For 150 years Australians have
seen mining as a platform (engine) for economic growth. Two central policy
themes over that period have involved (a) encouraging mining to stimulate
development, and (b) appropriation of part of the net value of minerals through
royalties.
This perception has been
challenged over the past 30 years by: environmental and resource depletion
concerns; 'Dutch Disease' and 'Resource Curse' ideas; native title; royalty
controversies; criticism of tenement regimes; and artificial obstacles created
by governments in the 1990s.
Sustainable
Development: This concept has been prominent only since the 1980s - and
has derived from old anxieties about the capacity of natural resources to sustain
growth - which has recurred periodically for 200 years. The most common
definition of sustainable development involves meeting the needs of the current generation without
compromising future generations. This has multiple dimensions including -
economic growth; efficient resource use; social development; and intergenerational
equity. A narrow concept requires that the quantity and quality of resources
must remain steady - and leads to pessimism. A broader concept considers the
option of substitution - and implies much less government intervention. COAG
has accepted such a concept.
Policy Assessment
Criteria: Sustainable development does not require new policy criteria. It
is enough to consider equity, economic efficiency and administrative
efficiency. However sustainability has increased emphasis on:
intergenerational aspects; internalization of environmental impacts;
inter-temporal and dynamic aspects of economic efficiency
Australia's
Institutional Framework: is outlined.
Imputed Net Value of
Minerals: The imputed net value of minerals in the ground has been a
primary focus in economics in relation to mining. It is relevant as: price of
a resource; source of income; and base for taxation. If the imputed net value
of minerals in-situ is positive, then four key tasks fall to government (a)
guiding distribution of that net value amongst competing interests (b)
ensuring net value is not diminished by poor policy (c) correcting market
imperfections to ensure that net value is neither under- or over-stated and (d)
minimizing administrative costs. Imputed nett value derives from demand
for mineral products and supply characteristics (exhaustibility, variability and
scarcity). Resources can be exhausted by extraction or augmented by exploration
/ technological advance and by higher prices. Deposits which are commercially
attractive are relatively scarce. High quality deposits can have positive net
present value - after recovering full cost of discovery, development, mining,
processing and transport (including capital costs). Different parts of one ore
body can have different unit net values. Historically technological advances
have more than offset any tendency towards higher unit costs. When imputing net
value to minerals, allowance must be made for risk and uncertainty.
Economic Function of Imputed Net Value: allows allocation of supply
between users over time. There is controversy over whether a positive imputed
nett value elicits supply of mineral resources. Most economists claim imputed
nett value in situ can be positive and still elicit supply. Others claim that it
must be zero to attract new exploration and mining. It is difficult to design a
royalty / tax system that can capture imputed nett value of minerals without
interfering in efficient resource allocation.
Depletion and Sustainable Development: depletion of resources has been
seen as a constraint on sustainable development in Australia. While this may
have regional implications, historical evidence is that depletion has not
constrained growth. New discoveries and technologies have more than offset
depletion. Thus mineral prices have long been in downtrend. How long can this
continue? A pessimistic view (which would require government intervention) is
not supported by evidence over the past 200 years, or by convincing arguments.
The optimistic view - which advocates have also not justified convincingly -
still requires government to ensure that (a) the ecological processes on which
life depends are maintained and (b) entrepreneurs and governments are
accountable for the social costs of environmentally adverse activities.
Depleting mineral resources requires adding to capital resources to restore
productive capacity. This concept is also controversial. World Bank economists
have expanded concept of investing in reproducible capital - resulting in idea
of 'genuine savings' which are the nett result of investments and losses of
natural resources, human capital and built capital. The Bank assessed 'genuine
savings' for 100 countries from 1997, 1998 and 1999, and showed that high income
developed countries (with the notable exception of Australia) exhibited positive
'genuine savings', while low income under-developed countries had negative
'genuine savings' (like Australia). This has implications for (a)
emphasizing savings of resource rents for investment (b) this need not absolving
governments of requirement to cut artificial obstacles (c) avoiding policies
that destroy imputed nett values and (d) transitory price increases allowing
increased investment without cutting income - which governments have failed to
take advantage of, so contributing to poor growth by resource rich countries.
Resource Curse and Sustainable Development: 25 years ago the idea that
minerals the engine of growth was challenged by the Gregory thesis - that
booming mining will contribute to shrinking agriculture and manufacturing
(called the 'Dutch disease' or 'de-industrialization') [because the mineral boom
boosts exchange rates, and this erodes the competitive position of other
industries]. Over the past decade, a 'Resource Curse' thesis has emerged, which
portrays mineral wealth as detrimental because (a) abundant resources
predisposes counties to substandard per capita growth (b) growth rates after
booms are below pre-boom rates (c) natural resource wealth triggers factors
contributing to poor growth including 'Dutch disease' and (d) star performing
economies are resource poor. 'Resource curse' thesis is based on generalization
from study of various countries growth - which has been criticized because (a)
such countries are not all the same (b) relative performance varies over time
(c) ethnic strife can be a better explanation of poor growth (d) many problems
arose from using high resource prices in 1970s to build up debts - which created
problems in the 1980s. Mechanisms whereby the 'resource curse' is assumed to
operate include: (a) leading to weak governments (b) effect of long term decline
in resource prices (c) growth induced externalities from manufacturing are
greater (d) government mismanagement of booms (e) destruction of resource rents
- by rent seeking behaviour or by artificial impediments to mining / processing
and (f) wastage of resource rents. Some argue that these factors, especially (a)
to (c), justify diversification. However these arguments lack substance.
Symptoms of 'resource curse' are the result of inappropriate government
policies. Suppressing resource based industries won't correct the policy flaws.
Policy guidelines for resource rich countries are (a) ensure resource rents are
saved and invested (b) don't treat windfall resource revenue due to price spikes
as permanent income (c) maintain low inflation and (d) eliminate artificial
impediments that handicap industries.
Artificial Impediments: Governments have created artificial
impediments by poor design of policies. This involves intervention that
discriminate against particular economic activities without good reason.
Policies to correct market failures (eg excessive pollution, abuses of monopoly
power, under-provision of public goods) and natural impediments are not of
concern. Artificial impediments include special incentives to other industries
which give higher taxes. Two types of artificial impediments are (a) burdens due
to government intervention unrelated to managing mineral wealth and (b) poor
intervention in mining and processing. The former includes import barriers to
protect manufacturing. The latter includes tenement and royalty systems . Some
aspects of environmental and native title policies fall into both categories. 10
years ago the Industry Commission estimated that removing only some artificial
impediments would yield large economic gains. For most of the 20th century
artificial impediments were the cause of Australia being one of the worst
performing economies - while attempts to reduce them since have made Australia
one of the best. There has long been concern about the lack of mineral
processing in Australia, despite having world class resources. While Australia's
potential comparative advantage in minerals has not been fully exploited, this
has been masked by the existence of some outstanding mines. Under-performance in
mining has just been less noticeable. Artificial impediments do not make mining
uneconomic - but do change cut-off grades, reduce mining depths, shorten mine
lives, lower output rates and reduce profitability. Where there are
inefficiencies from government failure or market failure, piecemeal reforms can
make the situation worse - thus they should be avoided in favour of a
comprehensive approach. This can be hard due to short term problems which some
groups will face, which require government adjustment assistance.
Surface Rights and Land Access: Access to land held by private
interests is a major problem - which appears to result from the poor definition
of surface rights relative to minerals in situ. In Native Title legislation, the
Commonwealth compounded this mistake. There must be a better alternative to a
'right to negotiate' that has not yielded equitable outcomes. Native title and
other surface rights are not the problem - poor linkage of these to mineral
rights is. High Court could decide to attach mineral rights to native title.
This would bring exploration and mining in Australia to a sudden halt.
Exploration and Mining Tenement System: Exploration tenements have
been designed to encourage exploration. Allocation is traditionally on a
first-come-first-served basis - possibly with conditions to increase the pace of
exploration. Those conditions can induce excessive exploration and imputed nett
value of minerals. Conditional first-come-first-served systems are also
unattractive in terms of administrative efficiency. Arguments for conditional
tenements and work program bidding are that this will result in earlier
development of deposits - but this only happens if a deposit is ripe for
development. Also government policies (such as environmental procedures) can
delay development. If imputed nett value of minerals is captured by royalty and
tax systems the tendency of conditional tenements and work program bidding to
misallocate resources is constrained - because it reduces the value of the
prize. However if royalty / tax systems exclude return on exploration
investment, then government's revenue base will be undermined. Royalty systems
based on gross revenue or output disallow costs - and thus include exploration
expenditure in the royalty base. This doesn't justify retention of ad valorum
royalty systems - because the latter reduce resources, output and development
investment. States need to replace both poor tenement systems and deficient
royalty systems. In replacing tenement systems, distorting tenement conditions
need to be eliminated (for which possible methods were suggested).
Royally Policy Revenue based royalty systems - traditionally used in
Australia - are poor in terms of economic efficiency and equity. They cause
otherwise economic material to be left behind because extraction costs are not
taken into account. They are a major artificial impediment to mining. An
accounting profits royalty system (as in NT) allows adjustments for costs and
prices, though it has higher administration costs. A resource rent royalty - as
applied to offshore petroleum - is a considerable advance - though deficiencies
remain. A realized economic profits royalty system is an efficient alternative,
though it has negative political implications of paying rebates when profits are
low. Competitive up-front bidding has support in economics' literature. State
and Commonwealth governments should agree to design a uniform combined realized
nett value royalty and competitive lump sum cash bidding system.
Mining and Environment Policy: Environmental costs should be
internalized in the interest of economic efficiency and sustainable development.
Comprehensive reform to achieve this should be preferred to a piecemeal
approach. Government needs to determine the economically efficient level of
rehabilitation for each mining operation. Governments in Australia have tended
to use command and control methods for internalizing the social costs of mining
- and there is a stronger case for greater reliance on market oriented methods.
There is an unreasonable degree of proliferation of complexity in relation to
the environmental effects of mining in Australia. This needs to be addressed by
governments.