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Risky business? For government or mining?

By Geoff Carmody - posted Wednesday, 2 June 2010

Proponents argue the Resource Super Profits Tax (RSPT) means governments effectively shoulder 40 per cent of the risk of mining projects, and this justifies taking 40 per cent of project profits.

Opponents assert the finance sector isn’t prepared to provide finance for 40 per cent of affected mining projects on the basis of the Government’s risk-sharing offer.

The more polite version of opponents’ argument is the finance sector puts no value on the “effective government bond guarantee” for 40 per cent of project risk offered by the RSPT.


More bluntly, opponents argue lenders don’t believe that, when it (literally) comes to the crunch, future governments will honour the contingent liability the present Government’s RSPT bequeaths them. The Coalition’s current position on the RSPT seems to provide backing for this latter view. If so, this heightens already high concerns about Australian “sovereign risk”.

To work out who is right, ignore whether or not 40 per cent is a low project risk share relative to the Government’s tax share (60 per cent or more). Assume also the current RSPT proposal has got the “super profits” tax base exactly right and that that full and immediate refunds of 40 per cent of expenditure on affected projects - even before they start generating a cash flow - is “impractical”.

The standard rationale for the last assumption is the need “to protect the integrity of the tax revenue system”. How can we decide whether the 40 per cent risk sharing argument by RSPT proponents, or the counter-assertion by finance and mining industry representatives, is correct in practice?

Analysis of this matter, rather than rhetoric from both sides, is needed. There is one way to test this proposition in practice. RSPT advocates argue the 40 per cent risk sharing proposal is effectively the same as the government offering to finance 40 per cent of the project cost via “riskless” government bonds. If so, the government could offer to make this effective RSPT financing mechanism real. It could offer to “stand in the market” for affected mining projects as the “40 per cent lender of last resort”, financing 40 per cent of project costs by issuing government bonds at the long bond rate.

If the finance sector can do the same job at the same price, as RSPT proponents claim, the government would have called the opponents’ bluff, and private financing for 40 per cent of the project would be forthcoming at the long bond rate, based on the government’s RSPT guarantee. In this case, chalk up a win for the government, RSPT design, and finance market competition.

Even if the finance sector won’t come to the lending party, the mining project might still proceed, unaffected by the RSPT, because government bond issuance will cover 40 per cent of the project. However, will this government bond-financed option work?


Suppose the finance sector’s refusal to finance 40 per cent of mining projects at the long bond rate is correct: what does this mean for Commonwealth government budgets?

The government must issue more bonds, in large volumes, to finance risky mining projects. While commodity prices are strong, this will be a good investment, with tax returns exceeding bond-financing costs. But if/when there’s an economic slowdown, RSPT and other tax revenues will fall, while bond interest payments to bond investors will be maintained. (As a 40 per cent “equity partner” the government is receiving risky tax dividends on the mining project bonds, but paying “guaranteed” interest to those buying these bonds.)

Who’s paying the cost of these new RSPT bonds in the first instance? Mining companies.

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A version of this article was first published in The Australian on May 26, 2010.

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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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