The ugly side of resource development

Much is being made of benefits from resource development. Regional, state and national growth potential is assumed to overcome all difficulties associated with resource discovery and consequent large injections of capital, industry, and labour. The Federal Government views resource exports as the elixir of life for the Australian economy. The RBA holds its trigger finger ready to combat that evil inflation emanating from the resources boom and record terms of trade. In rural areas hosting resource development, the picture is not so" gung ho". Rural areas exposed to resource exploration and development are experiencing labour supply difficulties, infrastructure inadequacies, and land tenure dislocation. Budget policy should address both financial and real sector distortions emanating from economic "hot spots".

So far, political and media interest in rural Australia has concentrated upon infrastructure shortfalls and protection of iconic farm land. Whilst infrastructure inadequacies cannot be ignored, Iconic farm land has caught the media attention. Iconic farm land whatever that might mean is a successful political campaign mounted by a handful of farmers to draw attention to their land being engulfed in resource development. In terms of food security, iconic farm land is a nothing issue contributing little to sound policy debate. It is national food security which should be of importance in Budget considerations

Food security depends upon four concurrent conditions: certainty of land tenure, cleared land, adequate water either by rainfall or irrigation, and profitable farm output prices. Natural rainfall districts with 600mm rainfall and higher should retain cleared land for intensive agriculture. Drive around Australia and observe the types of land that produce quality output in substantive volumes. Most soils are low in fertility; but, are cleared and fertilised in suitable rainfall regions. Overseas deserts have been managed to produce volumes of food. The Australian fragile soil debate therefore becomes politically motivated negatively contributing food security.

Certainty of land tenure is critical for investment. The more the tentacles of environmental legislation and native title encroach upon 600mm rainfall districts, the more threatened becomes food security. Extensive mineral exploration and development in agricultural districts significantly erodes certainty of land tenure. In situations where tenements overlap, uncertainty of tenure is compounded generating property market failure. Property market failure is a major economic problem affecting farm solvency and socio economic well-being of regions. Uncertainty of land tenure becomes the unrecognised ugly side of resource development

Exploration and mining tenements are granted by Governments for different exploration purposes for example, coal, gas, and other minerals. Often tenements for different exploration rights overlap. For example, on my property in the Surat Basin, we have overlapping tenements for coal and natural gas exploration. Compounding these overlapping tenements are two separate pipeline easements to carry gas from the Surat basin to Gladstone processing plants. Companies claim that compensation is paid based upon legislation for necessary easement access through private property. Companies offer a miserly one-off payment based upon some "market" value of recent sales in the area. This "market" value is then discounted because the easement holder allows the land owner to carry on certain agricultural activities that meet the easement holder's approval. Meanwhile, for the duration of the project, State and Commonwealth Governments and gas companies reap billions of dollars yearly from gas flowing through the pipe lines.

An easement concept of a market value is a political definition not an economic value. There is no market. In economic terms, market structures are classified into neat definitions of monopoly, oligopoly, monopolistic competition, and pure competition. With rural property, two markets structures are in conflict over easement negotiation: monopoly v purely competitive. The energy company is a monopsonist with full legislative backing of Government legislation to force a decision upon a reluctant landowner. The other side of the "market" negotiation is the purely competitive landowner effectively deprived of the right to say no under the Petroleum and Gas (Production and Safety) Act 2004. In the name of growth and development, the Petroleum and Gas (Production and Safety) Act 2004 waters down property rights within a purely competitive property market whilst strengthening property rights of the monopolist.

Given full power of the Government legislation, the judicial arm of Government, The Land Resources Tribunal, administers the relevant Act to ensure the mining companies' access to government owned underground minerals. The landowner's property rights become the legal barrier between State Government resource rent income, Commonwealth tax revenue, and company profits. Should disagreement occur over value between the energy company and the landowner, a Land Tribunal arbitrarily determines "fair" value" finalising the dispute. This effectively transfers certain property rights over the property from the landowner to the energy company by judicial sanction. This becomes a de facto acquisition of property rights – not a market transaction. Conflicts of interests lined up against the landowner are immense.

The second major issue surrounding resource exploration and development is overlapping tenements. A tenement is a lease for exploration granted to a resource company to explore for minerals underground. Tenements are restricted to particular exploration and development activities. For example, a gas exploration company is granted a lease or tenement to search for underground reservoirs of gas, whilst a coal exploration lease or tenement restricts exploration activities specifically to coal deposits. It is common for gas and coal tenements to overlap on a single property. There is no requirement for tenement holders to explore and finalize findings. Land tenure uncertainty becomes market failure for the duration tenements remain in place

Whilst exploration tenements remain in place, a property is valueless. No sensible buyer would purchase a property lying within a tenement. As there is no defined time for development of the tenement, a property buyer does not know how long ownership will remain should proven commercial deposits of minerals be found. The existing owner then remains owner at the "pleasure" or discretion of one or more exploration companies and their tenement holding Ownership might remain for a year, a decade, or a lifetime. It is ownership uncertainty that strips land of any "market" value.

Development of underground projects take years to effect. If the land owner happens to be of retirement age or approaching retirement, then quality of life over remaining years of healthy ageing becomes a real social issue. Sale of the property at a value that would allow enjoyment of retirement years is denied because of the tenement holders commercial objectives. A lower quality of life over retirement years is forced upon the powerless landowner unlucky enough to own the property in the first place. Growth and wealth accrual to the local community become meaningless to the unfortunate landowner. Security of retirement income is a Commonwealth policy area that must embrace uncertainty of retirement income for this type of dislocation in resource rich regions.

Farm viability depends upon farm prices rising in line with prices in the wider community. Of particular concern to farmers and rural policy is the long term decline in industry terms of trade (ratio of prices received to prices paid). In 1979/80 before structural reforms began, farmer terms of trade had an index value of 162.7. In 2009/10, the same index value was 91.5. Structural reform has overseen farm terms of trade decline by 43.8% or 1.9% compound annually. Real net value of farm production has declined from a peak index value of 278.7 in 1979/80 to a low of 105.4 in 2008/09. Prior to 1980's structural reforms, farm debt was 34.3% of the gross value of farm production. By 2009/10, farm debt was 154% of the gross value of farm production. By any common sense measure, rural structural reform has been a failure and now threatens national food security.

Rural policy has failed Australia because a well know law in economics has been ignored by free traders. Engel's Law is the work of the nineteenth century economist Christian Engel. Engel's Law taught in modern microeconomic text books quantifies the relationship between consumer's income and expenditure and commodities. The operation of Engel's Law on food consumption can be easily inferred from Australian household final consumption expenditure. Expenditure on food as a percentage of total consumption expenditure is as follows;

Structural reforms of rural industries of the1980's and 1990's sought to overcome Engel's Law through international competition, efficiency and productivity improvements. Serious policy failure has been the result.

In December 2005, Bill Pritchard wrote:

During the 1960's and 1970's there was a seismic shift in the intellectual environment of - agricultural economists. The discipline - became more centred on the influence of the Chicago School paradigm. By the 1980's these views had inculcated key policy arenas within the Australian Government

Prichard  International Journal of Agriculture and Food – Vol. 13 (20 Dec. 2005

Milton Friedman's modern monetarism became the genesis of structural reform of Australian agricultural.

Post 1980's rural policy concentrated upon the top 20%-25% of farmers producing 70% of production. Data analysed above, confirms failure of not only rural policy; but also, Friedman's' economic philosophy. As Australia moves toward becoming a net importer of food, the threat of emerging Australian food insecurity brings into sharp focus the need to dramatically change rural policy; and, policy recognition must move beyond its narrow focus upon a hand full of farmers to embrace the other 75% - 80% of farmers producing the final 30% of production.

The fragility of rural Australia depicted in the above statistics compounded by the resources boom property market failure has produced a toxic alchemist's mixture within regional Australia. The ability of rural industries to pay reasonable real wages sufficient to attract labour to agricultural regions is non- existent. Meanwhile, cashed up mining and exploration companies poach qualified tradesmen be they town or farm based. To date 457 visas have provided a temporary solution. This suits Australian industrial policy pushing Friedman's natural rate of unemployment as the full employment definition at 4.5%-5% unemployed. Under a deregulated labour market, migration to maintain a labour supply sufficiently ahead of demand becomes an important policy direction to manage wage push inflation.

The shortage of tradesmen in Australia be they in rural or urban areas is a hangover from the high unemployment levels of the 1980's and 1990's. In those times industry did not have to train apprentices, they simply rang the CES and pulled tradesmen off the unemployment heap. As labour supply tightened, it was inevitable that tradesmen would become in short supply. A business culture of expecting unemployed tradesmen on tap has now evolved into a strident demand that skilled labour should be waiting the pleasure of business. Industry demands that either the taxpayer train workers or they must use 457 visas. This culture has to be addressed at Commonwealth policy level.

These policy problems lie within the province of the Commonwealth Budget strategy. Solutions will require abandonment of Friedman's economic philosophy and a return to the economics J. M. Keynes. Whilst Governments and commentators claim GFC policy response was a return to the economics of J.M Keynes, it was not. The GFC expenditure strategy was quintessentially nineteenth century classical economics. Consider the template below from a nineteenth century classical economist, J.S Mills, interpreting Say's Law of Markets commonly referred to as supply creates demand.

Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should by the same stroke double the purchasing power. Everybody would bring double the demand as well as supply; everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange

J.M Keynes, p. 18

GFC subsidies did not double incomes; but, did subsidise consumer purchasing power. The unanswered questions:

• In a free trade economy, in which economy was employment supported: Australia or import suppling countries?

• Why should Australian taxpayers pay the tab for employment support in import supplying nations?

Herein lays an explanation of contemporary policy failure. No one at Government, industry, or media level appears to understand the genesis of contemporary economic orthodoxy. Consequently, the Budget will not address problems of concern to ordinary people; and, in particular, regional Australia.