Twiggy’s sticking to his MRRT story, so it’s time for a miner history lesson

Will Andrew Forrest succeed in his push to change the mining tax? Others have succeeded in the past. AAP

Andrew “Twiggy” Forrest’s visit to Canberra earlier this week didn’t prove particularly effective in swaying the government on its freshly drafted mineral resources rent tax (MRRT) legislation.

But the Fortescue Metals Group boss could be forgiven for seeing the Gillard Government as open to persuasion on the way it taxes Australia’s booming mining industry.

After all, the MRRT draft legislation, which was released on Friday, represents a compromise between the government and the big three mining companies on the much more severe resource super profits tax.

Amid long-running debate on this tax, it is easy to lose perspective on the historically fraught relationship between state and federal governments and the big miners.

In recent months, the debate has been further clouded by a move by the Western Australian government to raise iron ore royalties. The Federal Government, keen to protect its fragile relationship with miners and maintain the centralising drift in taxation, has retaliated with a threat to cut WA’s share of the MRRT.

This is a tiring and arcane debate that can only really be properly understood within the context of a 50-year struggle between the states, the Commonwealth and the miners.

The time has come for a history lesson.

Digging deeper

This is too long a story to tell in full, but it is worth looking at the start and comparing it with where we are now.

We see a history of governments posturing before mining companies, but the mining companies consistently coming out on top.

But first, we need to clarify some terms in relation to mining: rent, royalties and taxes.

Rent is a confusing one. Rent on land is a payment for the occupancy of land, with a premise that the attributes of the land will not decline by its use.

It is a minor issue in our context. But there is a distinct concept of “economic rent” central to the current mining tax debate. Economic rent refers to a surplus return: profits in excess of what is required to keep a mining company operating as it currently is.

Royalties, on the other hand, are paid for the extraction of minerals in the land deemed to be in fixed supply. It is useful in this case to think of a mine as being like a warehouse, with the mining company paying for products it extracts from the warehouse.

In iron ore, the largest and most famous royalty accrues to Hancock Prospecting, founded by Lang Hancock and now run by his daughter Gina Rinehart.

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It is the cornerstone of her enormous wealth. Hancock had staked the original Hamersley lease in the 1950s and sold it to Hamersley Holdings for a percentage share of mine revenue: a private royalty.

Taxes are, of course, payments to governments. Different forms of government revenue can have more or less tax-like attributes.

Where a government owns the land, rent on the occupancy of land may appear as a tax.

Where a government owns the mineral reserves, royalties will appear as taxes. And of course, governments levy taxes on profits, including taxes on surplus profits or economic rents.

It is important to be clear that the sort of rent referred in the Gillard Government’s mineral resources rent tax is a surplus profits tax. It is not related to the common concept of rent, nor is it a royalty.

These categorical distinctions are contentious – as are their policy ramifications - but they are also critical.

An immediate problem here is the nature of the Australian federal system, for it is contestable as to which government has rights to tax the surplus revenues that arise from high global mineral prices and associated high mining company profits.

The federal government has a claim over a profits tax, while state governments have claims to royalty payments.

So the important question to ask is: are mining profits high because of something inherent in the mineral deposits, or because of something in the efficiency or market power of the mining companies?

If the former, it looks like high profits are the subject of state government royalty claims. If the latter, then they are rightfully in the zone of federal income tax.

Breaking ground

It is not my intention to adjudicate here, but merely to reintroduce some historical evidence that is germane to the debate.

In 1938 the Federal Government imposed an embargo on iron ore exports in the belief that Australia’s deposits were tiny. They needed to be kept for domestic needs and away from the Japanese war machine.

But the discovery (though perhaps the correct term is rediscovery) in the 1950s of massive iron ore deposits in the Pilbara changed Australian mining dramatically. With the deposits confirmed, the export embargo was lifted by the Federal Government in 1960 and the government of Western Australia proclaimed the Pilbara open for business.

This year is the 50th anniversary of the first granting of mining rights to Pilbara iron ore.

With mineral deposits owned by the Crown (state governments), the establishment of iron ore mines occurred only by agreement with the WA government .

Moreover, by its ownership of the deposits, the Crown was at liberty to charge a royalty on extracted ore. Indeed, it can be argued, this is not a liberty, but an obligation, for once ore is extracted, it is an asset forever lost to the Crown and, thereby, the people of WA.

Each of these agreements took the form of an act of WA Parliament. In 1963 and 1964 there were five such acts, giving approval for five new mine sites.

Each included royalty payments to the WA government.

These initial agreements specified low royalty payments on output, and instead required the companies to provide all their own infrastructure – mining towns, railways, ports, and so on.

While presented as a demand on companies, the investments could be written off against income tax. Moreover, the outcome of this was that the companies held monopoly rights over rail and ports, with the capacity to set high freight and port prices for later-entry mining companies.

These initial agreements also required mining companies to undertake certain commitments to process iron ore in the state.

The WA government was intent on securing a process of industrialisation, not just a string of quarries. It believed, rightly or wrongly, that the building of processing plants and steel mills, more than payments into state coffers, represented the long-term interest of WA.

The specific terms of these agreements involved the greatest obligations of processing on those ore deposits which were recognised to offer the largest prospective profitability.

With the deposits claimed by Hamersley (Mount Tom Price) and by the Mount Newman consortium (Mount Whaleback) recognised to be the most valuable, it was these two projects which were committed to the most extensive programs of mineral processing.

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Each was required to establish secondary processing, such as concentration or other benefaction, within WA within 13 years of the commencement of iron ore exports. They were also required to submit plans for the establishment of an integrated iron and steel works in WA within 20 years.

By contrast, the agreement with Mount Goldsworthy required only secondary processing and “additional upgrading or benefaction”. The Robe River project required only a pelletising plant, while the agreement with Western Mining for the small and low grade Tallering Peak mine made, in effect, no processing requirements at all.

Of course, these processing requirements were not what the mining companies wanted. It was effectively the cost of getting access to the huge profit potential that lay beneath the ground. Accordingly, the construction of processing facilities was undertaken reluctantly.

For the Mount Newman project, these obligations changed once BHP joined the project in 1966.

BHP agreed to take Mount Newman ore for its own iron and steel making operations at Kwinana, an industrial area south of Perth.

As a consequence, the Mount Newman consortium was released by the WA Government from any processing commitments. Quite why this was a good deal for the people of the state is hard to see, but it was likely part of a concessionary deal to get an Australian company, BHP, in as a player in Pilbara iron ore.

This was back when the nationality of companies mattered (although BHP had yet to claim the title “the big Australian”), but the Pilbara developments were out of the league of so-called “Australian” companies.

It sounds strange today, but back then BHP lacked investment capacity, and the processing concessions were what made BHP’s entry attractive to the other Mount Newman partners.

With the Mount Newman consortium freed of obligations, it was Hamersley, majority owned by Rio Tinto-Zinc, via its Australian subsidiary CRA, which faced the highest processing obligations.

It had a pellet plant running in 1968. But a steel plant never eventuated and perhaps it would have been a waste of investment anyway.

Lang Hancock knew it at the outset. His royalty payments didn’t begin until extracted ore was sold, so he was keen to see the WA government appeased.

He claimed to have told the Chairman of RTZ, Sir Val Duncan, that Hamersley had to promise the WA Government a steel mill.

According to a biography of Hancock, he once declared, “It would never matter a bugger if it never turned a wheel; he’d still come out on the right side of the ledger”. It is as sharp a statement as you could want to illustrate just how low the government royalty was set.

Troubled beginnings

In retrospect, the tax fight between royalties, local processing and national corporate taxation revenue was already fierce by the mid 1960s.

It seems the mining companies played the governments – state and federal – for novices and fed off the conflicts between these different levels of government.

The companies got the low royalties and the tax concessions on infrastructure development, but the down-stream processing didn’t occur as agreed. And what did occur didn’t last.

Instead, the mining companies have become highly profitable, the federal and state governments have taken but a modest share of revenue and, in iron ore, the “big Australian” title now rests with Gina Rinehart whose wealth base is not production of ore or mineral processing, but merely receipt of royalty payments.

Perhaps it is too late to reevaluate the initial deal and challenge the terms on which iron ore companies have, for almost 50 years, accessed publicly-owned wealth.

While the companies themselves have changed a lot in 50 years, it seems to be too short a time to discern a change in relations between mining companies and governments.

Throughout it all, this is a story is of mining industry profits underwritten by governments – a perspective lost in the analysis of the MRRT and the current standoff between the federal and WA governments.