Is the KPMG-report on the resource super-profit tax reasonable?

Last week, the Minerals Council Australia (MCA) came up with a KPMG report (download here) that suggested that the newly introduced Resource Super-Profit Tax (RSPT) would lead to many future mining projects being non-viable. This is of course a cornerstone in their scare-campaign about this tax and I had a look at the report to see what they did.

A preamble to this is that the timing and source of this report raises an eye-brow. I first presumed that KPMG must have some very fast modelers in order to be able to come up with a whole report on the effects of a new tax on new mines within weeks of the budget announcement of this new tax. It would be a testimony to how fast markets can generate research if there is a quick dollar on offer for it. However, this appears not to be a case of fast modeling. The research was commissioned way in advance of the budget. This is somewhat extra surprising if you reflect on the fact that KPMG also modeled the long-term consequences of the RSPT for the Treasury, as part of the Henry Review! At the same time, in the last months of 2009, they were apparently already modeling extensions of their RSPT models on behest of the Minerals Council Australia. Large sections of the report are hence devoted to explaining the differences which read a little forced to me. You can smell the guilt.

I doubt any formal codes of conduct were broken in terms of conflicts of interest, but I find it a little dubious that the same modelers are able to sell the advise to the Treasury that the RSPT will have no adverse long-term consequences whilst simultaneously selling advise to the MCA that there might be some negative short-run consequences. It is hard to see how you can conscientiously serve two masters at once.

I have the following quick comments to make about the content before turning to the main issue:

– The report nowhere gives you the actual models and codes used for the calculations. I could not find the code books either on the KPMG website, linked to within the report, or on the website of the MCA. It is hence very much a ‘trust me, I know what I am doing’ piece. Since these were the same guys as that did the calculations for the Treasury, they probably did know what they were doing, but it would be nice to have independent access to the data and models, and I gather from the introduction that the MCA could give this information out if it wanted to.

– The report is highly selective in terms of what it chooses to calculate and highlight. It doesn’t tell us what the RSPT would do to the Net Present Values (NPVs) of all possible future projects, but only talks about the NPV of the second quartile of profitable projects. This is of course because the first quartile will go ahead anyway and the third quartile will probably see increases in NPVs due to the cost-sharing in the RSPT. It loads the dice towards the negative to focus on only 25% of all considered future projects.

– The report leaves out the effects of all existing projects, at least in its headline treatment. As Chris Richardson pointed out in his presentation on June 3rd to the Minerals Council, existing projects will probably start to see more intensive mining activity because of the reduction in output-taxes associated with the RSPT increases the incentives to produce more at existing mines. This is also implicit in the KPMG report, but the finding that in the next 2 years mining activity should increase is not highlighted at all.

– Trying to make the argument that the RSPT leads to high overall taxes by international standards, the report compares effective tax rates under the new regime with existing tax rates elsewhere. The crucial questions are of course which commodities the comparisons are made to. In choosing comparison commodities, the report leaves out oil which is more heavily taxed than the mining industry would be under these changes (but where production and investment in oil exploration haven’t suffered in the slightest despite these high taxes!), but leaves it to a side-note on page 30 to mention this. Since mineral production is becoming more profitable, it is not at all strange to compare the future of mining with the present treatment of oil, since both involve exploration, investment, and production phases.

– The report itself mentions that long-term effects of the RSPT should be positive for mining activity (a similar point is made by Richardson).

– Computed internal rates of return look very healthy for all types of mining under the RSPT, something given little attention to.

– All these highly selective choices already make it clear that the report, and in particular the summary, is indeed not an objective appraisal but a piece of propaganda that was bought for a reason. The newspaper headlines ‘KPMG report shows miners are going to be ok the next 2 years and in the long-run’ clearly is not what the MCA wanted others to get from this report, even though such headlines would be warranted by it.

Then, to the true matters of substance.

The main thing the report does is to calculate how much profit future projects will make under the existing situation compared to with an envisaged implementation of the RSPT. New projects are presumed to consist of a certain amount of start-up costs, ongoing equity costs, and various yes-no decisions along the way as to whether a mine is taken into production. The key assumptions in coming up with Net Present Values of projects surround the costs of equity and what the RSPT will do to the cost of equity.

The main ‘trick’ employed in the report is to envisage new projects as having to borrow its equity at the same rate as the historical returns to equity. Concretely, for 4 out of the 6 minerals looked at, the presumed interest rate that has to be paid on equity is 15% (plus or minus a half percent), whilst the RSPT is presumed to pay back losses at the end of a 30-year old project using the long-term bond rate as an incremental factor.

It is crucial to see the basic sleight of hand involved here: because new projects are constrained to take 30 years (whether they fail quickly or not), the pay-back on losses implicit within the RSPT in their models is going to be almost nothing compared to the costs of equity, simply because one dollar spent in year 1 on equity needs 66 dollars of return after 30 years, whilst one dollar of RSPT off-sets (presuming a 4% long-term bond rate) is worth no more than 3.24 dollars in pay-backs after 30 years! Hence, by assuming huge discrepancies in the costs of borrowing equity versus the value of RSPT off-sets for losses, the report effectively presumes that the government pays back almost nothing in the case of losses, reducing the RSPT to higher taxes in case of positive profits. It is not hard to see how this might lead to large reductions in NPV if you focus on projects with some chance of going negative and some chance of making high profits.

How sensible is this assumption of 15% cost of equity and a 30 year wait until the government pays back some of the costs at very low levels of annual increments? They are completely unrealistic for two main reasons:

  1. The hypothesized cost of equity essentially derives (via a quick reference to CAPM calculations of the ‘Australian School of Business’, which is hardly an authoritative source on this since the empirical usefulness of CAPM is highly questionable. It tells you something if a report basis its crucial assumption on a nursery-rhyme version of the CAPM) from historical stock-market returns on equity, i.e. on what happened in the last 30 years or so. This is completely unrealistic because part of the reason for the tremendous growth in the stock market in the last 30 years is the huge relative increase in profits which cannot be repeated in the future (profits by design cant go above the threshold of 100% of output). Also, a lot of the stock-market return in recent decades came in terms of price increases, not dividend returns. No one expects the returns the next 30 years to be just as high. Even more importantly though, the stock-market return already contains a notion of return to risk and a sharing in potential high gains. This hence means the 15% is not the cost of borrowing at all, but the historical rewards for investments. For huge diversified companies like mining companies the valid cost of borrowing is not the stock market return, but rather the bond returns that large private companies have to pay in order to borrow money. Those costs are not even close to 15%. If we’d pick a more realistic cost of borrowing, say 8%, then the RSPT is going to look much better compared to existing taxation.
  2. Its the presumed 30-year wait in the report that makes the RSPT off-sets worthless. If these off-sets were immediate or even just took a few years, or could be transferred to other projects, they would be worth far more to companies. Hence the report’s compartmentalization of the RSPT to individual projects of fixed length is a pure rabbit-in-the hat conjuring trick (and I hedge my bets here by saying that this is how I interpreted the report. Since the code books are not to be found, I am best-guessing what the modelers actually did). As soon as you allow transferability across projects, which is entirely reasonable for any large mining company, then the RSPT is in many cases going to give you higher NPVs compared to the existing tax arrangements.

Hence, as far as I can ascertain, this report is guilty of double-dipping in terms of clientele, uses various assumptions that are far from realistic, and systematically highlights the worst case for the RSPT. In my own mind it carries a big sticker saying ‘some poor competent modeler was told to make up a set of assumptions that would help the cause of a rich client’. I am not at all surprised that the report carries the immortal phrase on page 2 that ‘neither KPMG nor any member or employee of KPMG undertakes responsibility arising in any way from reliance placed by a third party on this report’ which basically means KPMG washes its hands of the use of its report in the media and by opponent of the RSPT. I wouldn’t want to be held responsible for the content of this report either.

Author: paulfrijters

Professor of Wellbeing and Economics at the London School of Economics, Centre for Economic Performance

18 thoughts on “Is the KPMG-report on the resource super-profit tax reasonable?”

  1. Full disclosure Paul, I used to work for KPMG but do not have inside knowledge of this report. I have scanned it but have not read it in depth.

    I think you have a few misconceptions.

    1. This report appears to have been prepared by KPMG Corporate Finance (project finance people), which is a completely different arm from KPMG Econtech (mainly economists).

    2. It is true that this report does not disclose the full details of its modelling (presumably all this info is commercial-in-confidence). But then neither does the Econtech report. Indeed, Chris Murphy’s model is proprietary, no one can see the underlying code or even structure of the model. Closed-shop modelling is becoming a habit for Treasury. They won’t even share their CPRS modelling with other parts of the public service. (Even though their modelling benefited significantly from the openness of the Productivity Commission and ABARE.)

    3. Similarly, your criticisms of the assumptions used in the KPMG report could equally be applied to the Econtech study. Econtech were told by Treasury to assume that the RSPT had no deadweight losses. That’s a pretty important assumption!

    4. Although you are right to point out that the government’s tax credit arrangements would somewhat reduce the cost of capital, there is a legitimate debate about how much it would do this by. Econtech basically assume that the Government’s word is as good as a bond. I seriously doubt this. The KPMG study makes the obvious point that if this doesn’t hold, it is possible the tax will switch NPVs from positive to negative.

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  2. Having worked in Corporate Finance for many years and being a qualified accountant with an economics and accounting degree and currently studying towards a masters degree in international finance I feel I can speak with some authority on this topic. A lot of multinational businesses ( and I used to work for one for many years) when evaluating long term capital intensive investments use a 15 % return on equity assumption as a feed in discount factor into NPV models. You always assume full equity funding for any project as a starting point. How you actually fund it initially is irrelevant. It has to stack up on a full equity funded basis. If it does, adding debt to the mix only increases returns as debt comes with a lower cost than equity and its tax deductible. This decision methodology is based on the very simple but obvious realisation that a projects profitability in its own right has nothing to do with how it is actually funded and one shouldnt mix up funding decisions and project decisions. Your right the CAPM model is an overly theoretical concept although roughly speaking conceptually it is just a statement of common sense though with some fancy maths to back it up using correlations of security returns versus market returns , the more risk ( when compared to a diversified market portfolio), the more required return. Big corporates dont follow it though literally and go off and get beta factors and all that sort of nonsense that specificially measure an industry relative risk to the market. No one has time for that sort of stuff in the corporate world that academics do. At its core, to take on risk you need to be sure your potential returns are significant and there is some comfort level in there. You want to exclude projects that look marginal. This is why you use 15 %. You compound that over a few years and you can say why thats a big hurdle to get over, but business do it as the risks out in the real world are very big and need to be factored in. Most larger corporates therefore start with a simple rule of thumb, if a project can produce a positive NPV at 15 % discount rate, the project passes, and you go on to do more scrutiny and investigation. You fine tune your analysis and do even more investigation particularly of your other profitability assumptions. If it can’t reach 15 % on reasonable sorts of profit assumptions, it just gets canned end of story. This is why those of us who actually have work in corporate finance when we read the tax just laughed out loud. It was obviously thought up by Treasury boffins who have no idea how the corporate world works, most likely because they have never worked on my side of the fence. They have spent their whole life tweaking the silly models they have in treasury. Thats fine but when they start thinking they know more about how corporate finance works then business people who live and breathe risk every day , it shits me. You can get whatever result you want with their models by just tweaking the assumptions until the result you want falls out. They are a guide and anyone who starts justifying a tax in the real world , based on a Treasury model ( or anybodys model for that matter)answer, you should always be highly suspicious of. In the corporate world this is why we do sensitivity analysis as well. Any modelling without this is just a diaster waiting to happen. That is you publish tables that show that if i change this variable by these small increments how the overall result changes. This very quickly can tell you the veracity of the model and its assumptions and allows you to better quantify risk. The other bit that is extremely hard to model in macro-economic models of investment is the feedback effects between variables within a model and for this you need a myriad of assumptions with estimates for factors usually based on some sort of regression analysis. The net effect at the end is usually  a highly sensitive model that somehow has to factor in how a sane rational business person will react to being highly taxed as with this proposal and how this will impact on his decision to make long term investments in a highly risky world. Any model trying to capture that effect by using the risk free rate in any component of it is inherently floored to say the least. Calling a super profit anything over an above a 6% govt bond rate is ridiculous in the extreme. A model on estimating investment behaviour on these projects with this proposed tax has to model on these  businesses seeking circa 15 %, not 6 % as I can tell you no-one will model on 6 % in the real world in appraising projects. No one particularly post GFC will get debt from the capital markets at anything approaching 6% , and most project finance will have to be equity based coming from overseas markets. I can tell you those international capital providers if its equity will work on at least 15 % post tax, i know this as I have worked for them. I am sorry if all this sounds like I am supporting the mining industry but what they are saying is simply true. This tax will kill off investment in their industry. All these people making these technical sort of arguments about govt bond rates and values of tax credits are all just trying to make a dog of a tax semi credible. It aint fellows…….end of story. Australia needs international capital to carry out investment. Our big 4 banks simply dont have the capital to fund billion dollar plus investments on a  project finance basis. That means we need foreign capital and lots of it. It has always been as such in this nation. For most of the last 100 years we have run Current account deficits that have had to be supported by inflows on our capital side of the Balance of Payments Account. This is reality………and for such funding to flow means those investing in Australia need to have confidence in 2 things 1) the govt is not just going to change the rules when it feels like it to the investors  detriment, we used to have credibility here, although that is quickly evaportating and 2) there is a reasonable risk/ reward trade off. Taxing investment at close to 60 % is not a reasonable trade off. I am sorry labor party people, you can live in your little utopian bubbles, but in the real world of capital markets , it just does not stack up when there are alternative mining locations. Future investment will be extremely difficult and only very profitable projects will go ahead. Marginal projects will never see the light of day and those who think future marginal projects will be helped by this tax are living in a dream. Its not elegant, its just dumb. Furthermore it makes treasury’s future cashflow more cyclical and also more risky, and could expose australia to massive payments to mining companies if our terms of trade decline significantly in the future. Ken Henry’s job is to make future govt cashflows more secure, not less secure . Its craziness. This is why this modifed Brown Tax as he has proposed has never been adopted anywhere else in the world ………ever. Anyway enough said , I could talk all day why this is a dumb tax. It saddens me that in 2010 this is the sort of garbage that our Treasury department comes up with and then we have a government that gets in and tries to justify it with a whole heap of lies and deceit, and making the miners look like they are evil and nasty people ripping off australians. Australia has a choice, we can say ok, we want to continue to develop our nation, lets work togethor and give a fair return to all including a fair return to whose money we need to fund these investments for the risks they are taking, or we can miss the opportunity that these sorts of investments can bring to australia over the next 50 years. Foreign investment is a good thing in a nation particularly when it is developing resources and creating jobs and generating export income. This is what seperates us from countries like Greece who have plowed their foreigh borrowings into just more bureaucracy but nothing into their productive economy. Australia is taking a strong turn down the road of greece if this tax goes ahead in its current form.

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  3. Matt,

    the modelling part of the report is an addition to the work done for the Treasury, with a large set of very specific assumptions, meaning the same underlying model was used. The report says so itself. That needs the same analysts and the same knowledge base, where the checks were sent from two different departments within KPMG or not.
    Yes, I would advocate full disclosure with regards to the Treasury too. If I needed modeling support for the RSPT, I would find ample in this KPMG report.

    Paul Farmer,
     
    I love these finance types who tell academics they have no knowledge of how the real world works, whilst they in their ‘real world’ are using almost the same models and calculations. How on earth can you keep up the pretence to have a chrystal ball lacking in academia when at the same time talking about ‘stress testing, NPV, etc.’? Where do you think those concepts came from if not the halls of academia? Hence the disdain you display for modeling is pure fake.
    Then to the substance. As soon as you allow the tax-offsets for loss-making projects to be immediately transfered within a company to profit-making ones, the RSPT will come close to its ideal form, making the discussion about 15% versus 8% irrelevant. You seem to miss what I think is the main trick employed in this report, which is the presumption that the off-sets for negative profits are carried forward till the end of the project (30 years in the future!!!!) at the bond rate until the company gets it back. At least, that’s how I understand the assumptions of this report. That is where the real bite in this report is and where hence the differential rates gain their importance. Now, if we’re talking about projects that take 30 years for certain, it makes more sense to talk about the costs of borrowing rather than the return on equity.
    Otherwise, what you are essentially saying is that historically speaking projects need to have a 15% internal rate of return in order to go ahead. Whilst I doubt that rule of thumb will remain valid in the future, you can just read the report and work out yourself how more reasonable assumptions on the off-sets would easily keep most of these projects above that threshold.
    In short, your story of  ‘I am a man in the real world needing to tell those silly boys in Treasury and academia how they should keep their dirty paws off our money’ is not convincing.

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  4. Paul, Can I make the point that comparison to the petroleum resource rent tax is completely illogical? Since it’s introduction in 1987, the price of natural gas has more than tripled and demand from nearby asian countries has made it more than viable for hydrocardon producers to place more emphasis on the shallower waters of the NW shelf as compared to the North Sea and gulf of mexico, even ignoring the fact that the cost difference in exploring and producing in shallower waters as compared to deeper waters is gigantic. To postulate in this context that the introduction of the PRRT left investment decisions unchanged completely ignores the changes in these market fundamentals over the last 2 decades, and I believe that using this as evidence that future mining investment decisions may be unchanged is not feasible, unfortunately most pro-RRT people seem to be using it in their arsenal.

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  5. Very snarky response, Paul. This quote : “How on earth can you keep up the pretence to have a chrystal ball lacking in academia when at the same time talking about ’stress testing, NPV, etc.’?” is indicative of the problem you have. No one is saying that they have a crystal ball – that is the point! The Treasury forecasts have too many unrealistic assumptions and are not based on the same type of drivers as those who are prepared to fund the projects in the first place.

    Your fixation with the tax refund is another problem. One of the key considerations for debt financing is the net cash flow position. No provider of debt financing is going to be jumping for joy at lower net cash flow from operations which this tax will impact. Furthermore, the tax refund thingy (how will this work out in practice is a good question) is useless because people do not fund loss-making projects with debt capital. They will fund projects with strong and sustainable cash flows. Asking them to rely on a tax credit or whatever ignores how financing is raised in the first place.

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  6. WTuckeyforPM,
     
    the comparison with Petroleum is of course not perfect in that we cannot yet be guaranteed that the boom times will hold for mining in the next 20 years, so in that sense I agree with you. As a natural resource that is heavily taxed and that involved exploration and a long life though, Petroleum is very akin to mining though. So is the increase in taxation as the profits are growing. And the RSPT is not all that different from various profit-sharing taxes on petroleum.
    As to investments, the point about Petroleum is that I dont know of accepted and replicated studies saying that new projects in oil exploration and usage were axed due to greater grabs of the profits. But that may be untrue. Do you know of such?
     
    Sean,
    the NVPs on the highly selective subset (!!!) go from higher than current to close to zero depending on the precise modeling assumptions of the tax-offset. I tried to point out how the KPMG report relies on ridiculous premises (the fixed 30 year wait, plus the inability to off-set within companies) to get at the outcome its paymaster wanted. What you call the ‘tax refund thingy’ is absolutely crucial for the sleight of hand being committed here and is not the afterthought of the investment decision at all.
    Of course, the RSPT is designed to grab more of the profits and hence increases the effective tax rate, so in that sense you are right that those who would otherwise get the additional profit have something to squeal about, but the number of projects that would go into negative NPVs would seem very low under the current proposals.
    Real world businessmen in general stand to profit from the RSPT since it reduces company taxes. As do the miners. The ones who lose are the big stakeholders.
    As to being snarky about Mr Farmer, I was being polite.

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  7. Well, if the financiers squeal then there will be less funding for Australian projects since other projects will have larger comparable returns. Banks will sensitise not receiving the tax credit (the mythical ‘thingy’) and that will form part of their decision to invest or not. In effect the lower net cash flows, lower cash reserves, downside problems of inability to “sell” the debt to fund management groups will all have a greater weight in decision-making than a tax offset.

    The key determinants of funding projects are not as symmetric as the Treasury would assume.

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  8. So Paul Farmer – who seems to be unfamiliar with the concept of the paragraph, let alone the more sophisticated elements of corporate finance and tax theory – thinks that the RSPT will turn us into Greece.
     
    Is that a Greece that I am unfamiliar with, one which has unlimited mineral resources lying untouched because international capital is scared off by punitive taxes?  Or the more familiar Greece, which has huge government debt because of a culture in which powerful vested interests manage to avoid paying their share of tax?
     
    @Sean: now that is snarkey.

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  9. Thank you for the couple of criticisms you have made of my argument . Criticism is good as it encourages debate. Firstly I am not having a go at academics at all and if anyone got that impression or is an academic I am sorry. I just re-read my comment pertaining to academics and it was that those in the corporate world dont have time to do the highly technical stuff that is done in academia. I didnt think that was a criticism to be honest. Obviously all of corporate finance principles were developed in academia.

    My criticism was more directed at the Federal Treasury. There are far to many economists in that institution who in my view whilst being technically brilliant often could do with a dose of real world experience. 

    The mere existence of this tax with all its complexity ( and look at all us professionals arguing on a site such as this shows its complex )it is so at odds with encouraging investment in the real world. I therefore  can only unfortunately conclude it must of been dreamt up by someone who has never worked in private enterprise. I would like to be proved wrong on this point but somehow I dont think that will occur.

    The essence of my argument is at some point  in the application of these principles to the real world, one must move from the theoretical . Real human beings have to abstract to make sense of all the complexity of our world. This is why the corporate world often works with  heuristics (rules of thumb) like 15 % IRR as a starting point. 

    Sean who came to my defence summed up my rationale perfectly when he said ;

    The Treasury forecasts have too many unrealistic assumptions and are not based on the same type of drivers as those who are prepared to fund the projects in the first place.

    Paul, I have read your critique and for me as long as no financier is putting any value on the tax-offset I can’t see it being valid to even consider it other than in the world of models.

    That gets us back to the starting point that no model will properly capture how ugly this tax will be in detering future investment because you have taken an axe to the risk reward ratio.

    Trying to cut to the heart of your argument, I think your saying that by virtue of the government being a sleeping partner in the project, and bringing with it soverign status the required return could move much closer to the risk free rate or some weighted average thereof.

    Again I have no problem with your argument and in a technical sense you are right. Its the same as Henry’s argument that you could have the RSPT at 90 % and it wouldnt deter investment. Both of you are right but in a very pure model sense.

    In a technical sense you are just moving yourself along the ‘Security market line” in line with the fact you now have lower cost financial support from the Government which affects the weighted average cost of capital for the project.  My concerns lie outside the realms of that model in the real world though.

    My problem in part is that businesses just wont look at the tax through the same lens but rather will remain very pissed off in that this is  effectively expropriation or a diluted form of socialism. Future investment will just vanish unless they perceive it to be super profitable. Net future investment will diminish. 

    Capital is not infinitely available so investors will direct it to those with the highest returns and lets hope some of those projects remain in Australia.

    If capital were basically limitless this tax would make a lot more sense as you could roll the dice on many projects knowing the government will be there picking up the tab if it fails. I might only make 42 % of this project which knocks the stuffing out of the return but hey I will just invest in many more projects and make up what i have lost with the volume of projects I take on.

    Slight problem in this logic is that there simply isnt enough opportunities in Australia and the capital would need to be vast. Again it isnt, so another real world disconnect. Furthermore even in that theoretical environment you would just introduce a bubble, creating a rush for exploration permits and in the long term encourage over-capacity through mining of marginal ore bodies through over investment. This would lead to significant loss making the very thing now you are picking up 40 % of and hence the thing you want to avoid.   

    The other philosophical concern is that this tax will undermine the long term fiscal stability of the nation. The government has decided hey these resources are worth a fortune, therefore we are effectively now nationalising a large part of them. We dont reckon fellas there is much risk in mining those resoures anymore and we want our share of the profits.

    This line of thinking  is based on the last 10 years of boom history against a backdrop of the last couple of hundred years where mineral reasources have boomed and busted many times over. Inherent in this philosophy is that there wont be another bust period coming.

    Unfortunately even if China’s demand stays strong even for the next 50 years, ultimately the mining industry will over expand more in capacity globally then it should due to the sheer lumpiness of these longer term investments. The result will be mineral prices will likely fall in the future and possibly substantially, due more to supply factors then demand factors. 

    I can’t see the future  but nor can Treasury but Treasury’s role  is not to be in the game of project financing mineral developments. That role is better left to the private sector unless there is some major private sector or market failure such that no investment capital is available for that sector and it is in the national interest for that sector to develop.

    Ironically this RSPT may cause a lack of investment capital in the sector justifying its mere existence.
    Seriously though until this tax there was no shortage of capital available to this sector, provided they could demonstrate reasonable risk adjusted returns, so there is no reason in my view for the government to be compulsorily project financing 40 % of every project now.

    If the Govt was dead serious about this tax from a risk evaluation perspective they should be modelling how big a hole there would be in government revenue if a major collaspe in the terms of trade should occur in the future. This shouldnt be hid away from the public if they have done it, it should be on the table for discussion as the public should know what the risks are, that we collectively as a nation are getting into with this project style tax where we are sharing in the losses.

    Hey the government is going into business here with this tax, there is no avoiding that if your ‘technical arguments are right”. That means a sensitivity analysis of the top and bottom fellas, and since the government is the ‘public’ that should be ‘public’ knowledge. Lets put all the cards on the table.

    Bear in mind too if things go to hell in a hand basket, right when you need treasury to supply fiscal stimulus to the economy in a time of major downturn it could be bleeding from paying out failed mining ventures. That could see Treasury in the bond markets even borrowing more money crowding out private sector investment at a time of economic downturn.

    So you arrive at the strange thought that here we have our Big 4 banks and all banks globally expected to face a new era of tigher financial control post GFC with more regulation from Government to reduce systematic risk to the financial system and yet here we have the Australian government diving head long into being a project owner and financier for about the most risky industry on earth. Its hardly the policy of a fiscally conservative government, which labor have stated they are. So I am confused !

    But this tax debate is good because it raises a much bigger philosophical question . Should government be involved in risky business ventures or should that be left to the private sector ? Personally I thought that question was answered some time ago but it would appear not.

    The second question is, if it is left to the private sector, then what risk / reward ratio is fair and reasonable ??? Unfortunately in this debate the government , with its eyes so mesmerized by the potential tax revenues up for grabs answered the second question before it answered the first. My argument is the government should not just avoid the first question. We owe it to future generations who may cope the raw end of the stick in the future when mineral prices have declined to address it.
     
    Ultimately you can see why this argument goes beyond economics and start to become political. This sort of question about the direction of government in this nation needs to be decided by the people at the electoral box because it is a fundamental shift in government philosophy out of step with all the work done over the last 30 years.

    Dave : my argument about Greece is simply that they are a basket case because for many years they have not invested in their productive economy. They have put social investment ahead of productive investment which is evidenced by the size of their bureaucracy. Now they are in a hole and have no export economy with which to drag themselves out of the hole while they implement their austerity cuts.

    Our economy thankfully is substantially different to a large degree because over the last 30 years in this nation we have made significant micro-economic reforms, improved productivity in the workplace and had labour and capital working togethor. We shouldnt forget floating our exchange rate and deregulating the financial system either. Both labor and liberal governments have made significant contributions.

    We are very much dependant on international capital though for our sustained growth. That equation has not changed. The Balance of Payments position of Australia is irrefutable evidence of that. Therefore we need to keep the risk/reward ratio reasonable or otherwise we put the cart before the horse in my view and we will frighten off international investors. Greece is nothing like Australia but they are guilty of putting social objectives way in front of economic objectives and now they are paying the price.

    This is a salutory lesson that social equity is best achieved in the longer term through good economic policy that encourages long term growth and private risk taking not policy that is short sighted with potential high revenues now in boom times for the government through a risky tax grab with little thought given to how things will wash up in bad times for the government now that it has moved into risk based investment as a means of raising tax revenue.

    Should be an interesting next few months……….

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  10. I am a retired public accountant and would love to see a hypothetical worked example of how the new mining taxes work -with assumptions clearly stated . Then, it would be nice if this example could be followed by a comparison with the current level of tax payable by the same hypothetical company.    Can anyone help please?    Denis Todd

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  11. Paul,

    It is just one of those times when the gulf between market practitioners and government/academics is too large to breach!

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  12. The mere existence of this tax with all its complexity (and look at all us professionals arguing on a site such as this shows it’s complex)…

    I disagree that the RSPT is that complex. I think it was mostly just poorly explained to the general public. The actual TAX is fairly simple, both in its definition and its model. Of course it may be complex in its EFFECT… but that is true of ANY tax… even the simplest!

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