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Speech to the Committee for Economic Development of Australia, Perth.



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Committee for Economic Development of Australia, Western Australia

Hyatt Regency Perth

4 June 2010

Introduction

Thank you Steve (Scudamore) for that introduction.

I thank the Committee for Economic Development of Australia (CEDA) for convening this symposium

“Inventing the Future: Shaping Western Australia from 2010 to 2050”.

For the past 50 years, CEDA has played an important role in providing a forum for debate and discussion

about issues shaping Australia's economic and social development.

I also thank the Australia China Business Council for its support not only of this event but for the

tremendous work that it does to strengthen business links between Australia and China.

I have been asked to speak about China, and the implications China has for Australia and Western

Australia. Given the host and our audience, I will necessarily focus on matters economic.

China is Australia's largest trading partner and, since 2009, our largest export market.

China is also a growing investor in Australia's modern and vibrant economy.

China's pace of development has meant that its influence now, in a much shorter time than expected, is

greater than anyone anticipated.

The size and scale of China's industrialisation is something we are all still coming to terms with.

Over the past 30 years, since Deng Xiaoping's reform and opening policies were adopted, China has had

an annual average GDP growth rate of close to 10 per cent.

Japan's post-war growth was fast. Australia, in particular Western Australia, was a beneficiary of that.

The four so-called 'Tigers' — Hong Kong, Singapore, South Korea and Taiwan — also all experienced

rapid growth.

None was as fast, as big or as sustained as we are seeing in China.

China overtook Germany last year as the world's biggest exporter, and will soon overtake Japan as the

world's second largest economy, if that hasn't already occurred.

China now has, by market capitalisation, three of the world's four largest banks, the world's two biggest

insurance companies, and the world's second largest stock market.

The Australia — China bilateral relationship has been growing both in its prominence and its complexity.

The relationship is now one of Australia's most important and high-profile.

Our mutually beneficial trade, economic and investment interests continue to form the bedrock of our

relationship.

China as investor

While trade links between Australia and China have grown strongly over the past two decades, investment

is increasingly prominent.

Australia maintains, as it has for many years, a consistent, open and welcoming stance towards foreign

investment, whether from China or elsewhere.

Despite China's status as our largest trading partner, Chinese investment forms only 0.5 per cent of the

foreign investment stock in Australia, ranking it 15th behind countries which not only include the obvious

like the United States, United Kingdom and Japan, but also Malaysia, the Netherlands, New Zealand and

Switzerland.

In Western Australia we understand very clearly the role that foreign investment plays in strengthening both

our local and our national economy.

This year marks 20 years since China made its first major investment in Australia's resources sector, in the

Pilbara.

That investment, Sinosteel's joint investment with Hamersley Iron to develop Channar in 1990, paved the

way for a range of ventures that are now contributing to Australia's economic growth and prosperity.

Australia's welcoming policy towards investment from China is borne out by the facts.

Since the Government came to office in December 2007, Australia has approved around A$60 billion of

Chinese investment, including investment in Australian business and real estate.

More than 160 Chinese proposals to invest in Australian businesses have been approved during this

period. Only five of these have involved undertakings, conditions or amendments.

None have been rejected.

Investment proposals from China's state owned enterprises are subject to review processes and are judged

on national interest considerations.

In the same way, China has its own foreign investment review arrangements to which Australia and other

investors are subject.

Australian investment in China also continues to grow, with about A$7 billion in Australian investments in

China in 2008.

This is an area where Australian companies can do more to seize the opportunities available, and not just

in Beijing, Guangzhou or Shanghai. As in Australia, so in China: there are opportunities, in the west,

including in great cities like Chongqing and Chengdu.

Rapid and extensive regulatory reform, industrial development and continuing efforts to open up the

economy have done much to increase China's attractiveness as an investment destination.

Some of Australia's largest companies, such as the ANZ, the Commonwealth and Bluescope Steel, are

making very significant investments in China.

As our economic relationship matures and we increasingly recognise the strengths and capabilities of each

other's economies, so we will see greater investment flows.

Australia has a lot to offer China. Greater Australian investment in China would facilitate China's continuing

industrialisation and modernisation and help further integrate China into the global economy.

Trade with China

The past year may well have been a defining moment in Australia's trade relations with China.

Thirty years ago our two-way trade in goods and services with China was under $1 billion, 3 per cent of

Australia's total trade.

Last year, two-way trade between Australia and China was valued at $85 billion, nearly 17 per cent of our

total trade.

Last year, for the first time, China became our number one export market for goods. It had earlier become

our biggest two-way merchandise trading partner.

This year two-way trade may well reach the $100 billion mark.

China is significantly bigger than our 3rd, 4th and 5th markets combined, namely South Korea, India and

the United States.

Western Australia, Australia's largest export state, generates nearly 40 per cent of Australia's total

merchandise exports.

And of course, minerals and petroleum resources make up a substantial proportion of Western Australia's

exports to China.

That has been the case for a number of years. More importantly, it will be the case for many years to come.

This is indeed well reflected in the recent Western Australian State budget papers.

And it will be the case, notwithstanding some of the more extravagant assertions that have been made

about the impact of the Government's proposed resources tax, a matter to which I will turn shortly.

This growing trade is very important to Australia.

It helps improve our prosperity and our standard of living.

Our trade relationship is also important to China. China looks to Australia as a reliable source for the

minerals and petroleum resources that it needs to fuel its own domestic economic growth into the future.

Reflecting that mutual benefit, last year Australia and China reached an historic agreement over the sale of

Liquefied Natural Gas from Western Australia's Gorgon project, worth $50 billion in exports to China over

20 years.

The highest political and policy priority for China is the continued expansion of its domestic economy.

In that environment, Australia along with other energy resource-rich countries will continue to be called

upon to produce and deliver to Chinese customers vast quantities of minerals and petroleum resources

required to sustain that domestic growth.

This is deeply significant for Western Australia itself.

China's heavy reliance on Australia's mineral and, increasingly, energy resources is a significant national

asset for Australia.

It also raises challenging issues. This is, for example, the case with iron ore. From an Australian

perspective, private companies mine and market their product.

For the Chinese authorities, iron ore is a strategic resource. China, however, finds itself dependent on

international markets for about 60 per cent of its iron ore needs.

This troubles China.

It means that trade which should be conducted on a commercial basis can raise issues of strategic concern

for the Chinese.

The effects of this could include pressure on Australia to reassure China on the reliability of Australia's iron

ore trade, and China having diversity of supply.

Minerals and petroleum resources

Like my colleague Martin Ferguson, the Minister for Resources, I know full well the contribution that

Western Australia's minerals and petroleum resources industry makes to the economy of our own State,

and to the Australian economy as a whole.

Mining contributes significantly to Western Australia's and Australia's export income.

A strong minerals resources and petroleum sector is essential to Western Australia's and Australia's

continued economic prosperity and development.

These days I've been around long enough to have seen on numerous occasions the predicted demise of

the great Western Australian minerals and petroleum resources industry.

Such claims were made in the early 1970's about the introduction of environmental protection regulations.

That clearly has not happened.

Such claims were made when we saw the introduction of the Petroleum Resources Rent Tax in the mid

1970's.

That clearly has not happened, as the Gorgon project makes crystal clear.

Such claims were made about the introduction of Native Title and respect for indigenous rights in the

1990s.

That clearly has not happened either.

Such claims were also made about Industrial Relations policies, most recently the abolition of Work

Choices.

That clearly has not happened either.

On each of these occasions, these claims have all proven to be overblown and overstated.

From time to time, the Australian minerals and petroleum resources industries, led by the Western

Australian industry, have faced the introduction of new regulatory requirements or new taxation

arrangements which are pursued in the national interest, either by the Federal Government or by a State

Government.

Such change has often if not always been difficult, but it has been effected and sustained by governments

of both political persuasion at both the State and Federal level.

Today the Australian minerals and petroleum resources industry has never been stronger.

The assured, continued growth of the minerals and petroleum resources industry in Western Australia will

continue to underpin Australia's economic growth and export outcomes and prosperity well into the future.

It is important and in our national interest that all Australians get a chance to share in those benefits.

Australia's minerals and petroleum resources are of course non-renewable resources not owned by the

industry. The resources belong to the Australian community, and access to them is given by Federal and

State Governments under terms and conditions set by public policy.

It is important that Australians get a better and fairer share from our natural resource wealth.

Before the last resources boom, Australians benefited from $1 in every $3 of mining profits through

royalties and resource charges.

At the end of this decade, that was down to just $1 in every $7.

Last month, the Government announced that new taxation arrangements would apply to profits earned

from Australia's resources from 1 July 2012, payable at a rate of 40 per cent on the realised value of all

resource deposits and payable on the difference between revenue and extraction costs.

Entities will be able to recognise operating costs in full in the year in which they occur while capital

expenditure will be spread over a number of years.

Payments of royalties to State and Territory governments will also be returned to resource firms in the form

of refundable credits. As a result, the proposed new taxation arrangements will effectively remove the

application of State royalties.

There is a genuine lack of appreciation within the industry in Western Australia that marginal mines —

those whose costs are high relative to their revenue — will pay less under these arrangements than under

the States' royalties, which Premier and Treasurer Colin Barnett has made clear he has a plan in his back

pocket to increase.

Some mines that currently pay State royalties may not be net payers under these new arrangements if they

do not earn sufficient profits.

Only projects generating the required return will pay more tax compared to current arrangements.

It is a tax on profit, not a tax on production.

Unlike royalties, these proposed new arrangements recognise the cost of investment and production. This

can be particularly important during periods of low commodity prices, a cycle which experience shows

always eventuates.

Companies will pay less tax when commodity prices are low or production costs are high.

In contrast, under the existing royalty regimes, entities will pay the same amount regardless of their

profitability, regardless of the cost of production and the peak or trough of a commodity price cycle or spike.

The Government is also proposing to introduce a resource exploration rebate.

The rebate will provide cash flow benefits to exploration companies.

The rebate gives exploration firms immediate recognition of their expenses, rather than having to wait for

when, or if, they turn a profit.

The rebate will particularly benefit junior exploration companies, which face a competitive disadvantage

because the losses they generate from exploration cannot be used to offset other taxable income.

Over the next decade, at least $5.6 billion of the proceeds of the new tax arrangement will be dedicated to

investing in critical infrastructure, especially for resources states like Western Australia.

This will help ensure that we put something back into the mining communities that make such a big

contribution to our prosperity.

Last week saw some of Australia's leading economists publish an open letter describing the proposed tax

as “a more efficient and equitable system of sharing the value of [exploration and mining] rights”.

They wrote “there is no reason to expect a net contraction in mining over the longer term as a result of

replacing royalties with the proposed resource rent tax. This is because a tax on economic rent of non-renewable resources is a more efficient way of raising revenue than taxing mining production (royalties).”

The proposed new arrangements apply to mining profits from 1 July 2012. It does not apply to past profits.

It does not apply to current profits. It would help a more informed public debate if there was clear distinction

between retrospective taxation — which this proposal is not — and taxation of existing projects, a concern

which has been raised by the minerals and resources industry.

On this issue, I make two points. The first is the suggestion that new arrangements should not apply to

existing projects. This is an argument that governments should never change tax rates. That is not and

never has been a sustainable proposition for any government State or Federal at any time, including with

the minerals and resources industry.

If it were the case, then State royalties would never have changed for a particular commodity or a particular

project.

It is an especially unsustainable argument when the tax share of profits has fallen, regardless of whatever

measure you use, significantly in recent years.

The Government is extensively consulting the industry on the design of the tax.

We are going through a detailed process of consultation.

The first progress report from the Resource Tax Consultation Panel has been delivered to the Government.

Many resources companies have consulted with the panel.

The Government wants to work with the industry in a constructive manner.

There has been plenty of public noise and heat in recent days and weeks. But noise does not necessarily

shed all that much light.

On Wednesday night, as I have on almost every year since I became the Member for Perth, I attended the

Minerals Council Dinner in Canberra.

I listened to a number of speeches, all from current or former industry figures. I heard some robust rhetoric.

But I also heard a serious call for wiser, calmer heads to prevail and to engage and talk and see whether

the differences in policy design between industry and the Government could be bridged through the

consultative process.

My colleague Martin Ferguson also made the same point in his contribution to the Minerals Council

Seminar: let's engage in the consultative process.

My conversations that night also identified a number of key areas where the industry has or will put a view:

i. The design differences between the Government's proposed mineral resources rent tax and the

existing Petroleum Resources Rent Tax (PRRT). The fact is that the PRRT deals simplistically and

expressly with two commodities — oil and gas - whereas minerals commodities are much more

diverse from gold nickel to iron ore to mineral sands.

ii. The presence of an on shore minerals royalties scheme, which varies from state to state and

commodity to commodity, unlike the PRRT, where life is much more simple as a result of the

absence of offshore state-based royalties.

iii. The different capital investment profile of minerals resources to petroleum resources.

iv. The differing commodity profit profiles for a wide range of minerals commodities; and

v. The detail of application of the proposed tax to existing projects.

These are all areas where the consultative process can see submissions or views from the industry for

proper and careful consideration.

Many companies have indicated, publicly and privately, that a profit-based tax system has merit.

A profit-based system provides greater fiscal stability for our minerals resources companies than a state-based royalties system.

During good times, a profit-based system will provide the Australian community with a fair return on the

nation's non-renewable resources.

During bad times, where revenue is down and profit margins reduced, a profit based system provides

timely tax relief for the industry.

Martin Ferguson has encouraged — as I do — all companies to become involved in the consultation

process.

There are other aspects to the Government's proposed tax reforms.

We will cut the company tax rate from 30 per cent to 29 per cent in 2013-14, and to 28 per cent from 2014-15.

With everyone focusing on the new resources tax, this important tax initiative has gone unnoticed.

A lower company tax rate is good for investment across all sectors of the economy and will improve

Australia's international tax competitiveness.

The Government will also use some of the proceeds of the resources tax to support the provision of the

major infrastructure required to improve our ability to grow our economy into the future and to continue to

improve our export competitiveness.

This is particularly important here in the West.

Western Australia will be a significant beneficiary of this approach.

As will China.

The prospect of better infrastructure opens up the prospect of even more efficient production and stability

of costs.

Australia's mineral and resources industry will continue to be of great importance to Australia's prosperity

and economic development into the future, as it will be for China.

As it is true of the minerals and petroleum industry, so it is true of the Australia — China relationship

generally, well into the future.

Thank you.