RSPT anniversary

Sinclair Davidson has a terrific insight today into what transpired in the RSPT debacle for the Rudd Goverment. Much of the piece is derived from freshly released FOI documents:

It is now possible to reconstruct much of what was happening within government and the bureaucracy in the run-up to the announcement of the RSPT and in the period immediately following.

A view has developed, in some quarters, that the RSPT was a good idea badly implemented. But the documents show a tax predicated on confusion, falsehoods and, above all, arrogance.

From the FOI documents we now know that both the politicians and Treasury were woefully unprepared to defend the basic structure of the tax. Core features were not understood within government, certainly not by the prime minister. Even so, the documents reveal that most of the problems with the tax were foreseen. It’s just that little or nothing was done to address them.

Treasury, at least at the highest levels, emerges as being remarkably unhelpful to its political masters. Ken Henry, the RPST’s architect, is largely absent in dispatches through the critical days and weeks after the tax was announced, as mid-level officials scramble to justify his handiwork.

The RSPT was a case study of stakeholder neglect. State governments were ignored, even though they are the actual owners of the mineral resources the Rudd government set out to tax.

No serious consultation with miners was ever contemplated. In its place, Treasury erected a sham process to go through the motions of consultation. Treasury expected to divide and conquer — smaller miners were seen as natural allies of government.

It is clear that the RSPT was born of arrogance. The Henry review and consequent mining tax arose from the 2020 Summit, when Rudd summoned to Canberra 1000 of the nation’s “best and brightest minds”.

It was meant to provide a blueprint of proposed tax reforms, yet the only tax experts it contained were public servants. The interests of industry and, especially, taxpayers were not well represented. This was an environment ripe for group-think, unexamined assumptions and grandiose policy prescriptions.

The RSPT would, in theory, tax resource rents, leaving the miners with sufficient profit to still maintain their investment.

Government would take a 40 per cent “virtual” ownership of all resource projects and gain 40 per cent of the returns.

Of course, the government didn’t want to pay cash for its share, so miners would effectively loan the money to government, which would be paid back out of future earnings.

The government would pay interest on its loan at the long-term government bond rate of around 6 per cent — the so-called uplift factor. If projects failed, the government would pay in its share of the investment — this was so-called refundability.

The FOI documents reveal a tax that was fatally flawed in terms of both its premise and its design.

The Australian government only owns those resources within its own territories and located offshore. All other resources are owned by state governments. The notion that resources belong to “all Australians” is just cant. The Henry review made some reference to this fact, but that was very quickly forgotten.

I pretty  much agree with everything to this point. But this last quip is wrong. The selling of the tax as a fair share for “all Australians” was not “cant”. The RSPT was complex in design precisely to get around the very fact that the Australian people (via the Federal government) didn’t technically own the resources and that the states, who do own them, were not individually powerful enough to extract a fair share.

The federal government’s attitude to the states was simply contemptuous. Treasury proceeded with its plan noting that “state agreement (is) not required”. In one presentation to the Treasurer, Treasury listed their bureaucratic counterparts — state Treasuries and Mining Departments — as stakeholders, but excluded actual state governments and elected politicians. State treasurers were only briefed on the morning of the official announcement and advised that they would be consulted on implementation in coming weeks.

A singular feature of the RSPT debacle was the inability of the federal government to get any traction on fundamental tax design issues. Anyone proposing a 40 per cent tax on mining “super profits”, with miners forced to make a virtual loan to government earning just the long-term bond rate, needs to be able to justify those characteristics.

Treasury’s justification for the 40 per rate was cursory at best. It was deemed a “reasonable trade-off” between the “community”, miners and the “imperfections in the measurement of profit and incentives to avoid high taxes”.

The use of the long-term bond rate as the uplift factor was to prove very controversial. As early as January 19, 2010, an internal Treasury document states that: “Many are likely to argue that the required rate of return for the company should be used.” A February 21 presentation to the Treasurer recognised the uplift factor would be a “key pressure point”. A further presentation on March 14 noted that: “The uplift rate reflects the risk that government will not provide its contribution . . . bond rate is a reasonable approximation for this risk.” Remarkably, it appears that everyone in Treasury and government was happy with that glib analysis.

The best way to understand what was proposed is that the miner would have to finance 100 per cent of a project at the corporate cost of capital and then share the profits with the government, which had “bought” 40 per cent of the project at the risk-free rate. After the tax was announced it became clear that the government had no idea how to communicate the idea of the uplift factor and its centrality to the operation of the tax. It was simply too complex and those who did understand it didn’t believe it.

The day after the tax was announced then prime minister Rudd stumbled badly in relying on the uplift factor to explain what a “super-profit” was. That afternoon, a Treasury officer sent a polite email suggesting: “Expressions like ‘tax is payable only after providing a normal return to shareholders’ are best avoided.” Wayne Swan would later label mining executives as either “lying” or “ignorant” when their understanding of the RSPT was no different from Kevin Rudd’s.

What is notable from the Treasury documents is that well before the tax was announced some within government realised they had genuine problems. Chris Barrett, Swan’s former chief of staff, emailed Ken Henry and his senior lieutenant David Parker on March 30, 2010, expressing concern about the uplift factor, saying “the rate itself is hard to defend” and later that “avoiding the whole uplift rate factor would be very attractive”. Henry replied simply saying that a higher uplift factor would be expensive, while Parker argued that the alternative would be an upfront expensing model that would also be expensive. The advice from Treasury, if technically correct, was hardly helpful. No effort was made to ensure better understanding of the uplift factor before the tax was announced.

Paul Binsted, the Labor-aligned corporate financier brought in to help with implementation, lamented just two weeks after the tax was announced that: “It took me almost three weeks to move from my corporate finance paradigm of a WACC (weighted average cost of capital), to seeing it (the uplift rate) from the paradigm of the commonwealth’s liability management. This was with a lot of goodwill and openness on my part. Accordingly, I think it unlikely that many or even any others are going to accept this proposition in a time frame which is relevant for our purposes.”

Henry provided some explanation of the uplift factor in a speech to the Australian Business Economists. He cited some academic literature and two Australian economists, George Fane and Ben Smith, as inspiration. The problem was the academic literature relied on very strong assumptions. Embarrassingly for the government, Fane and Smith both wrote opinion pieces heavily qualifying their views.

It is in relation to sovereign risk and the extension of the RSPT to existing resource projects where Treasury was most disingenuous. In a 2009 speech to the Minerals Council, David Parker had correctly identified the issue: “Sovereign risk is the risk that investments will be reduced in value by future changes in government policy.”

Yet in place of any serious consideration of whether expropriating 40 per cent of established, successful mining projects just might have sovereign risk implications, Treasury could only offer ex cathedra pronouncements.

The mantra was always the same: the RSPT would reduce sovereign risk compared with royalties.

Of course, it was all a ruse to hide the true purpose, which was to gouge as much revenue as possible in the shortest possible time. A March 14, 2010, presentation to the Treasurer is especially damning. One of the “key considerations” is: “How much should be spent on bringing existing projects into RSPT?” Clearly, Treasury imagined a scenario where all resource projects would, within a short period, be included in the new tax regime. In the words of Treasury: “The faster and harder existing projects are transitioned into the RSPT, the faster and greater revenue collections will be . . . there is no right amount of contribution and firms will always ask for more.” The cynicism is clear — miners could be bribed to accept the tax. All it did was blind the government to the genuine outrage over the tax as opposed to ambit claims for greater compensation.

I’m not sure I agree with the conclusions here either. The “cynicism” is not clear to me. Of course “firms will always ask for more”. That’s their job. Moreover, the couching of the tax as some greedy government grab for revenue is again misleading. Much of the tax was earmarked to fund cuts in tax rates for broader business. This was the tax’s fundamental rationale for being. That it would manage the resources boom in a way that did not wipe out other industries (which we are seeing now, instead). To me, this was the largest part of the equitable underpinning of the tax; not only that Australians didn’t get a fair share of the revenue, but that most the rest of the economy would have to pay too higher price to support the boom. The tax would have slowed resources and sped up everything else. Mind you, it should still have sent revenues into an SWF to encourage this even further via keeping the currency in check.

The misjudgment over refundability of losses encapsulated both the poor advice that underpinned the RSPT and the amateurism of its political marketing. No one bothered to road-test this key feature with industry.

Far from finding it attractive, smaller emerging miners with riskier projects saw it as camouflage for an attack on their profitability.

In May and June, the Treasury sales job on the RSPT bordered on the bizarre. Unusable press releases and op-eds were drafted and sent up to the Treasurer’s office extolling the virtues of higher tax on successful mining projects and a government handout for failures. Detailed technical papers were reworked without any real connection to the anger among miners and growing concern in the broader community.

Treasury officer Jason McDonald wrote in a June 3 email: “We are in a good position. The longer this runs, the more the big mining arguments appear hollow and the more the good news stories will come through . . . we are finding that small miners are likely to be significantly better off, we just need time to explain it to them.”

A year on from its announcement, it is clear that no amount of time would have save the RSPT. This flawed and complex tax deserved its fate.

I don’t agree with this final conclusion either. The tax was poorly thought through, poorly executed and poorly sold, but what should have happened was a reasoned debate that modified the tax in the direction of something far less expropriating and complex but far more penetrating that the MRRT (which is an overly limited dog of a tax that has clearly done nothing to address management of the boom).

I agree with Professor Davidson in just about every assessment of government culpability but as history is now showing very clearly, we still need a well designed resource rent tax linked to a sovereign wealth fund, more desperately every day.

David Llewellyn-Smith
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Comments

  1. Best appraisal thus far of the RSPT debacle.

    You know where I stand. I don’t have any dispute with Sinclair’s article. H&H, you keep bringing a SWF into it – it never was a part of the deal. Not ever.

    After dodging BMW’s and Porsche’s outside the Hyatt, I joined the bustling throng on the Swan River foreshore to flag my opposition to the Super Profits Tax (as it was then tagged). Having full knowledge and understanding that the tax was poorly constructed, ill-considered and, in its current form, potentially damaging. In addition, it was sheer arrogance the way the Super-Tax was announced and then its attempted railroading into acceptance. It deserved to fail, as should have the instigators.

    But alas, No. Here they are now with a new arrow in the bow – a carbon tax! In light of the Sinclair Davidson’s article, does anyone really believe that this administration is capable of constructing reasonable legislation to enact a carbon tax. Not likely.

    A SWF – an even more remote probability of getting such an important and enduring piece of legislation correct. Truth is, the government neither wants nor believes in a SWF. If this government did, such a fund would have been the beneficiary of any RSPT, it would have been worth taking to the electorate, possibly even losing that election, but in the process having won the ‘moral’ high ground and spent the next three years persuading the electorate and devising first rate SWF policy. But they didn’t and they won’t. They don’t believe in anything.

    Just say that the scenario I suggest above occurred. Next election, ALP elected primarily on the SWF issue. All agreeing that this was a once in a lifetime opportunity to implement generationally significant policy…

    If the original RSPT had been a carefully considered paper constructed in consultation with the resources sector and State Governments, with appropriate concessions and exemptions, the “tax” levelled in a manner similar to the existing royalty structure, clearly designed as a basis for a SWF, it would have received widespread support.

    A wasted opportunity.

    • And you think either side of politics is going to recommend a SWF or RSPT….like, ever?

      Broad macroeconomic reform is off the agenda for both major parties, and its not their fault.

      Its the people – political debate and understanding in this country is now on a par with South Parks “they took our jobs” mentality.

      The fact that “boat people” or gay marriage are higher priorities than crucial taxation or macro reform shows how low the LCD has sunk.

      • Interesting that Lindsay Tanner said as much over the weekend in launching his new book. He blames compulsory voting, but I’m not sure on this. Australia is a nation of bitesize shock media, witness TT/ACA, or even commercial tv news. You don’t find such prominent tabloid TV ‘journalism’ in the UK for example, despite some questionable tabloid print content.

  2. Ken Henry is the ultimate statist. He represents only one constituent-the public services. Consolidated revenue-the grab bag of plunder-pay yourselves first and produce services second.

    Maybe Ken the Kommo, saw that the plunder from property was a sunset industry for the free lunch crowd and needed to be replaced by another source of income-a sunrise industry-mining tax.

    No taxation without representation. That is, no supply side increases without major reform on the demand side.

    NSW-152 senior public servants off work on full pay for more than 12 months. The reason given-no departmental allocation available. Bullshit-it’s called Centrelink.
    54% total tax take spent on P.S. wages and salaries.

    QLD-230k on payroll.
    Quote: “The amount of government funds to pay employee expenses has risen from about $9 billion in 1998/99 to about $15 billion in 2006/07, or a whopping 77per cent over the period.

    Total average weekly earnings of those working in the private sector have actually declined as a proportion of earnings for government workers.
    The Queensland Government employs about 230,000 people; over 100,000 of its employees are currently sacrificing some portion of their salary, making this the largest such contract in Australia.
    Public sector employees in Queensland now have an alternative in their salary sacrifice and novated leasing provider.”
    12.5% super Vs 9% Private super. Cars and fuel supplied.

    $50k limit on super contributions does not apply to States super. No Federal juristicion-been that way since Federation.

    Fed: 165k
    ATO pays bonuses during and after GFC, when private workers are hitting the dole ques and companies going bust or struggling. (Yet no one in government, Henry, Stevens, Rudd) or Garnaut could see it coming.
    15.5% super.

    As DFM says-you can’t look at a currency in isolation. Neither can you focus on tax with total disregard to govt. spending.

    Try this common sense approach- I bet that I can spend money at the casino faster than you can earn it! Adding to the consolidated revenue only encourages the bastards to use complexity to drive obfuscation as a cover-crank up the smoke machine, there’s a tax train to loot.

    Stop this nonsense about SWF, MRRT, RSPT, CARBON etc. without addressing demand side issues. If you can get them to ask the wrong questions, the answers don’t count.

    Why should I get a billion dollar loss making tunnel as my share and a public serpent get $150k cash? Risk free bond rate my arse-it used to be called highway robbery -larcenous louts.

    Let’s fix the holes in the boat before we load cargo. Force freeloading non productive passenger classes to disembark.

    My QLD red cattle dog has gotten very sick with 230k ticks,fleas and parasites sucking the lifeblood out of it. How’s your dog doing?

    • Man..Seanm you better load another clip…
      after that you’re bound to empty…
      Unless Gat…
      cheers JR

    • Man..Seanm you’ better load another clip…
      after that you’re bound to empty…
      Unless Gat…
      cheers JR