The mining sector's hidden help

Assisting the mining sector makes some political and economic sense, but there needs to be a broader discussion on the return on government assistance and the spill-over effects to other spending.

According to The Australia Institute, state governments subsidised the mining sector to the tune of $17.6 billion over the past six years. But should we care?

At first glance, mining subsidies will make a lot of readers feel a little uncomfortable -- particularly those of you who believe in ‘small’ government. You might become less comfortable again when you remember that the mining sector has experienced an once-in-a-lifetime commodity price boom, which has provided an unprecedented boon to resource companies across the country.

But assisting the mining sector does make some political and economic sense -- although that cannot be said of all assistance.

State assistance to the mining sector is concentrated in Queensland and Western Australia. The Queensland state government spent or offered concessions to the tune of $9.5 billion over the past six years, with most of that directed towards transportation for coal. By comparison, the Western Australian government provided support of around $6.2 billion. The other states and territories provided relatively minor support.

In Queensland, most of the government assistance was only of use to the mining sector. This reflects that much of their investment was in the rail infrastructure that connected the existing network to coal mines in the middle of nowhere.

By comparison, a high proportion of assistance in Western Australia was directed towards ports, which are beneficial not only to the mining sector but also to other export or import industries. Assistance in Western Australia appears to have a public good element that is largely missing from the assistance provided by the Queensland state government.

Mining assistance – Queensland and Western Australia

Graph for The mining sector's hidden help

The mining sector has also enjoyed assistance via the federal government. The Productivity Commission found that in 2011-12 the mining sector received $400 million directly from the government but an additional $300 million via tax concessions. The estimates from the commission are with regards to industry-specific assistance, so it excludes the $2.3 billion in savings the mining sector accrues from the fuel tax credit, which allows companies to claim a tax credit for the use of diesel fuel in heavy road vehicles.

As a result, total government assistance to the mining sector amounted to around $5.1 billion in 2011-12 (or around 2.2 per cent of the industry’s output), which will have picked up somewhat since then because state assistance in 2013-14 was much higher at $3.2 billion. The estimates from 2011-12 may be understated a little via some of the other tax arrangements that benefit both the mining sector and other industries but are hard to identify.

However, we shouldn’t automatically assume that such investment is wasteful or that mining executives are simply rent seekers trying to squeeze everything they can from state and federal government (though I’m sure some are).

There are a number of issues at play here.

We cannot assess government assistance without first considering the opportunity cost. What could the money be spent on?

The Australia Institute provides a range of comparisons against spending on education and health care, providing evidence that assistance to the mining sector is relatively high. But we cannot simply assume that these sectors would benefit if assistance to the mining sector was lowered -- if fact it could go the other way depending on the return received on this assistance.

Unfortunately, the return on assistance is largely unknown, although the Mining Council of Australia was quick to highlight the royalties the industry pays to state governments.

“It is an affront to the mining industry for the research arm of the Greens Party to again suggest that the industry is receiving billions of dollars in subsidies when in the last six years alone, the mining industry contributed $121 billion in federal and state revenues MCA,” chief executive Brendan Pearson said.

We shouldn’t mistake total royalties for a measure of returns but if the returns to assistance are sufficiently high then they might actually boost government spending to other areas.

Unfortunately a lack of transparency makes it difficult to identify which projects were sound investments, and which constitute rent-seeking. Industry assistance does not necessarily infer that the project is uneconomic, it may in fact reflect the possibility that the project has a public good element that makes it uneconomic for a single company but beneficial for a range of companies.

Assistance provided by the Western Australian government seems to be of the latter, with a range of projects that could provide benefits to the economy even as we transition away from the mining sector. Assistance by the Queensland government appears to be narrower, largely benefiting coal producers with little spill-over benefits.

It’s also worth noting that mining investment can be exceptionally risky because of the long lead time between finalising the investment proposal, finishing the investment and then realising your return. Investment decisions made when the iron ore price is $120 per tonne may be completed when the price is only $90 per tonne -- leaving companies highly exposed to the market. To some extent the government may be better placed to bear the risk of some of these investments and in that regard a public-private partnership can make some sense.

It should be clear that I have mixed feelings on industry assistance. It doesn’t necessarily sit well with me although I can acknowledge that it may, at times, be necessary to encourage activity. The big risk for me is that government subsidies may encourage over-investment.

We may have seen a bit of that throughout the mining boom with a number of projects, which were not really economical, going ahead because the firms themselves were not bearing the entire risk of the investment. Given the over-supply in the iron ore market and the relative weakness of the coking coal industry compared with a few years ago, it seems that some firms would have been better served by a more cautious approach.

The Australia Institute research paper will put some noses out of joint but it represents a good first attempt at analysing industry assistance at the state level. But clearly there remains a lot of important information that we simply don’t know -- such as the return on government assistance and the spill-over effects to other spending.

It is an issue that should be more broadly discussed -- and extended beyond the mining sector -- and an issue that the Productivity Commission should look into further.

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