-profits tax that applied to all commodities.

In a deal with Tasmanian independent MP Andrew Wilkie on Monday, the government agreed to raise the profit threshold for the tax from $50m to $75m.

Mr Wilkie revealed the move would restrict the number of companies paying the MRRT to fewer than 30.

But this failed to quell criticism from junior miners, which claim the design of the tax still favours the established miners.

It remains unclear how the government will raise $11.1bn in the first three years of the MRRT.

Billionaire miner Andrew Forrest added to the confusion last week when he estimated that his iron ore company, Fortescue Metals Group, would largely avoid paying the tax for at least five years thanks to the substantial writeoffs available to all big producers.

Many in the industry also doubt whether BHP, Rio and Xstrata will face big MRRT liabilities, particularly in the early years of the mining tax.

This is because the design of the tax allows iron ore and coalminers with existing operations to price their assets using today’s inflated market values and claim potentially massive deductions…

Glyn Lawcock, a top-rated mining analyst at UBS, said it was impossible to predict with accuracy how much MRRT companies would pay from next financial year because it was difficult to calculate a company’s market value, which was used to determine MRRT liability.

When asked whether he believed the government could raise $11.1bn over three years, he said: “I scratch my head a little bit at that.”

It certainly is a head scratcher. Especially when one takes the time to carefully review the Treasury department’s Minerals Resource Rent Tax Bill 2011 document.

Recently a mining industry chief executive walked your humble blogger through this document. And explained that there is a very good reason why there has been little except “token noise” from the mining industry over the GilSwan MRRT, in stark contrast to the spirited fight put up against the original Rudd RSPT.

It is because in his words, “big miners will pay nothing for years, and small miners will pay nothing at all”.

But there’s more. In having the details explained to me, an even bigger flaw dawned.

A key insight, that mainstream economic commentators have not cottoned on to.

The clever accountants and lawyers for the Big 3 appear to have conned GilSwan into creating a tax mechanism that not only allows the Big 3 to defer paying any MRRT for years. It is a “tax” that acts as a financial incentive for the Big 3 to increase their monopoly, by gobbling up their smaller competitors and getting MRRT write-offs for doing so.

To understand how, let’s work through the details of the Treasury department’s document (emphasis added):

• New investment will be given generous treatment in the form of immediate write‐off, rather than depreciation over a number of years.  This allows mining projects to access the deductions immediately, and means a project will not pay any MRRT until it has made enough profit to pay off its upfront investment.

Sounds good if you are a start-up miner or explorer, right?  No doubt this idea was sold to GilSwan by the Big 3 as being “necessary” to encourage future mining investment, given that the MRRT places Australia at a competitive disadvantage versus other nations that do not have an MRRT.

But it’s also an obvious loophole that immediately dawned on your humble blogger. One that favours the Big 3 miners, who have the deepest pockets.

Consider.

What happens if a big multinational miner such as BHP, Rio Tinto, or Xstrata buys out a smaller mining company, such as a junior explorer or a company with proven but unrealised in-ground reserves?  It would appear they can claim the cost of that “new investment” as an immediate tax write-off, thus offsetting any MRRT they might otherwise be obliged to pay with respect to their other mining projects.

As you will see in a moment, this is no mere speculation by a sceptical blogger with an eye for detail.

It is exactly what the mechanism allows.

But it gets better for the big miners.

What if that smaller miner or junior explorer that they have now bought out, is presently making losses? Remembering that all do, typically for the first 5-10 years of the mine’s life:

• The MRRT will carry forward unutilised losses at the government long term bond rate plus 7 per cent.

Buy up a smaller, loss-making mining company. And claim the value of their unutilised losses against your other MRRT obligations.

Can’t believe that GilSwan (and the “bozos” in Treasury) could be this stupid?

They are:

• The MRRT will provide transferability of deductions. This supports mine development because it means a taxpayer can use the deductions that flow from investments in the construction phase of a project to offset the MRRT liability from another of its projects that is in the production phase.

No use to a small mining company with only one project. But manna from heaven to a large multinational miner with multiple projects.

Buy up a junior explorer, or a mining company that has proven reserves but has not yet begun/completed construction on the project. Claim 100% of the costs against your MRRT liabilities from other, active producing projects.

Thanks to the MRRT, the initial ‘new investment’ in swallowing up a junior mining company, and the ‘unutilised losses’ of that junior mining company, and the construction costs of taking that newly-acquired mining company’s project to production stage, all these now become tax-minimising assets to a hungry Big 3 multinational looking to take over their smaller, up-and-coming (Australian-owned) competitors.

But there’s still more:

• The MRRT will recognise the particular characteristics of different commodities, by applying a taxing point close to the point of extraction, and using appropriate pricing arrangements to ensure only the value of the resources extracted is taxed.

The Big 3 miners were very clever indeed in negotiating this “deal” with GilSwan.

As my mining industry source pointed out to me, the point of extraction is the point of lowest value of the ore; the grade is far below “shipping grade”, and so its value is far below the actual market value. He cited the example of copper ore.

At the point of extraction, the ore may only comprise 1% copper. The value of the ore at this point is around $20 per tonne.

But when subsequently processed into a 25% copper concentrate, the value is around $1,387 per tonne.

And the cost to the mining company of processing the raw 1% copper ore into 25% copper concentrate?

“About $30 per tonne.”

When the Big Miners insisted on the tax being applied “close to the point of extraction”, they took advantage of GilSwan’s abject ignorance of real-world business.  An ignorance that has been all too often seen in their many other policy calamities – think ceiling insulation, school halls, computers in schools, subsidised Toyota hybrids, green schemes, set-top boxes, and the daddy of them all, the no cost/benefit analysis NBN.

You should not be surprised, dear reader.  Not when our World’s Greatest Treasurer has an Arts degree, zero business experience, and has never worked a real job in his life.

Which explains, of course, why we are paying him $262,000 per year. And why we are about to increase his salary by $84,000 per year. And why we have spent $75,440 in 6 months on empty RAAF VIP “ghost” flights to ferry him about.

This ignorance of how things work in the real world is borne out even more starkly however. Not only have GilSwan agreed to impose the mining tax “close to the point of extraction”, (ie) at the ore’s lowest value, far below its value-added market value. They have also agreed to a 25% extraction allowance:

• The MRRT will provide a 25 per cent extraction allowance to further shield from tax the important value add and capital that mining companies bring to mineral extraction.

“Further shield” it?!  When they are already applying the tax “close to” the point of its lowest value?!

Ignore if you can all the other write-offs and deductions for a moment. What this “extraction allowance” really means is that GilSwan have not only agreed to tax the ore at or near its lowest value. They have also agreed to an effective tax rate of only 22.5%. Not the headline 30%.

In other words, this so-called “super profits tax” will be applied at 25% less than the standard company tax rate that even my own small business has to pay!

But where the now-familiar Labor descent into complete farce reaches its denouement, is when we get to the Treasury department’s modelling:

How the MRRT works

The following example is intended to illustrate how the MRRT will apply to iron ore and coal projects, commencing after 1 July  2012.

The example presents outcomes for a single project company with an equity financed mine that operates for 5 years.  The company is assumed to invest $1 billion in the first year of the project.  Over the life of the project the pre‐tax rate of return (revenue less operating and investment costs) is 50 per cent.

Click to enlarge

As my mining industry source assured, the modelled assumptions are beyond fantastic.

They are positively delusional.

The Treasury assumes this fairytale mining company begins to show “Revenue” of $520 million at Year 2 (see table). In the real world, a start-up mining project typically absorbs 5-10 years of losses before they even begin productive operations. My mining industry source pointed out that he has never heard of any mining company ever going from zero revenue to half a billion in a single year.

The Treasury also assumes this fairytale company has Year 2 operating expenses of 25% of revenue, and 25.5% at Year 6. Again … unheard of figures.

Back to the modelling:

The MRRT is levied at a rate of 30 per cent of the operating margin (revenue less operating and investment costs) less the MRRT allowance and the extraction allowance.  The MRRT allowance is calculated as the value of unused losses uplifted by an allowance rate equal to the long term government bond rate plus 7 per cent…

When we look at Year 4 in the example, the year in which Treasury has modelled the first MRRT “profit” (an inconceivable $436m), we find another problem. It is unclear whether Treasury has modelled “Revenue” as being Company revenue, or, as the “extraction point” value of the ore. If, as appears likely, the modelled “Revenue” figure is actually Company revenue, then on this point alone Treasury’s modelling is gravely flawed. Company revenue has nothing to do with the value of the ore at the “extraction point”. Meaning, the Treasury figures are nonsense.

Indeed, my mining industry source described them as “totally made up and have no resemblance to reality”.

Rather like Treasury’s modelling for “green jobs” (see one of 2011’s most popular posts, Barnaby Bamboozles Chief Of Climate Change Modelling Unit … Again).

Back to the MRRT modelling:

State royalties are assumed in this example to be equal to 7.5 per cent of sales revenue and are credited against the MRRT liability to produce the net MRRT liability. Where royalty payments exceed the MRRT liability in any one year, the balance is uplifted at the allowance rate to be offset against future MRRT liabilities…

We’ve left the issue of how the MRRT impacts on the payment of State mining royalties until now, to avoid complication. This is already a source of political angst between the governments of the mining states, and the Federal government. For the purposes of our look at the modelling, however, it’s pretty simple. The GilSwan grand plan grants a 100% credit for State mining royalties paid by the mining company.

In summary then, the MRRT is essentially calculated as follows:

MRRT 30% x Operating Margin (ie, Revenue calculated “close to Extraction Point”, less Operating costs)

less 100% write-off of construction costs

less write-off of unutilised losses

less 100% write-off of construction costs of acquired companies/projects

less write-off of unutilised losses of acquired companies/projects

less write-down of “market value” of existing assets over 25 years, OR

less write-down of “current written down book value” of existing assets (less the value of the resource) at an accelerated rate over 5 years

less Extraction Allowance (25%)

less 100% State Royalty credit …

It all begs the question … from where is the government’s claimed $11.1bn in MRRT revenue ever going to come from?

Treasurer Swan has claimed that “the vast bulk of MRRT will be paid by the big three”.

But in reality, given all the write-offs and concessions, the big miners will pay nothing for many years. If ever.

As Fortescue’s Andrew Forrest has affirmed.

So then, of GilSwan’s originally alleged “2,500 mining companies” in Australia, just who exactly are these “estimated 20-30” (small) iron and coal miners who will be earning profits of $75m per annum from July 2012?

Especially given that the boom in commodity prices has now peaked … and plummeted?

Others are asking the same question:

“Is this for real?

“Firstly, what 2500 companies are mining in Australia? There is NO WAY the number is that high unless one counts every Pty Ltd quarry and sand pit and borrow pit. Even then, it is an extraordinary figure and I cannot believe for one minute that it is real.

“But secondly, Gillard says only 320 iron and coal companies were captured under the MRRT. Really? Are there really 300-plus coal companies? Because as far as I know, there are only about 14 iron ore companies. And if you believe those figures to be true (i.e 320 dropping to around 30) that means that there are 290 iron ore and coal mining companies that are operating at an annual profit of between $50m and $75m since that is the only difference between MRRT Mk 1 and MRRT Mk 2. This is patently absurd.”

…

The broader point here is that there is just not a whole lot in the sustaining rhetoric of the MRRT that stands a cold hard reality check. Yet the government continues to represent the tax as a great leap forward in the commonwealth’s chase for a fairer share of the resources boom.

It isn’t.

As colleague David Uren made clear in his insightful dismantling of a tax “so compromised by its bastard birth that it puts the commonwealth budget at risk and cannot be considered an economic reform”.

Uren observed that a 20 per cent fall in commodities prices would wipe out the government’s MRRT revenue and leave it stumping up for the $4.5bn of recurrent spending commitments that were supposed to be funded from the fairer share.

And folks I am here to tell you that this is exactly the scenario that the government is facing.

The sustained retreat of iron ore and coal prices means that big mining is now some months past peak cashflows.

Indeed.

With the China bubble deflating, iron ore and coking coal spot prices are currently trading around 30% below their 2011 peaks:

Source: RBA Chart Pack, Dec 2011 | Click to enlarge

At least the Coalition is aware of the budget risk. Even if they too appear not to have twigged to what is a blindingly obvious extension of logic – that the MRRT is designed to help the Big 3 multinationals increase their profits, and their monopoly:

“There are serious question marks over who will pay what and when under Labor’s mining tax deal,” Shadow Assistant Treasurer Mathias Cormann said.

“FMG says it won’t pay any MRRT for a number of years given the tax design features favouring larger miners,” he said.

“There are credible suggestions that the big three miners who had exclusive access to the Prime Minister and the Treasurer to design the mining tax behind closed doors won’t pay any MRRT for years either.

“No wonder the big three say they are happy with the MRRT, while the smaller local miners are not.

“Wayne Swan has consistently refused to release the commodity price and production volume assumptions used to estimate MRRT revenue claiming that they’re based on commercial-in-confidence data provided by the big three miners.

“So not only are the big three miners allowed to design the tax to suit their needs, they’re also the only ones allowed to know the governments mining tax revenue assumptions. That’s just not good enough.

“Even on the government’s own figures, the mining tax package is a fiscal train wreck in the making.

The Great Big Mining Tax … that isn’t.

As my kind mentor concluded:

“This bill was drafted BY miners, FOR miners”

“I think the miners and their accountants outsmarted Gillard and Swan, and bamboozled them with mining jargon”

“The miners in reality love it.” 

Greens’ supporters … welcome to the Pit of Despair.

“What did this do to you? Tell me. And remember, this is for posterity so, be honest. How do you feel?”

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Same Old Labor Govt – Same Old Debt

9 Oct

Media Release – Senator Barnaby Joyce, 4th October 2010:

Senator Barnaby Joyce says that the Labor government seems to be getting back to normal. “Our gross debt went up by $3 billion last week, the week before it went up by $4 billion. The gross Federal debt is now $163.152 billion.

This is the issue that should be front and centre of Labor Government’s attention, beyond private members bills for euthanasia, same sex marriage and a bid to cool the planet with a new carbon tax.

The reality is there in the numbers. The debt is racing ahead; it is not under control, it is not going to stop.

There is no argument for this profligate waste of money. How much money do we want to owe people overseas?

This money does not include the states’ debt which is on its miserable way to $240 billion, as noted in front page articles of recent weeks.

We also have to note now that local governments too are expected to borrow money.

If we do not get on top of the debt, these debts will get on top of us.”

More Information – Jenny Swan 0746 251500

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Joyce: The Labor Government Is Dodgy

15 Jul

Media Release – Senator Barnaby Joyce, 15 July 2010:

In trying to think of a metaphor to describe the Labor government in one word, it is this – dodgy! Their figures are dodgy when they talk about a $7.5 billion reduction in revenue but apparently only causing a $1.5 billion reduction in income. Their approach is dodgy when they talk about net debt as if the people who lent us the money don’t want the money back in gross terms and just for the record, we currently owe $150 billion and are currently borrowing an extra $150 million a day.

They are completely dodgy with how they change Prime Ministers in the middle of the night without telling the Australian people. They are even dodgy amongst themselves with the deals they make, such as the one between Kevin Rudd and Julia Gillard on the process of leadership transition which Julia obviously didn’t honour because the backroom boys told her not to. They are dodgy in how they talk about future surpluses, yet their past prescriptions about current surpluses have been so totally wrong and actually end up as deficits.

They are dodgy in how they describe solutions for the processing of boat people in East Timor when they haven’t actually done the homework to get the deal through East Timor. They are dodgy in how they employ mates such as Mr Kaiser for $450,000 a year without even putting an advertisement in the paper so that other Australian’s can apply for the job. They are dodgy in how they go forward with a $43 billion capital infrastructure program such as the NBN without doing a cost benefit analysis as to whether it will actually work.

They were dodgy in the way that they allowed the importation of beef from countries with Mad Cow Disease until we found out about the deal and then they changed the decision around again. They were dodgy in how they told people that the ETS was the greatest moral challenge of our time, but the person who was crucial in changing that moral paradigm is now enjoying the benefits of the Prime Minsters office. They were dodgy when they inferred that an ETS would change the climate when quite obviously it was never going to.

They were dodgy with how they told the Australian people that they would fix the hospital system by July 2009 or they would take it over and in the end, they did neither. They were dodgy when they decided to build school halls across our nation for $16.2 billion whether you wanted them or not and at three times the price. They were dodgy when they decided to put ceiling insulation into roofs and burnt down over 180 houses causing tragically the deaths of 4 people that we know of.

However, where they are really dodgy is this – they told people that they would assist with the cost of living. They had the dodgy fuel watch scheme and the dodgy grocery watch scheme which were announced with fan fare but achieved zip.

The cost of living in Australia is going through the roof because this crowd in government is dodgy and has absolutely no idea how to get the basics right. You cannot keep borrowing money at the rate they are, putting upward pressure on interest rates, and squeezing the last drop of blood out of working families and then claim to know something about the cost of living.

You cannot talk about reducing coal fired power replacing it with renewables at many times the cost and not expect that this is going to make working families poorer. You can’t fail to develop the inland and not expect the result to be far greater pressure on the social and economic infrastructure of urban Australia. If you don’t develop water infrastructure then you have to expect the price of a limited resource, water, to go through the roof. If you keep on making it difficult for farmers to farm, with continual new laws on vegetation, and everything they do from sunrise to sundown and in between, while at the same time failing to oversee that farmers are getting a fair price at the farm gate, then the farmers will disappear and the price of food will go through the roof. You can’t borrow hundreds of billions of dollars from overseas and not expect that it has to be repaid by people who have to pay taxes, working families, who could have otherwise put that money in their pockets.

In summary, many people at the supermarkets and at the pubs and clubs and at the church on the weekend and at the sport with their kids understand one thing – that they seem to be poorer under this crowd then they were before, they have less money than they did before. They seem to be watching a political soap opera that has more episodes than Blue Hills standing in proxy for decent government.

My statement to the Australian people on behalf of the National Party in the Senate will be this – Do you honestly believe that you can carry on with this crowd for another three years? What do you think will be left of the show if you do?

More Information – Jenny Swan 0746 251500

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46 US States In Debt Crisis

29 Jun

46 out of 50 US state governments are now technically bankrupt.  To understand how bad that is for the global economy – including Australia – consider the fact that California alone has an economy that is larger than that of Russia.

From Bloomberg:

California, tied with Illinois for the lowest credit rating of any state, is diverting a rising portion of tax revenue to service debt, Bloomberg Markets magazine reports in its August issue.

Far from rebounding, the Golden State, with a $1.8 trillion economy that’s larger than Russia’s, is sinking deeper into its financial funk. And it’s not alone.

Even as the U.S. appears to be on the mend — gross domestic product has climbed three straight quarters — finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution.

State budget woes are a worsening drag on growth as the federal government tries to wean the economy from two years of extraordinary support. By Jan. 1, funds from the $787 billion federal stimulus bill will dry up. That money from Washington has helped cushion state budgets as tax revenue has plunged.

State leaders won’t be able to ride out this cycle the way they have in the past. The budget holes are too large.

What will the US do when nearly every state government is facing Greek-style deficits?

According to an RBS note to its clients, prepare for unprecedented money printing.

From the UK’s Telegraph:

As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on “monster” quantitative easing (QE)”.

“We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable,” he said in a note to investors.

Societe Generale’s uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the “stinking fiscal mess” across the developed world. “The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant,” he said.

Barnaby Joyce began warning about a bigger GFC in October last year. No one wanted to listen.

He was roundly ridiculed by the “experts” – such as the genius academic who designed the controversial RSPT, Treasury secretary Ken Henry – for suggesting the possibility that the USA could default on its massive debts.

The simple fact is this.  The USA is defaulting on its debts.

Printing money (euphemistically called “Quantitative Easing”) is technically a form of sovereign default.  When you cannot pay your debts, printing money devalues your currency, and makes it easier to pay back your debts.

It also means high inflation.  Possibly hyperinflation.  Think Weimar Germany in the 1920’s.  Or Zimbabwe today.

Barnaby is right.

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Henry “Dumb”, “Completely Mad”, “Naïve Greenie”

24 Jun

In the wake – literally – of former PM Kevin Rudd, Mike Mangan at Business Spectator predicts the death knell for the RSPT:

The Labor leadership spill ensures the resources super profits tax is dead. While the RSPT started as an investment theme, it’s now just politics…

This (the RSPT) would have to rate as one of the dumbest political moves since Chifley tried to nationalise the banks 60 odd years ago. Labor nick-named Mark Latham “crazy brave”. But I doubt even Latham would have tried this one on…

Happily, Mangan goes on to join the rumblings (that were started right here on this blog back in February) calling for the sacking of Treasury secretary Ken Henry:

Former Labor senator Graham Richardson said earlier this week the miners are now spending a million a week advertising the stupidity of this “super tax on profits”. And he concludes “their ads are 50 times more effective than the government’s ads”. What was Rudd thinking? Who was advising him?

Enter stage left: Ken Henry.

Although Rudd has since rejected the idea, on Monday Rudd’s Treasury Secretary helpfully suggested the RSPT should be extended to all industries, especially banks and retailers. I think there are three possibilities here. Ken Henry is either politically dumb, gone completely mad or he is a secret admirer of Tony Abbott. Surely Kevin Rudd had enough enemies without adding two of Australia’s largest industries to that ever growing list. There is another possibility. Henry is just a naïve greenie. Reportedly he partly drafted his tax review while caring for northern hairy-nosed wombats in central Queensland. Too bad wombats don’t vote.

The spill result is great news for investors, because the mayhem Rudd unleashed over the last six or so months will cease and the RSPT in particular will be consigned to the history books with him. And I strongly suspect Secretary Henry won’t be too far behind.

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McKibbin For PM 2010

23 Jun

Long something of an outsider – the lone outspoken voice of reason and commonsense on the otherwise “reserved” board of the Reserve Bank – Warwick McKibbin has again spoken out.  He has accused Rudd of panicking, and wasting huge sums of taxpayer money.

Who’d have thought!

From the Sydney Morning Herald:

A prominent university economist and member of the Reserve Bank board has delivered a scathing critique of Kevin Rudd’s response to the global financial crisis, saying his government ”panicked” and ”rammed through” decisions fraught with risk.

Warwick McKibbin, of the Australian National University, accused the government of overspending on its stimulus package, and then coming up with ”a really badly designed resource tax” to try to compensate.

And he described the government’s planned $43 billion national broadband network as ”a gigantic white elephant waiting to happen”.

It gets better.

McKibbin also attacks Treasury secretary Ken Henry.

Readers of this blog will know our scathing views of Henry’s “performance” before, during, and after the GFC.  We have been calling for him to be sacked… a call that is only now just beginning to resonate in the Opposition ranks.  And in the economic commentariat too. Highly esteemed business leader and commentator Robert Gottliebsen recently said this:

The position of Ken Henry as the head of Treasury is not sustainable.

Here’s what Professor McKibbin had to say about Henry:

Professor McKibbin also took aim at fellow Reserve Bank board member and Treasury secretary Ken Henry, accusing him of not only failing to consult experts on economic issues, but of trying to silence them…

(Professor McKibbin)… has told The Age he was stunned by Dr Henry’s call this week for academics to ”put down their weapons” and stop nitpicking over government proposals such at the emissions trading scheme.

”The ETS was a flawed scheme. Had the government got it through it would be dead by now because of the financial crisis,” Professor McKibbin said. ”I have enormous respect for Ken Henry, but he can’t believe that you should have consensus because it is better to have bad policy that everyone agrees with than eventually get good policy that will work.”

Enough of Henry. Really … enough!

Back to Rudd / Henry’s rushed and bungled “economic stimulus”:

And in a damning assessment of the government’s stimulus package, he (McKibbin) said: ”It wasn’t evidence-based policy, they panicked. They put the money into school buildings, they put it in insulation, they put it in stuff they could never reverse.

”The government rammed those decisions through the economy even though they were fraught with risk,” Professor McKibbin said. ”No one was consulted about an alternative view, and if you did say anything you were attacked by the Treasurer and the Prime Minister in public.”

He also accused the government of overspending on the stimulus package and then deciding that ”because of politics they had to get their spending back so they could claim they had fiscal surplus – for which there is no economic basis, by the way.

”So they come up with a really badly designed resource tax to try and get the position to look good three years from now and, in the middle of a sovereign risk crisis, exposed the economy to a reassessment of sovereign risk.”

Warwick, we need you in politics.  You have my vote.

McKibbin For PM 2010!

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