A resource rent tax question

As it is one of the few things the Government is actually doing from the Henry Review, the Resource Super Profits Tax (RSPT) is a focus for much discussion. Henry Ergas worries that the Government can’t be trusted to keep from adjusting the tax in the future and that mining companies will have diminished incentives to hold costs down. But the discussion fails to consider the elephant in the room: what if mining companies have market power? (And a quick disclosure, I have consulted for FMG in its rail access matter against BHP and Rio although everything I am writing here are my own views only and here I talk about theory rather than anything that necessarily to do with that).

Philip Williams and I wrote many years ago about this issue (here and here). We argued that when it comes to independent exploration, if a mining company owned some key infrastructure assets (such as rail and port facilities) that were very costly or impossible to duplicate, then they could effectively tax the upside profits of the explorers in the form of higher rail haulage charges or alternatively low asset value for the rights to mine a particular prospect. It is interesting to note that this is precisely the same risk that Ergas is worried that the Government might impose on mining companies. My point is that this risk is one that potentially already exists in the market.

And what does this mean for the RSPT? It all depends on how rail and other infrastructure expenses are deductible. From my reading of the Henry review, these will just be deducted at cost — although as the tax is on a project by project basis, this immediately opens up the thorny issue of common costs. But that will mean that mining companies who own infrastructure assets have a double incentive to raise charges for the use of that infrastructure. First, it is not subject to the additional tax. Second, it establishes a means by which they might value those costs within the vertically integrated firm. In theory, with a bottleneck infrastructure, the mining companies could shift the rents there and avoid the tax itself. (And that is without even thinking about how costs are calculated). So Ergas is worried about the unions getting more but the same issue applies to costs ‘owned’ by mining companies whose value is arguably related to the value of the underlying resource.

This all becomes easier if infrastructure assets have access prices at a competitive benchmark. The good news that there are open access regimes around the country and so there is a means of doing this. Moreover, in the future, such regimes may emerge out of the regulatory process although that has been and will likely continue to be a lengthy one. Put simply, if regulation resolves the market power issue then this will make the RSPT work closer to its intention.

1 thought on “A resource rent tax question”

  1. We argued that when it comes to independent exploration, if a mining company owned some key infrastructure assets (such as rail and port facilities) that were very costly or impossible to duplicate, then they could effectively tax the upside profits of the explorers in the form of higher rail haulage charges or alternatively low asset value for the rights to mine a particular prospect. It is interesting to note that this is precisely the same risk that Ergas is worried that the Government might impose on mining companies. My point is that this risk is one that potentially already exists in the market. You are not serious, surely? Joshua, did you and your friend ever ask the question , where did the original rail and port faculties came from in the first place? Who paid for them and why would you expect the second player not to incur the same capital costs as the first if your really comparing? Lastly that is not what Henry Ergas is arguing at all. You have completely missed his point.

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