Tuesday, 8 November 2016
Western Australia: Taxation
Mr Deputy Speaker Hastie, it is good to see you in the chair. I am sure you share my grave concerns about a recent tax proposal in our home state of Western Australia from the WA Nationals. I would like to make the point that I certainly do not include my federal National Party colleagues, our coalition members, in the comments that I am about to make in this speech. As you know, the WA Nationals are seeking to create a new revenue source by increasing taxes paid by the state's largest iron ore producers, BHP Billiton and Rio Tinto. The policy sends a negative message about government intentions at a time when we should be encouraging investments in our home state.
The WA Nationals' proposal to increase the 25 cent per tonne rental on production of iron ore ignores the basic principles of economic responsibility. Recklessly pursuing a new revenue stream through higher taxes is a dangerous proposition in the current climate within Western Australia, but the implications of this policy go beyond the short-term effects. The core values that encouraged investment and brought years of prosperity to Western Australia are at risk. We should all be deeply concerned about the message Brendon Grylls is sending to the world and the way in which he seeks to betray Western Australia to both domestic and international investors. By signalling his intention to unilaterally alter state agreements, Brendon Grylls has made a statement to WA's current and future investors. Since the WA Nationals revealed their plans, much has been said about altering state agreements. Although the WA parliament does have the legal authority to amend state agreements, doing so would set a dangerous precedent.
To focus solely on the legalities of such a policy would be short-sighted. There are some longstanding principles at stake. We must consider the impact this kind of approach would have on the state's reputation. It is because of the capacity for state agreements to be altered within the parliament that the government must demonstrate it can be trusted to honour its negotiations with the private sector. A state agreement is intended to represent a clear market signal to investors of the state's support for and commitment to a project, reducing sovereign risk. State agreements exist to encourage development of the state's natural resources to generate economic benefits.
Negotiating and ratifying a state agreement is supposed to be an indication of trust and faith between the State government and a private party. It is an acknowledgment of a mutually beneficial development. It is a promise of stability and consistency for an investor seeking to develop a project that will create jobs and stimulate the economy. An investor's commitment hinges on the guarantees provided by state agreements, which will help reduce the risks associated with developing a project over several decades.
Brendon Grylls's belligerent attitude to the guarantee provided through state agreements is sending an alarming message to would-be investors in the private sector. He has gone after the two major iron ore producers, arguing that the miners need to start paying their fair share of tax. Clearly he thinks the two companies are falling short of the mark, notwithstanding that, collectively, BHP and Rio paid $5.2 billion in company tax in 2015, $3.2 billion in 2014-15—which represents 65 per cent of all minerals royalties paid in WA—and $259 million in other state government taxes. But it would be a mistake to think that only BHP and Rio Tinto would be affected by the WA Nationals' tax increase. In the short term, the policy might only pose a risk to the two iron ore companies and the thousands of Australians they employ every year. What Western Australians should be extremely concerned by is the image of our state that Brendon Grylls is promoting. We need investment. We need to encourage new projects to create job opportunities. But sending a clear message of sovereign risk to investors and threatening our reputation as a safe place to do business is simply bad policy in the current fiscal environment.
The apprehension felt by the private sector is extending beyond BHP and Rio. Companies operating in my electorate of O'Connor are getting nervous. Bill Beament, the managing director of Kalgoorlie-based Northern Star Resources, spoke of this sentiment last month. In reference to Brendon Grylls's proposal, he had this to say:
The stuff that is going on in WA at the moment is just disastrous …
Northern Star's register is half offshore owned, pensions funds in North America starting to dip their toe in … And stability is something they require to make these long-term decisions. Not making policy on the run—it's death by a thousand cuts when we're changing policy all the time.
I note that Northern Star has been one of the most successful companies operating in the WA goldfields in recent years. Companies that have ridden the price slump and looked to acquire new projects through times of hardship have softened the blow of poor commodity markets. Discouraging their financial backers from further investment in WA is something that we, as a state, simply cannot afford. Mr Beament's comments were echoed by St Barbara chief, Bob Vassie, who said:
…people underestimate how much of a bit of uncertainty in tax competitive, or changes in regulations, disrupts what investors and explorers choose to do …
Just last week, it was reported in the media that two Chinese steel companies had requested an urgent meeting with Western Australian Premier Colin Barnett out of concern over the WA Nationals proposal. Sinosteel Australia and Baosteel Resources have labelled the tax increase a sovereign risk for any Chinese company operating in WA.
Already, we are seeing threats to new development because of Brendon Grylls's attitude towards the guarantees outlined in state agreements. A huge part of my electorate includes the WA goldfields, where encouraging exploration is vital to driving economic activity. It is no good for anyone to see dozens of drill rigs parked in West Kalgoorlie gathering dust. We are at risk of signalling to investors that exploration in WA is a risky business, fraught with unpredictability and driven by inconsistency in government policy.
Of further concern is the fact that the WA Nationals have left none of the 60 state agreements off the table. At its state conference in 2015, the party passed a motion to review all state agreements in WA. This is now enshrined in the party's policy platform, and creates a worrying question of who might become their next target. The 25c production rental that Brendon Grylls wants to increase applies to all iron ore miners in WA that have been in production for more than 15 years. Cliffs Natural Resources joins BHP and Rio as one of the three companies that pay this fee at present, though they have not yet been on the WA Nationals radar. In September, Cliffs received the green light to expand their operations at Koolyanobbing, west of Kalgoorlie-Boulder. The new project will allow the company to continue producing and exporting more than 12 million tonnes of ore per year through the Esperance port.
This company supports about 650 jobs directly and 1,650 jobs overall. The revenue to the state government through existing royalties, port fees and other taxes is significant. The diversity it brings to the goldfields economy is invaluable. The ore in the Yilgarn region of the goldfields is of lower grade and quality than the hematite ore found in the Pilbara, creating a challenging business climate for mining operators in the Yilgarn. The iron ore price may have bounced back from the absolute depths we saw it descend to in the last 12 months, but commodity prices are still low.
It is inappropriate that, at this time, the WA Nationals are sending shockwaves through the mining industry with their attack on this sector. Brendon Grylls has sent a message to the resources sector that a state government at any given time may exercise what he sees as a statutory right to change the clauses in any state agreement. Clauses agreed upon by two parties on the back of negotiations between the government and the private sector enshrining contractual arrangements are no longer safe from ad hoc alterations. Mr Grylls argues his 25c fee is outdated, and that no-one has sought to modernise this clause in 50 years. But there are some critical flaws in his argument. One is that the tonnage of iron ore produced in the Pilbara by BHP and Rio has skyrocketed over the last decade to 600 million tonnes, meaning that revenue from this production rental has dramatically increased one hundred and twentyfold from the five million tonnes of production annually in the 1960s.
The other glaring deficiency in Mr Grylls's argument is that the state agreements he refers to were modernised in 2010. The concessional iron ore royalties payable by BHP and Rio rose from 3.75 per cent to 5.625 per cent in 2010, and were later harmonised with most iron ore royalties at 7.5 per cent. The two companies also made a one-off payment to the state government of $350 million during the alterations made to the state agreements. Mr Grylls was a key member of the cabinet during those negotiations. He was the leader of the WA Nationals, and the minister for regional development. There was an opportunity to raise the production rental during those negotiations with BHP and Rio Tinto, yet, at the time, he saw no need to further increase taxes. Now, he and his party are seeking a new revenue stream, though they put no proposal on the table for reduced spending or fiscal responsibility. But their recklessness and greed will come at the cost of working families in towns like Kalgoorlie-Boulder, who will be the hardest hit by a contracting resources economy, sapped of capital, confidence and investment. If the WA Nationals really believe in regional WA then perhaps they would be better served by looking to implement a policy that creates jobs, not destroys them.