Risky business? For government or mining?

Who’s responsible for ensuring buyers of government bonds can be repaid? Taxpayers.

If new “riskless” government bonds are being issued to finance inherently risky mining projects that are also subject to the RSPT, how will bond buyers react? This is an empirical question.

We could run the experiment proposed and learn the answer from market experience. Alternatively, we could try to assess likely market reactions before the event if possible. That way, we might avoid learning nasty lessons by having to suffer their effects.

One possible reaction is that government bond buyers and taxpayers will respond like the finance sector. They will “look through” the government bond-backed “riskless” guarantee to the underlying project risk (or, for bond buyers, a mining sector average of those risks) and focus on government capacity to finance RSPT bond issues over time.

Bond buyers might re-rate government bonds, and add a risk margin to what is supposed to be a riskless investment benchmark, because of their deployment in risky mining ventures. Taxpayers might factor in an expectation that, if things turn bad, governments in future will be forced either to cut government spending and/or increase tax rates to cover increased government debt and debt-servicing obligations at a time when government budgets themselves will be shifting into deficit.

Such responses would slow investment, and economic and employment growth more generally.

Shuffling financing arrangements should not alter the inherent riskiness of a project. If a specific mining project has a given risk, all of those who are financing it need to price in that risk. It shouldn’t matter whether private interests or governments (i.e., taxpayers) are the investors.

If it can't, then under the RSPT as it now stands, the government is not shouldering 40 per cent of the risk and, by its own rationale is not entitled to 40 per cent of the rewards.

This issue is worth thinking about a lot more before we proceed with the current RSPT proposal.