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STANDING COMMITTEE ON ECONOMICS
08/04/2009
Uranium Royalty (Northern Territory) Bill 2008

CHAIR —Welcome. I might just remind the committee that the Senate has resolved that an officer of a department of the Commonwealth or of a state or territory shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Do you have an opening statement you would like to make?

Mrs Taylor —I would like to thank the committee for the opportunity to discuss the details of the uranium royalty bill. As you are aware, the Australian government established a uranium royalty subgroup as part of the Uranium Industry Framework in early 2006 to design a resource charge applying to Aboriginal and non-Aboriginal land in the Territory which balanced efficiency with stability, administrative simplicity and revenue objectives. The uranium royalty bill sets out a royalty framework for uranium in the Northern Territory which is consistent with the recommendations of this subgroup and consistent with the royalty regime for other minerals mined in the Territory.

I note that concerns in the inquiry have primarily focused on the comparison of profit based royalty regimes with ad valorem regimes, including the potential for payments under a profits based regime to be more volatile than that under an ad valorem regime and the potential for no royalty to flow under a profits based regime for some time during the early operation of a mine’s life. The government considered these issues very carefully and concluded that the advantages of the proposed regime outweighed any potential disadvantages. Firstly, implementation of this royalty regime replaces the current system of ministerial determinations, which have been taken on a case by case basis, for uranium mining operation in the Territory and thus provides greater certainty for planning and investment decisions for all stakeholders. Secondly, the regime will be the same regime for uranium as for other minerals in the Territory, thereby reducing administrative complexities for all stakeholders: industry, traditional owners and administrators alike, particularly in circumstances where mines produce more than one mineral.

On the matter of profit versus ad valorem, we consider that a profits based royalty charge is more economically efficient in that it does not of itself act to distort investment decisions. Ad valorem royalties are more likely to discourage higher risk projects and impede the efficient development of otherwise marginally profitable projects and can result in the premature closure of mines, whereas a profit based regime will facilitate development of longer life mines which of itself brings a broad range of economic and social benefits to the community, including in the form of taxation, employment, infrastructure and services.

A profits based regime can also result in greater returns to the community, particularly during periods of higher profits. The Henry tax review in its consultation paper noted that one reason for the relatively slow growth in government revenues during the recent period of extended profitability in the mining sector has been the prevalence of ad valorem royalty regimes. This means that we may not be maximising returns to the community as a whole for the use of Australia’s resources, and in particular Indigenous owners may be missing out on some of this return.

Lastly, we note that many of the issues raised by those representing Indigenous interests are either already being managed or can be managed through alternative mechanisms. For example, some 64 per cent of the royalty equivalents paid to the Aboriginal Benefits Account during the period 2002 to 2006 were already derived from mines in the Territory exposed to the profit based regime; and ad valorem royalties fluctuate by nature themselves, albeit not as significantly as under a profit regime. So these stakeholders are already managing volatility of payment issues. Secondly, issues associated with traditional owners potentially not receiving any revenue for the first few years of mine’s operation—whilst we recognise that this is of significant concern to Indigenous stakeholders—we feel can be offset through the structuring of negotiated payments in mining agreements to either meet any shortfalls during periods when no statutory royalty is paid in the early years of the mining operation or smooth payments if that is preferable. I am happy to take questions.

CHAIR —Thank you. You have, I think, correctly identified the major issues that we have received submissions on and have been discussing so far. I would like to explore the issue of Aboriginal communities and their agreements to mine on the understanding of negotiated payments. That is probably the major area where there is a lack of certainty about the change to the new regime. Also, the one area where uranium may differ from other minerals is that there is often a lot more sensitivity around the mining of uranium, and a community may well have to do certain work around that. In your experience, are mining companies open to that kind of negotiated payment if communities feel they need something upfront and particularly if the elders that agreed to the mining of uranium are worried that they might miss out on those payments?

Mrs Taylor —My understanding of negotiated payments is that in the past many of them have been structured on an ad valorem kind of basis. Our experience is that that tends to be in the one to two per cent type of range, but there are some examples where those sorts of arrangements can be put in place. Mr Angwin certainly identified his company’s willingness to enter into those sorts of agreements and to consider those issues. So, whilst a lot of these agreements tend to be commercial-in-confidence and we do not always see the detail, I am reasonably confident that the companies would be willing to enter into those negotiations.

CHAIR —The other, relatively minor, issue raised was about polymetallic mines. Those of us from South Australia know all too well that there might be several minerals mined from the one mine. How would that be treated under the current system as opposed to the new one?

Mrs Taylor —There is really no current system in relation to uranium mining, so the minister would have to make a determination. In the past those determinations have taken account of a number of factors. In respect of the uranium, there would be a different system for the uranium aspect of the mine and the remaining minerals would be mined in relation to the 18 per cent net profit. Going forward, if this legislation is passed, then all of the minerals mined in the Territory would be subject to the 18 per cent regime.

Senator LUDLAM —I might have misinterpreted the comments that you made at the beginning. Is it your understanding that moving to a profit based system of assessing royalties in the Territory will make more mines viable? Is that your thinking?

Mrs Taylor —Certainly more marginally economic mines would be viable—yes.

Senator LUDLAM —I just wonder why that would necessarily be seen as a good thing—that in a particularly volatile industry we would be trying to assist more marginally profitable mines to get started in the Territory.

Mrs Taylor —With mining development comes a range of benefits, including employment in local areas, community services, infrastructure, as well as taxation. In terms of the returns to the local community, we are not just looking at royalty payments but certainly economic benefits from a range of different activities.

Senator LUDLAM —Given the volatility of this industry in particular—and I guess it is not really the Commonwealth’s job to do the assessment as to whether mines are marginal or not—I would be very concerned that we would see small start-ups peter out and not last very long without paying any royalties. The converse position was put to us by one of the other witnesses. Is there a view to move to this form of assessing royalties in other states or just for the Northern Territory?

Mrs Taylor —Not that I am aware, with regard to the other states. South Australia and WA both want ad valorem. I understand that Tasmania has a hybrid royalty system which has a profit ad valorem component. At the moment we have a range of different royalty regimes across Australia.

Senator LUDLAM —If the mining boom, depending on your point of view, served the boom states, WA and Queensland, pretty well along an ad valorem model, why do we think the Territory should maintain a profit based model if it is not the case in the other states?

Mrs Taylor —Essentially it is the position of the Commonwealth that we consider a profit based regime to be more economically efficient.

Senator LUDLAM —So we have been economically inefficient in the other states?

Mrs Taylor —In terms of the modelling and certainly economic theory, I could point to a number of references where the different types of royalty regimes have been examined in terms of productive efficiency and whether they would distort investment decisions. Certainly a profit based regime has been seen to be superior.

Senator LUDLAM —It has been tricky to get hold of modelling which shows—and I do not know that this is the sort of work that you are referring to—for any given mine over a period of time, which of the two models ends up providing the greatest royalty return to the owners of the land and to taxpayers more generally? Have you done that work?

Mrs Taylor —Those are two different questions. In terms of the economic efficiency question, it looks at returns to the economy as a whole as opposed to returns to one particular component of the economy—that is, the traditional owners. In terms of the modelling that has been done under the royalty subgroup that looked at a number of specific assumptions in relation to mining and compared an ad valorem regime with a profit based regime and a hybrid royalty regime.

Senator LUDLAM —Is that work in the public domain? We have not seen anything to date.

Mrs Taylor —That should actually be part of the explanatory memorandum to the bill.

Senator LUDLAM —That looked at a specific mine or just a set of assumptions?

Mrs Taylor —It made a number of assumptions. I understand they took a Ranger type of mine and modelled two different prices. Ranger is a quite productive mine in terms of the actual concentration of uranium. It made a series of assumptions. I believe that is all in the explanatory memorandum to the bill.

Senator LUDLAM —Has that been rolled across the Territory as a whole—the prospective increase in the number of uranium mines? Has that modelling being done for the whole Territory to show—

Mrs Taylor —No. Apart from the specific set of assumptions, that is only modelling that the working group undertook.

Senator LUDLAM —Is the Commonwealth at the table at the UIF or is that—

Mrs Taylor —Correct.

Senator LUDLAM —And you are on the royalty subcommittee or is that something that the industry—

Mrs Taylor —Correct.

Senator LUDLAM —So would you say that the motivating force behind this piece of legislation is the Commonwealth or was it led by the industry?

Mrs Taylor —I think it was the Commonwealth. In relation to the royalty subgroup, there were a range of different opinions and viewpoints which came through as part of that process. Mr Angwin has outlined some of the issues that were raised around the deductibility of the negotiated royalty against the statutory royalty. In addition, the land council have raised their concerns about the revenue streams not being available in the early part of a mine’s operation if it was not profitable. On balance what came forward in terms of the legislation was a compromise of all those positions.

Senator LUDLAM —In what sense was it a compromise?

Mrs Taylor —In the sense that some stakeholders wanted more and did not get it. Lots of stakeholders had different positions but did not, I guess, get those taken forward.

Senator LUDLAM —I do not think we have seen a submission from the CLC, but the Northern Land Council certainly were fairly critical of the fact that Elders, in particular, may never see a dollar in royalties coming from its particular mine.

Mrs Taylor —Yes. The CLC advised us that they supported the regime provided that the negotiated royalty was not a deduction.

Senator LUDLAM —That is right.

Senator EGGLESTON —I would simply put the question to the department that this legislation appears to be being put forward basically on the basis of consistency. That, I presume, must have some benefit to the Northern Territory government in terms of administration of the royalty scheme. I wonder if you would like to outline what those benefits might be.

Mrs Taylor —In terms of the benefits around bringing forward a regime which is as consistent for uranium as for other minerals, those benefits would apply not just to the NT administrators but also to the companies operating within the Territory in terms of compliance burden and simplicity of understanding a regime in which the industry and regulators need to operate. So essentially it is around red tape and simplicity of administration.

Senator EGGLESTON —So in other words you are cutting down on the amount of paperwork and it is much more straightforward to administer this system. That is what you are saying, in effect, isn’t it?

Mrs Taylor —Yes, that is right.

Senator EGGLESTON —I have asked other people this question. Obviously there are other minerals being mined in the Northern Territory. As I understand it, all the royalties are paid on a profits basis and Ranger is exempt from this proposal. What that seems to presuppose, however, is that there may be other uranium mines established in the Northern Territory. Are there any specifics that you can tell us about in terms of other mines being proposed or considered for establishment in the Northern Territory—that is, uranium mines of course.

Mrs Taylor —Senator, were you asking for other potential uranium mines in the Territory?

Senator EGGLESTON —That is what I meant, yes.

Mrs Taylor —There are a number of deposits being developed. I could point to the Pamela-Angela deposit, which is currently being explored by Paladin and Cameco. Nolans Bore is a polymetallic deposit which contains rare earths, phosphate and uranium. That is certainly very likely to develop. Bigrlyi is another project which is likely to develop. There has been a scoping study completed on that project.

Senator EGGLESTON —That is about four projects, is it?

Mrs Taylor —I am sorry. There is another one—Napperby/Toro are developing that project and are at a scoping study stage.

Senator EGGLESTON —What is the total number of projects under consideration?

Mrs Taylor —In the order of five, I think—four or five. As you know, there are a number of other uranium deposits which the local Indigenous owners have said no to in terms of development. Certainly those are not counted.

Senator EGGLESTON —Are the five you mentioned not in Indigenous controlled land areas?

Mrs Taylor —A variety.

Senator EGGLESTON —And Indigenous people in Indigenous areas have the right of saying whether or not a uranium mine would go ahead, don’t they?

Mrs Taylor —Yes, that is correct.

Senator EGGLESTON —Good. So, in other words, this does have some practical import because you do have the possibility of five mines being considered for development in coming years.

Mrs Taylor —I am sorry, Senator. Could you repeat that question.

Senator EGGLESTON —What I am saying is that this is not really a hypothetical consideration because it seems you do have at least five mines being considered for development in coming years, so there is a certain logic about establishing a uniform royalties system before those mines are developed.

Mrs Taylor —Yes, that is right; that is one of the objectives of the legislation, to provide some certainty for future investment.

Senator FURNER —The department commented on the impact of the profit based royalty regime as ‘a creation of employment’. I would be interested to hear if they could indicate what the projection may be in terms of that growth.

Mrs Taylor —I am not sure that we have those numbers. If we could take that one on notice, that would be good.

Senator FURNER —Okay. I am wondering whether you are able to indicate whether the move to profits based royalty regimes can result in a gain for Indigenous owners during boom periods at all. Are you able to comment on that?

Mrs Taylor —Only so far as to say that our understanding of a profits based regime facilitates a greater return to the community and to traditional owners when prices are very high. In that regard, the system is preferable to an ad valorem rate, which of course does not change; it does not relate to profitability.

Senator FURNER —So there is certainly incentive there.

Mrs Taylor —That is right.

Senator PRATT —It may be beyond your scope, but one of the things put to the committee in evidence is the idea that, in moving to this scheme, when negotiating with native title holders, because there will be no immediate revenue flowing, there is going to be a greater emphasis on upfront payments to secure the native title in the initial phases. I am not saying that would not necessarily happen anyway under the current scheme, but have the two different scenarios been assessed with regard to the other payments that might be coming to Indigenous communities?

Mrs Taylor —Certainly. I would simply point out that the ability of traditional owners to negotiate royalties and to use the negotiated royalty to perhaps smooth out payments or have higher payments in the early years of a mine’s operation, in order to offset any impacts on their income from a profits based regime, is certainly there. I would expect that would be a subject of negotiation between the traditional owners and the companies, but certainly I would expect there would be significant incentive to look at that.

CHAIR —Just on that question, when we are talking about negotiated royalties, I presumed that we were talking about bringing forward the statutory royalties. Can you advise the committee if any negotiated royalties are made under the current profit based royalty regime in the Northern Territory for non-uranium mines?

Ms Barton —I am not aware of any specific cases for the other mines, but I do know that for the other uranium mines in Australia, such as the Beverley mine in South Australia, which is under native title legislation, that company has negotiated a package which includes royalty employment training and community development fund, and that is typical of the types of agreements that we are seeing from mining companies—not only uranium companies, but mining companies per se—and that would be considered as a best practice approach. Of course in the case of the Northern Territory, under the Aboriginal land rights act, the Aboriginal communities have a veto, so they have a greater negotiation power than in any other area in Australia.

CHAIR —In that example, is the negotiated royalty taken out of the total package of royalties or is it an additional payment?

Ms Barton —No. One of the contentions in the working group was that the 18 per cent profit would be a statutory royalty paid to the Crown for the use of the Crown’s resources. In addition to that 18 per cent, the mining company and the traditional owners can negotiate a number of payments, including a royalty but also other things. So we are seeing things like rental payments, compensation for land disturbed and employment and training benefits as well.

CHAIR —Is there any capacity under this legislation for those negotiated payments to be offset against the statutory royalties?

Ms Barton —No, they cannot be. They have to be separate payments, but the timing of the payments would be up to the traditional owners to negotiate whatever they feel is appropriate for their circumstances.

CHAIR —So the statutory royalties might be in place, but there could be a negotiation for them to be brought forward a year or two?

Ms Barton —That would be the negotiated portion of their royalties. A company may end up paying 18 per cent to the Northern Territory, and then in addition they may pay a 1.5 per cent ad valorem rate separately to the traditional owners, which can be smoothed if they choose to do that.

CHAIR —I see. I thank the department. You seem to have answered all of our questions. Thank you for coming in this morning.

Committee adjourned at 11.41 am