Examining virtual nationalisation

Resources companies in Australia have placed tens of thousands of jobs on hold.

JOHANNESBURG - 

Nationalisation, typically government seizing private sector assets, has a long - and often disastrous - history, as seen in post-Colonial Africa. It seems that modern liberal democracies would never go that far, but old themes can be reinvented, and varied, as appears to the case in Australia's expressed wish to extract huge additional taxes from resources companies.

Seen in a broader context, the Australian government's dream - which can be described at the extreme as "virtual nationalisation" - is part of a broader variable theme of resource nationalisation creeping across the world, on the perception that resource companies are making good profits that may, somehow, be undeserved. In authoritarian democracies, characterised by calibrated repression, straight nationalisation is on the rise, as seen in the likes of Venezuela and Bolivia.

In Australia, the reaction to the country's huge and impressive "future tax system" report, published in early May, has been emotional, and in a more analytical sense,  plain frightening, given the extent of potential damage as shown in carefully calculated numbers, increasingly published by companies as time marches on. The proposal is that resources companies in the country start paying a new "super tax" in 2012.

Transnational miner Xstrata is the latest to announce the potential impact of the proposed resource super profits tax (RSPT): a review of growth projects - alone - comprising possible investment of AUD 22bn, and the potential to create 14,725 new jobs. In immediate decisions, Xstrata has suspended AUD 586m of expenditure to develop both the AUD 6bn Wandoan thermal coal project, and an AUD 600m project to extend the life of the Ernest Henry copper mine.  The two Queensland projects would have created 3,250 new jobs. These are now at risk.

BHP Billiton, the world's biggest diversified resources group, has calculated that imposition of the RSPT would increase its effective overall tax rate in Australia from 43% to 57%, "making the Australian resources industry the highest taxed in the world. This compares to a tax rate of 23% in Canada and a range of 27%-38% in Brazil".

Australia's Fortescue, a relative newcomer to seaborne iron ore, announced on 19 May the suspension of both its Solomon Hub project, where 20,000 jobs have been placed on hold, and its Western Hub, where 10,000 jobs have been placed on hold. The Chichester Hub expansion is continuing; USD 4.5bn has been invested to date, with 2,700 people employed in operations, and 7,500 during construction.

The Australian government has also been slammed for publishing slanted numbers. BHP Billiton CFO Alex Vanselow has reiterated that the group paid total taxes to Australian governments of AUD 6.3bn in 2009, for an effective tax rate of around 43%. He expressed concern that lower tax rate numbers were being attributed to the tax paid by BHP Billiton.

Another transnational miner, Rio Tinto, put it this way, referring to its books: "more than AUD 20bn was paid in corporate taxes and royalties alone in the past 10 years. Rio Tinto's effective tax rate averaged more than 35%. About three quarters of these taxes and royalties have been paid in the past five years, underlining our growing tax contribution".

Peter Coates, chairman of Minara Resources, a major Australian nickel miner, put it so: "To create value from a resource that was previously considered uneconomic", new technologies were applied to Murrin Murrin, where over AUD 1.2bn was invested. "Regrettably", he added, "we would consider it unlikely such an investment would be repeated in a post ‘Resource Super Profits' tax Australia, as the returns simply would not justify the risks involved".

And so on. Looking at countries where straight nationalisation has featured in recent years, social dissent is on the rise as broader economic policies falter. In Bolivia, Juan Evo Morales Ayma has used May Day to announce nationalisations; this year it was four power companies; in prior years private sector oil & gas, mining and telecoms firms have been gobbled up. This year, Morales failed to turn out for the May Day celebration.

In Venezuela, Hugo Rafael Chávez Frías recently announced the expropriation of a group of iron, aluminium and transportation companies. Elected in February 1999, and survivor of a coup d'état in 1992, Chávez "re-nationalised" Petróleos de Venezuela after a crippling December 2002 to February 2003 strike. Venezuela nationalized its oil industry on 1 January 1976. Oil output has steadily fallen; the country recently accepted a USD 20bn loan from China. The country's economic growth is on the slide, fuelling resentment across an increasingly unstable country.

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