Should miners believe governments really are risk-taking investment ‘partners’?

Opponents of the Resources Super Profits Tax (RSPT) claim financiers put zero value on government promises to repay mining costs, plus a government bond rate “uplift factor”, in future. This undermines miners’ ability to finance new mining projects.

The view is governments will likely renege on the deal when faced with large future refunds.

This might be understandable, for three reasons.

First, governments hate tax revenue risk. They usually demand a larger share of successes (tax on profits) than losses from failure (tax refunds to losers).

Look at income tax systems around the world: governments demand income tax revenue up-front, but deny, defer, and/or allow the destruction of, tax losses.

Deductible income tax losses are often subject to “quarantining” (not claimable against all sources of taxable income). If carried forward, they generally don’t benefit from an uplift factor. They can be lost completely even if eligible for tax deductibility (e.g., if the affected entity goes belly-up) because refunds aren’t allowed.

At face value, this government’s RSPT IOU offer is more generous than for most other income taxes. Is this part of the reason why RSPT opponents think it’s just too good to be true?

Second, refunds under the RSPT would be triggered by global recession, rising unemployment, and a budget sliding fast into deficit. The last event will be accelerated by the operation of the RSPT itself (including large and fast-growing RSPT contingent liabilities).

This is politically toxic. Will governments facing such budget pressures concentrate on delivering RSPT IOUs to the mining industry? They’ll likely support hard-hit individuals first, try to minimise the slide in the budget bottom line, and possibly apply some budget belt-tightening to businesses.

Third, when “sovereign risk” in Australia appears on the rise, should those affected believe the Government’s RSPT IOU will be honoured?

The market “discount rate” on policy credibility and stability in Australia has probably risen a fair bit. RSPT IOUs might not be called in for many, many years. They might have no discounted net present value.

Can we escape this RSPT morass? Yes. There are two avenues. The first requires governments to be full and equal partners in project risk.