Mining Investment, Foreign Ownership, Taxation and Redistribution

Recent arguments that the mining tax increases the risk of investing in Australia are absurd. As Clancy Yeats argues:

conflating Australia's situation with that of Greece is exactly what some in the business community are carelessly doing. How could this be so? I'm referring to that favourite catch-phrase lobbyists use when trying to undermine a policy they oppose: ''sovereign risk.''

This phrase has been used ad nauseam by business groups, miners in particular, in their fight against policies they don't like - none more so than the mining tax and carbon price. With mining tax legislation coming into Parliament this week, expect the shouting to continue.

For all the bluster, sovereign risk means something completely different. It refers to the risk of a radical change in the economic environment for an investor - think of the 50 per cent ''haircut'' Greece's creditors will wear.

Putting these rather large semantic differences aside, how has Australia's ''sovereign risk'' problem affected investment?

As figures published today show, the proposed changes have done little to stem the flow of mining cash flooding into the nation. Despite all the complaints about pricing carbon and taxing mining profits, the quarterly Deloitte Access Economics Investment Monitor shows the value of definite projects swelled by 51.3 per cent to $406.8 billion in the year to September.

Boardrooms may well have thought carefully about the new policies while considering these mammoth projects, but it didn't stop them. Nor has the tax threat stopped proposals for investments that may still come to fruition. The value of possible projects leapt by 31.8 per cent in the year, to $256.9 billion, today's report says.

All up, the total pool of investment under way or on the drawing board has reached a staggering $894.1 billion.

But if you want reassurance from a more august institution than the Sydney Morning Herald, let's compare some recent quotes from the Reserve Bank of Australia's recent Statement on Monetary Policy.

Mining investment grew strongly over the first half of the year. Since the August Statement, a final investment decision for the Wheatstone LNG project has been announced, lifting the total value of LNG projects currently underway or committed to around $146 billion. With work done already at high levels, mining investment is likely to increase to around 7 per cent of GDP over the next few years.

The second concerns the fate of other areas of the economy:

The high level of the exchange rate is having a contractionary effect on a number of non-mining industries, particularly manufacturing and some service industries, including tourism and education. Manufacturing and services exports remain well below their pre-crisis levels; exports of education related services have been particularly weak over the past year, partly reflecting tighter access to student visas.

It is interesting to note that despite the patchwork our two-speed economy thesis. manufacturing exports have grown again after the global recession.

Employment in manufacturing has also suffered significantly, although service sector employment has grown over the past year.

In terms of foreign ownership of the mining industry, the RBA argues it is about 80 per cent.

However, the foreign ownership share of the mining industry is also significantly higher than for other industries. Most estimates suggest that effective foreign ownership of current mining operations in Australia is around four-fifths, although this varies significantly by commodity and by individual mine. Accordingly, in the balance of payments much of the investment in this sector is treated as being financed from abroad. This includes retained earnings that accrue to foreign direct investors. In recent years, mining has accounted for a large share of the foreign investment inflows into Australia. Importantly, a number of committed LNG projects are wholly foreign-owned, which means much of the investment over the next few years will be funded entirely by offshore parent companies. This should see an increase in measured foreign direct investment flows into Australia.

This leads to a persistent net income deficit (component of the current account deficit).

Australia’s net income balance is the net sum of income flows associated with the stock of Australia’s debt and equity assets and liabilities. Australia has a persistent net income deficit due to the large stock of net foreign liabilities and because foreigners are estimated to consistently earn higher yields on their investments in Australia than Australian residents receive on their investments abroad. The mining sector mainly affects the net income deficit via the share of mining profits that accrue to foreign investors (through dividend payments and/or reinvested earnings on direct investment). While such data are not available by industry, total reinvested earnings on foreign direct investment have steadily increased as a share of GDP, in line with strong mining profits in recent years. Given the outlook for the mining sector, this trend is expected to continue.

Reinvested earnings are stated as a positive for foreign ownership of the mining sector, but of course profits do eventually flow out of the country.

This is one of the reasons why it makes good sense to tax them at a higher rate so that taxes for other sectors of the economy could be lowered and superannuation payments increased.

One of the arguments given for why we should tax the mining industry at a higher rate is the argument that it will deter investment (and re-investment).

As current and future plans make clear. This is pure bunkum. (I can think of a few other descriptions for this thesis, but I'll leave them for private conversations!).