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Minerals Council of Australia_ 2008-09 Pre-Budget - MINERALS

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					                      MINERALS COUNCIL OF AUSTRALIA
                            2008-09 PRE-BUDGET SUBMISSION


                                                 JANUARY 2008




www.minerals.org.au
TABLE OF CONTENTS

EXECU TIV E SUM M ARY ................................................................................................... II
1.    PERF O RM ANC E OF AU ST RALIA’ S MI NERAL S I NDU ST RY ............................................... 1
      1.1    Safety and Health ......................................................................................................................................... 1
      1.2    Industry Revenues, Production, Profitability, and Investment.................................................................. 1
      1.3    Taxation Contribution ................................................................................................................................... 4
      1.4    Employment and Skills ................................................................................................................................. 4
      1.5    Environmental Performance ........................................................................................................................ 5
      1.6    Corporate Social Responsibility ................................................................................................................... 5
2.    GLOB AL OU TLOO K ................................................................................................. 7
      2.1    Global Growth ................................................................................................................................................ 7
      2.2    World Growth and Commodity Prices .......................................................................................................... 9
      2.3    Commodity Demand....................................................................................................................................11
      2.4    Commodity supply.......................................................................................................................................12
      2.5    Outlook for Commodity Prices: a New Base Level?.................................................................................15
3.    THE AUST RALIAN ECO NOM Y AND FI SC AL POLIC Y ..................................................... 19
      3.1    A strategy to sustain Australia’s economic expansion….......................................................................19
4.    POLICY ADVO C ACY AN D T H E F ED ERAL BU DG ET ....................................................... 28
      4.1    Regulatory Reform......................................................................................................................................28
             4.1.1       Occupational health and safety....................................................................................................29
             4.1.2       Project Approvals and Environmental Protection.......................................................................30
      4.2    Sustainable Regional Development...........................................................................................................33
      4.3    Building Sustainable Indigenous Communities.........................................................................................35
             4.3.1       An effective native title system.....................................................................................................35
             4.3.2       Building economic development in Indigenous communities....................................................36
             4.3.3       Indigenous Employment ...............................................................................................................37
      4.4    Exploration – Increasing Australia’s Minerals Inventory.........................................................................39
      4.5    Tackling Skills Shortages............................................................................................................................42
      4.6    A National Energy Market ..........................................................................................................................47
      4.7    National Water Reform ...............................................................................................................................49
      4.8    Competitive and Efficient Export Infrastructure........................................................................................51
      4.9    Maritime Transport .....................................................................................................................................55
             4.9.1       National Ballast Water Management and Biofouling Framework for International and
                           Domestic Shipping....................................................................................................................55
             4.9.2       Coastal shipping cabotage arrangements...................................................................................56
             4.9.3       International Convention on Liability and Compensation for Damage in Connection with the
                            Carriage of Hazardous and Noxious Substances by Sea (the HNS Convention)................57
      4.10    Workplace Arrangements .........................................................................................................................63
      4.11    Climate Change .........................................................................................................................................65
      4.12    Trade and investment...............................................................................................................................70




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EXECUTIVE SUMMARY

Mine rals secto r a st ro ng co nt rib uto r to eco nom ic e xp ansio n…

Australia’s minerals sector is performing strongly. The strength and scale of global demand for Australia
minerals commodities is robust and is expected to continue to expand, driven by vigorous growth in demand
from China and India as well as from traditional markets like Japan, Korea and Taiwan.

The stre ngt h o f t he m ine ra ls sect or’s e xpa nsio n ha s cont rib uted s ubsta ntially to the
Aust ra lia n ec o no my. The sector accounted for more than 30 per cent of new capital expenditure in 2006-
07. Employment in the sector has grown by 54,000 or 66 per cent in the last 5 years. Company tax paid by the
mineral sector has increased from $600 million in 2002-3 to $5.2 billion in 2006/7.1 Overall, direct and indirect
tax contributions to the Federal and State governments totalled $9 billion in 2006-7, an increase of 17.4 per
cent on the previous year.2 The economy wide impact of the current expansion is substantial - Access
Economics has estimated that in the 2008-9 Budget, more than $15 billion in Commonwealth revenues will be
directly attributable to the commodity expansion.

Cap acity c o nst ra ints t hre ate n to lim it sc ale a nd lo ng e vity of e xp a nsio n…

With demand for commodities firm and the outlook positive, the Australian minerals sector is gearing up its
supply capacity. Minerals projects worth $6.2 billion were completed in the 6 months to October 2007, a further
$34.2 billion in projects are at an advanced stage, and a further $71.5 billion in minerals projects are at a ‘less
advanced’ stage.3 B ut t he mi neral s sect or’s ab ility to exp and – and t hus the natio n’s ab ility
to be nef it f ul ly from this ‘ supe r cy cle ’ of growt h - is being ha mp ered by sev e re a nd
worse ning c ap acity c o nst ra i nts. These constraints are slowing growth in mine production, reducing
export income, and delaying the start up of new projects. The opportunity cost is clear. Australia is not
fully cap ita li si ng o n t he st ro nge st g lob al m arket in a ge ne rat io n .

Despite continuing robust demand and firm prices, Australia’s minerals exports are forecast to increase by only
3 per cent to $94 billion in the year to June 2008 (see Chart 1). This moderation in export growth is partly due
to a softening of prices for some commodities. Notwit hst a nding high g lob al p ric es , vigo ro us
dem a nd a nd bi ll io ns o f d ol la rs o f ne w inv est me nt, a rtificial co nst ra ints o n expa ns io n have
mea nt t hat new s upply i s only li mp ing ont o t he ma rke t. Coal exports have been adversely affected,
with production increasing by only 2 per cent in the year to June 2007.

                                Cha rt 1:




1 Minerals Council of Australia and PricewaterhouseCoopers, Minerals Industry Survey Report 2007, December 2007
2 Ibid.
3 ABARE, Australian Commodities, Volume 14. Number 4. December 2007


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Key c apa city c o nst ra int s due to p olicy failures…

Some of these capacity constraints, notably the cost and availability of key production inputs including mining
equipment, are a global phenomenon and are due to the unexpected strength and duration of the current global
expansion.

Other capacity constraints, however, are due to policy shortcomings at a national and state level. These include
chronic skills shortages, congested and poorly functioning export corridors, emerging shortages of energy and
water, inadequate social and physical infrastructure in remote and regional communities, and duplicative and
excessive regulatory requirements for occupational health and safety and land access and use.

The cost to the Australian economy of these capacity constraints is already substantial. If left unaddressed,
these capacity constraints will dramatically reduce the benefits that the global resources expansion can create
for future generations of Australians.

Few of thes e p robl em s c a n b e so lved in a single B ud get. In f act, ma ny so lutio ns to thes e
capac ity co nstrai nt s w il l not req ui re a ddit io nal sp e nding . Instead the solution to many of these
problems lies in better Federal State co-operation, the elimination of duplicative and contradictory regulatory
processes, institutional and intellectual capacity building, the increased efficiency and operability of the native
title system, and more appropriate competition policy settings. The Rudd Government has already taken
important initial steps towards the adoption of these complementary policy measures (the priority areas of which
are detailed in this submission). These efforts must be expanded and sustained.

PRIO RIT Y B UDG ET MEASURES

The 2008-9 Budget represents a critical opportunity to take decisive action to address key capacity constraints
that threaten to hold back the Australian economy in general, and the minerals sector in particular.

At the broadest level, the 2008-09 Budget must adopt a singular focus on sound macroeconomic management.
Ensuring that inflation remains within the 2 to 3 per cent band should be a priority objective for the Budget. The
maintenance of a healthy surplus will be a critical element of such an anti-inflation strategy. Over recent years,
the MCA has expressed growing concern at the trend of successive budgets to devote spending to consumption
(in the form of tax cuts and benefits) over the expansion of productive capacity (social and physical
infrastructure). This has inevitably led to a steady expansion of demand - Government policy decisions since the
2002-03 Budget are now running at a cost of $85 billion per year - at a time when the key constraint to
prosperity lies on the supply side of the Australian economy.

The B udg et m ust a ls o s ig nal a new direct io n fo r mac roeco nom ic p olicy. Its de fining
princip le s ho uld be a n em p ha si s o n the prog re ss ive inve stm e nt in inf ra struct ure ove r
cons um ptio n. This theme should inform the Budget’s approach to expanding Australia’s skilled workforce,
building a modern competitive export infrastructure, the reinvigoration of the national minerals inventory, and
appropriate service provision in regional and remote Australia, including in Indigenous communities.

Ad dressing skills sho rta ge s…

The 2008/9 Budget must accelerate efforts to tackle skills shortages in critical areas of the national economy,
and particularly the minerals sector. This is a critical national task. Although employment in the minerals sector
has grown by 54,000 in the last 5 years, the shortfall in skilled and semi-skilled employees has increased
dramatically. J ob v aca nc ie s in the mi nerals secto r have grow n f ive -f old since 2002, a nd
sk ills s ho rta ge s a re ca usi ng d el ays in so me p rojects , the ind ef inite mot hballing o f ot hers,
and hig he r c ost s ac ros s t he sect or. Industry projections4 suggest that the minerals sector will require

4National Centre for Vocational Education Research, Prospecting for Skills: the Current and Future Skill Needs in the
Minerals Sector, Report commissioned by the Minerals Council of Australia (MCA) the Chamber of Minerals and Energy
Western Australia (CMEWA), and the Department of Education, Science and Technology.
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an additional 70,000 employees by 2015. Unless the pool of skilled and semi-skilled employees can be
expanded to meet this demand, substantial growth opportunities, particularly in regional and remote regions of
Australia, will be lost.

               Cha rt 2:




The response to this challenge must be comprehensive in scope and sustained in duration. It must includ e
subst a ntia l re fo rm a nd bett er res o urc ing of Australia ’ s e d ucatio n a nd t ra ining sy stem ,
ra ng ing ac ro ss the sc hoo ls sy ste m, v ocat io na l ed ucat io n and t ra ining a nd the hig he r
ed ucat io n secto r. It is essential that Australia’s school system deliver literate, numerate graduates.
Australia’s vocational education system must be flexible, market-driven and responsive to needs in regional and
remote areas of Australia. In the case of the minerals sector, this should include support for the development of
minerals industry skills ‘hubs’ or ‘centres of excellence’ in mining regions to cater for the current and future
needs in specialist, skilled and semi-skilled occupations. Moreover, the higher education sector must be better
funded and responsive to employment trends and requirements.

These education initiatives need to be accompanied by other measures designed to progressively raise
workforce participation, particularly higher female participation and to support greater Indigenous employment.

The pote nti al fo r a s ub sta ntia l i ncrea se in I nd ig e no us em ploym ent in t he m ine ra ls s ecto r
is c o ns id erab le. More than 60 per cent of minerals operations in Australian neighbour Indigenous
communities and the minerals sector is already the largest private sector employer of Indigenous Australians.
With the industry expanding in remote regions and its employment needs growing, the scope for new
opportunities is significant. There are, however, considerable constraints that, if left unaddressed, will limit the
contribution of the minerals sector to expanded Indigenous employment. Better education outcomes, especially
in literacy and numeracy, will be fundamental.

The 2008-9 Budget represents an opportunity for a substantial investment in initiatives aimed at lifting literacy
and numeracy outcomes, raising school retention rates, and ensuring that vocational education opportunities
are available in Indigenous communities. The MCA also supports reforms to the Community Development
Employment Program (CDEP) to increase the ‘graduation rate’ of participants into permanent employment.

Re b uilding infrast ruct ure in re mote a nd reg io na l Aust ra lia …

The minerals industry operates predominantly in regional and remote Australia and is often the major economic
activity in these communities. But the key physical and social infrastructure in regional Australia is suffering from
years of inadequate investment. U nde r-f und ed ed uc ation a nd hea lt h s e rvic es , a nd inad eq uat e
tra ns po rt and c om m unicat io n li nks a re a sig nif ica nt d eterrent to t he attractio n o f
emp loy ee s a nd t he ir f am ili es to re gi o na l a nd re mote comm unitie s, thus re pres e nting a
furt he r a nd unw elc om e co nstrai nt o n t he s ector e xp a ns io n. The minerals sector does not support
a direct link between the contribution made by minerals operations in these communities in taxes and royalties
and public spending on infrastructure. But chronic under-investment in infrastructure in these communities

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serves to highlight the disadvantage endured by these communities in comparison to counterpart communities
on the coastal fringe. As a senior minerals industry executive said recently:

          “…we see more than $100 million being paid annually in royalties alone by mining companies
          operating in Northwest Queensland, with very little reconciliation to the social development funding
          being redirected back to the local communities.”5

Furthermore, a co ro ll ary o f t he c urre nt fa ilure of Fe de ra l a nd State gov e rnme nt s to p rov ide
ade q uate i nf rast ructure i s t he i nc re as ing expectat io n that t he m ine ra ls ind ustry s hould
provid e se rvic es that are p rope rly t he resp o ns ib ility of gove rnme nt, namely health, education,
housing, communications and transport infrastructure.

The 2008-9 Budget must include decisive steps to develop, renovate and rebuild infrastructure in remote and
regional areas of Australia. The Budget should also address the quality of infrastructure and social services in
remote and regional Indigenous communities, with emphasis on economic development, improved education
outcomes, work readiness and skills development initiatives, and better access to human and financial capital to
facilitate Indigenous enterprise development.

A glo ba lly co mpet itive b usine ss ta x e nv iro nm e nt …

The minerals sector’s current expansion phase has seen the industry’s share of total corporate tax payments
grow exponentially from 1.6 per cent in 2002/3 to 9.1 per cent in 2006/7.6 This reflects buoyant activity in the
sector, with healthy growth in net profit returns. For example, mining profits accounted for more than 5 per cent
of GDP in 2006-7, up from 2.2 per cent in 1999-00. There is, however, no cause for complacency. De sp ite
the curre nt ex pa nsi on, Austra li a’ s mine rals s ecto r op erates in a n int e ns ely c om pet itive
glo ba l e nv iro nm e nt w ith tax b urd e ns bec om ing a n inc re as ingly s ig nific a nt f acto r
influencing the locat io n of i nve stm e nt.

In the near term, the minerals sector’s focus is on bedding down remaining features of the Ralph business tax
reforms. To maintain the industry’s international competitiveness and to encourage investment, the industry
supports a number of improved deductibility measures, dividend imputation of foreign source income,
reinstatement of the 150% R&D tax concession, and 20 year caps on the effective life of long-lived assets for
depreciation purposes. The industry is also consulting with Treasury and the Australian Taxation Office on a
number of other issues including the appropriate tax treatment of payments received in farm in/our financial
arrangements, the deductibility of expenses when they are ‘mine site improvements’, and the removal of
‘inefficient’ state and territory government taxes.

Re plenishing Australia ’s minerals inve nto ry …

An ongoing threat to the minerals sector’s expansion is the shrinking national minerals inventory. W hile
exp lo rat io n sp e nd ing has grow n i n rec e nt ye ars, Aust ra lia co ntinues to fall be hind ot her
nat io ns i n id e ntify i ng new ba se m etal a nd go ld res o urces. In 2006-7, the total metres of
exploration drilling were 35 per cent below the peak achieved in 2001-2. Given the buoyant nature of the global
industry, it is clear that there are structural impediments to investment in exploration.

To t his e nd, the mi ne ral s secto r lo ok s f orwa rd to t he ea rly im plem e ntatio n o f La bo r’ s p la n
to introd uc e a ta rg eted fl ow t hro ugh s hares sc hem e. Such a scheme would enable the transfer of
tax deductions of individual exploration companies to their investors. In doing so, this initiative would directly
address one of the principal causes of Australia’s dwindling exploration effort – the fact that most exploration is



5 The AUSIMM Julius Kruttschnitt Lecture, ‘Sustainability Issues in a Super Cycle” reprinted in AUSIMM Bulletin, No.6.
November/December 2007.
6 This figure is obtained by comparing direct company taxes paid by the minerals sector (as recorded in the Minerals

Industry Survey Report 2007) against total corporate receipts recorded in Budget Paper No 1, Statement 5, Appendix C.
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undertaken by start-up mining companies with little income against which they can deduct exploration costs. A
similar policy shift in Canada is credited with a strong surge in exploration spending there.

Sup po rt req uired to und e rpin nativ e tit le p roce ss…

The minerals industry is committed to respecting the rights, interests and special connections of Indigenous
people to Australia’s lands and waters. This reflects a fundamental shift over the last decade from an
adversarial, litigious approach to native title to a new approach based on mutually beneficial agreements for land
access and sustainable Indigenous communities. An effective functioning native title system represents a critical
element in building sustainable Indigenous communities, characterised by higher living standards, and better
health and education outcomes.

How eve r, the eff ectiv e ne ss of Indi ge no us Re p re se ntat ive orga nizatio ns (inc luding Nativ e
Title rep res e ntativ e B odi es a nd P re sc rib ed Bo dies Co rp orate) is b eing ha mpe red by
inad eq uat e re so urci ng a nd ov e rly rest rictiv e ope rating p aram ete rs . These shortcomings are
delaying the negotiation of agreements and therefore the benefits received by Indigenous communities. There
are also reforms, with no funding implications, that can be taken to improve the effectiveness of NTRBs and
PBCs. More specifically, NTRBs should be provided with a greater degree of flexibility for expenditure of
government monies, while their broader role as a potential contributor to regional economic development should
also be recognised.

Ad eq uat e re so urcing for C om mo nw ea lth ag e ncies…

Ina deq uate res ourc i ng of Co mm o nwe alt h ag encie s wit h re g ulato ry re spo nsibility fo r
asp ects of the mi ne ral s s ecto r’ s e nviro nme nta l p e rfo rma nce rem ains a co nc ern fo r t h e
mine ra ls s ecto r. Amendments to the Environment Protection and Biodiversity Conservation Act 1999 have
not been matched by additional funding for the Department of Environment, Heritage and the Arts to implement
the changes. The Government should review funding arrangements for the agency to ensure that under-
resourcing of the agency does not emerge as a capacity constraint.

The minerals sector is committed to ensuring that cultural heritage be taken into account in Australia’s land
management systems. Current cultural heritage regimes are unnecessarily complicated, with heritage registers
maintained separately by the Australian Heritage Commission and State and Territory Governments. Moreover,
the assessment of cultural heritage under State legislative arrangements is imprecise, often leading to
substantial delays in the project assessment and approval process. Australia needs to develop a consistent
approach to Indigenous heritage matters and to integrate Indigenous heritage conservation procedures with
land management procedures to avoid duplication and overlap with other legislative jurisdictions.

There is also a pressing need for increased funding for the National Pollutant Inventory which seeks to provide
the community, industry and government with information about substance emissions in Australia. But funding
for the NPI has declined in real terms by 3 per cent per annum since 1994-5,7 limiting its effectiveness. The
Government should review funding arrangements of the NPI, and should not expand its coverage unless further
resources are forthcoming.

An efficie nt a nd e ffe ctive ap p roac h to c limate c ha ng e …

Australia must contribute to addressing climate change as part of a global solution to a global challenge.
Australia’s response should be environmentally effective, economically efficient and socially and politically
acceptable. This approach must be multifaceted, embracing the proposed emissions trading scheme, support
for low emissions technology and deployment, adaptation policies for industry, a negotiating strategy in
international forums aimed at securing a genuinely comprehensive response (including major developing
countries), and clearly defined communication of the rationale for each element of climate change policy.



7   Productivity Commission, Annual Review of Regulatory Burdens on Business: Primary Sector, November 2007.
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More specifically, the minerals sector welcomes the Labor Government’s commitment to an emissions trading
scheme that will not compromise Australia’s competitiveness, is developed in close consultation with industry,
and includes specific mechanisms that ensure that Australian operations of trade exposed emissions intensive
firms are not disadvantaged. T he m i ne ra ls s ecto r loo ks fo rward to the ea rly implem e ntatio n o f
Labo r’ s c om mitm e nt to a $500 m il li o n Natio na l C le a n Coa l Fund to acc ele rate t he
deve lo pm ent a nd d epl oym e nt o f cl ea n coa l t echnolog ies. T his Aust ralia n coa l secto r has
lo ng reco gnis ed the imp o rta nce of clea n c oa l tec hnologies , hav ing f und ed re se a rch into
its c le an p ro d uctio n a nd us e s i nce 1992. The sector has also committed $1 billion over 10 years to
support the pre-commercial demonstration of low emissions technologies in the power generation sector, where
over 95 per cent of emissions from coal occur.

COM PLEM ENT ARY POLIC Y M EASURES

New Budget measures will be a necessary, but not sufficient, response to the capacity constraints that confront
the Australian minerals sector. This budgetary response must be matched by a concerted commitment to
address the lack of consistency and duplication of approaches amongst various Federal and State jurisdictions
to key regulatory issues, the chronic blame-shifting between jurisdictions over responsibility for shortcomings in
infrastructure provision, and overlapping, complex and contradictory competition policy settings.

The Rudd Government has made an early and important commitment to substantial and sustained reform of
Commonwealth State relations to overcome these artificial barriers. T he rea l te st o f s ucce ss will be in
the ac hieve me nt of natio nal ly c onsi ste nt re g ulatio n, s trea mline d a pp rov als proce ss es a nd
comp etiti o n p ol icy setti ngs t hat p ro mote rat he r t ha n dete r inf ra struct ure inve stme nt .
Resistance, both overt and covert, should be anticipated. In some cases a shared national purpose and goodwill
may be insufficient to achieve much needed reforms. I n suc h c ase s, the Fed e ra l G ove rnm e nt s hould
als o c o ns ide r t he us e of i nce ntiv e p aym e nts to enc o ura ge t he State s and Te rrito ries to
accele rate the ha rmo ni sat io n of t he co nt ent , a dm inist ratio n and e nfo rce me nt of reg ulatio n
and app ro val s proce ss es .

Pro mot ing natio nal c o nsist ency…

Regulations impacting on exploration, mining and mineral processing inevitably involve a multitude of controls at
all three tiers of government that vary from jurisdiction to jurisdiction. Australia’ s re g ulat ory sy ste ms
gove rning t he mi ne ral s i nd ustry i n occ upat io na l healt h a nd sa fety ( OHS) a nd p ro ject
app rov al s are no w so exc es siv e a nd c om ple x, s o inc o ns ist e nt ac ro ss a nd w ithin
jurisd icti o ns , a nd s o di sag g reg ated f ro m prog re ss ive , mo de rn co mp a ny practice , t hat t hey
re pres e nt a f und am ent al cap acity co nst ra int.

Accordingly the MCA strongly welcomes the Rudd Government’s commitment to harmonise OHS regulations
within 5 years. The work already underway as part of the National Mine Safety Framework should provide the
basis for achieving national consistency in OH&S regulation. The resulting legislation should emphasise
prevention, be framed around the concept of acceptable risk, with minimal prescription without compromising
standards. The MCA considers that nationally consistent legislation should avoid the approach embodied in the
draconian workplace deaths/industrial manslaughter legislation of NSW – which imposes absolute liability,
automatically assigns guilt to the company and management, removes a test of gross negligence or wilful
misconduct, and removes any assignment of responsibility to other organisations or individuals.

Anot he r si g ni fic ant co nce rn fo r t he i nd ustry is duplic atio n of Fe de ra l and Stat e
env iro nm e ntal a pp rov al s p roce ss es in c as es w he re bilateral ag ree me nts bet wee n the tw o
leve ls of g ove rnm e nt hav e not be e n a gree d. The delays that result from such duplication represent a
disincentive to investment, increasing project costs and exacerbating the lag phase between discovery and the
commissioning of production projects. The MCA endorses the Productivity Commission’s recent conclusion that
that the Federal and State Governments should give ‘high priority’ to completing bilateral agreements for
approvals.


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Strea mlining co nge sted e xpo rt c hains…

The prolife ratio n of reg ul ato ry a nd ow ne rs hip co mp le xity w it hin Australia’ s c oa l s upp ly
cha ins ha s c re ated se ve re bottl e nec ks a nd ine ff icie nc ies . These shortcomings, evident in both the
Queensland and New South Wales coal sectors, are a function of outdated policy settings and the diverse
ownership arrangements those policies have fostered over successive decades. Instead of an integrated,
streamlined export chain, the mining operations, the rail track, freight services, terminal operations, port
management and shipping services have been developed, owned and operated independently of each other.

Not surprisingly, as global demand has expanded rapidly in recent years, these arrangements have been found
wanting. Long queues of coal vessels have developed off the Eastern Seaboard costing hundreds of millions of
dollars in demurrage charges. The underperformance of Goonyella Coal Chain (in Central Queensland) alone
resulted in a lost economic benefit of $1 billion in 2005/6. Further evidence of these constraints is provided by
the value of coal stockpiles awaiting shipment, the value of which has increased from $4.9 billion in 2005/6 to
$6 billion in 2006/7.8

Substantial investment is occurring to remedy the issues on the Eastern seaboard – including $2 billion of public
and private sector investment in the NSW Hunter Valley, with an additional $3.9 billion ‘committed’ and $4.5
billion ‘under consideration’ in the Queensland coal sector. T his inv est me nt w ill be of little be ne fit,
ho wev er, i f t he cap acity of the w hol e supp ly c hain do es not imp rov e to m atch the
capac ities of the p o rts, o r t he rai l s yste m.

Further regulatory reform must provide for effective national (not state-based) infrastructure markets; market-
based prices that send the appropriate signals to consumers and suppliers; public investment processes that
are integrated across governments, forward looking, based on consideration of all options and favour efficient,
integrated mining, processing and transport projects with the highest (and published) benefit cost ratio; private
ownership as the preferred model in all contestable market segments; and regulation of infrastructure that does
not discourage investment seeking to meet expected demand.

An efficie nt a nd e ffe ctive e xpo rt c hain unde r t hreat …

In the Pilbara region of North West Western Australia, the challenge is not to create an integrated export chain
but to preserve it from the threat of misguided competition policy. In this region, vertically integrated mine, rail
and port arrangements have been a key factor in the rapid expansion of the iron ore trade to meet the rapid
growth in demand from China and India. These facilities are far more than a simple freight operation but
represent an integrated logistical and production process Chart 3 highlights the relative efficiency of the
vertically integrated Pilbara iron ore export chain with the East Seaboard coal chains.

        Cha rt 3:




            Source: M. Spreadborough, Rio Tinto Iron Ore, Financial community visit presentation, 12 June 2007

8   Minerals Council of Australia and PricewaterhouseCoopers, Minerals Industry Survey Report, December 2007.
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These arrangements are threatened, however, by rulings that could lead to mandated third party access to this
infrastructure. The MCA supports the findings of the Export Infrastructure Taskforce that concluded in 2005
there should be a means to exempt highly efficient, dedicated, integrated, export oriented transport facilities
from the operation of Part IIIA of the Trade Practices Act. Therefore, where mineral developers have invested in
private infrastructure, t he M C A rec om me nds t hat Pa rt III A be am ende d to p rov ide f or a n
‘ef fic ie ncy ove rri de’ , w hereby k ey i nfrast ruct ure f acilities co uld be dec la re d e xe mpt f rom
third -p a rty acc es s.

Re g ulat ory a pp ro ac he s m ust p romot e inv est me nt in c ritic al e nergy a nd w ate r
infrast ruct ure…

In addition to export infrastructure, there is a pressing need to accelerate policy reforms in other areas of
essential infrastructure, especially energy and water. In both cases, delayed and fragmented approaches to
regulatory reform have hindered investment in new capacity.

In the water utilities sector, so-called ‘dividend stripping’ by State Governments has also contributed to under-
investment in new capacity. In 2006-7, for example, dividends paid by 8 major urban water authorities in 2006-
7 totalled $857 million.9 The result has been under-investment in new water capacity. A report to the federal
Government concluded that ‘most of the [water utility] businesses have paid dividends but have not increased
capital expenditure significantly and certainly not increased it to the levels required to have avoided the current
shortfall in supply.”10

Although the minerals sector accounts for only 2.2 per cent of national water consumption, access to a reliable
water supply is an essential input to mining operations. Reflecting the criticality of this resource, the minerals
sector uses water carefully, often recycling water up to 7 times, with its value added per mega litre (ML) of water
amongst the highest of all industry sectors. According to official data, coal mining generates $86000 for every
ML used, compared with $162 per ML for rice production and $3870 per ML for vegetable production.11

On c urre nt proj ectio ns t he re w il l b e a s ig nific a nt g ap betwe e n d em a nd a nd s up ply of wat er
ove r t he nea r a nd me di um te rm . Both current and future minerals projects are potentially at risk as a
result. In 2007, mine production in NSW and Queensland was scaled back in 2007 because of water shortages,
while an expert report warned that scheduled minerals projects in the Hunter Valley and in the WA Goldfields
could be endangered without substantial matching investment to ensure sufficient water supplies.12

An expa nd i ng mi neral s i nd ust ry nee ds a stab le , p redictable reg ulat ory e nviro nme nt so that
it ca n ma ke lo ng-ra nge d eve lop me nt pla ns wit h c o nfide nce . The establishment of well-structured
water markets are critical if the future requirements of the expanding minerals sector are to be met. It is
therefore essential that adequate resourcing is provided to fully implement the National Water Initiative, including
the specific provisions for the minerals industry. The National Water Commission should continue to drive water
reform to ensure allocation of water to users and the environment based on sound science allowing for security
of supply and trading to be established in an equitable market whilst pricing for the true cost of water and
differential quality.

Acce ss to reli ab le e ne rgy i s al so em erging a s a s ig nif ica nt is sue fo r mine rals p ro ject s.
Est im ates o f nati o n-wi de e ne rgy d em and ha ve s ug ge s ted t hat t he g ap betw ee n p rojecte d
ene rgy s up ply a nd ex pect ed de ma nd w ill b e 53 p er ce nt b y 2020. Investment required in new



9 The Australian, January 12-13, 2008 p.28.
10 Report by Marsden Jacob Associates, Securing Australia’s Urban Water Supplies : Opportunities and Impediments.
October 2006. Report commissioned by Department of Prime Minister and Cabinet. pESv
11 ACIL Tasman, Water Reform and Industry, Report prepared for the Department of Industry, Tourism and Resources, April

2007
12 ACIL Tasman, Water Reform and Industry, March 2007


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energy supplies is estimated to be $30-$35 billion by 2020.13 Without significant new expansion, the scale of
the minerals expansion may be curbed.

The obstacle is not a reluctance to invest on the part of Federal or State Governments. Provided there are
appropriate policy settings in place, there will be substantial private sector investment in new energy capacity.
More specifically, the MCA is a strong advocate for an open, competitive and integrated national energy market
and supports the further development of the National Energy Market (NEM). The MCA is concerned, however
that the timetable for implementation has slipped by up to two and a half years. It is vital to reinvigorate the
efficient and timely development of an integrated National Energy Market (NEM) that improves reliability of
supply, promotes greater interstate competition and trade, delivers effective customer choice and strengthens
investor and community confidence in the market. These arrangements should also ensure that water
entitlements for cultural heritage values are recognised as distinct and separate to environmental flows, and
where appropriate, can be traded in the market.

Workp lac e a rra ngem e nts that p re se rv e c ho ice a nd fle xib ility…
The Australian minerals sector needs an industrial relations system that promotes the development of mutually
beneficial partnerships between employer and employee. The minerals sector places considerable importance
on national workplace arrangements that enable the industry to continue to engender a culture of collaboration
and direct relationships, of individual enterprise and personal accountability, and of mutual dependency and
prosperity.
To this end, the MCA is encouraged by the extent to which the Rudd Government’s Industrial Relations Policy –
Forward with Fairness Phase II addresses flexibility and choice, transitional arrangements, and provides greater
certainty and stability for business, specifically in relation to the right of entry and compliance provisions. The
MCA will work closely with the Rudd Government as it develops the implementing legislation.




13   Business Council of Australia, Infrastructure Action Plan for Future Prosperity, March 2005
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BUDG ET P RIO RITI ES

Fisc al Po licy

Maintain significant budget surplus over the course of the economic cycle.
Budget focus should be on addressing demand/supply imbalance with emphasis on
investment in productive capacity in preference to short-term consumption.
Address capacity constraints to ensure Australia fully exploits current global commodity demand.

Re gi onal Dev el op me nt

Develop, renovate and rebuild infrastructure in remote and regional areas of Australia.
Urgently address the quality of infrastructure and social services in remote and regional Indigenous
communities.

Ind ig eno us Rel atio ns

Increase resourcing of Indigenous Representative bodies, and reform restrictive operating rules.
Reform Indigenous education and employment programs, with emphasis on improving literacy and
numeracy outcomes and ‘fitness for work’, as well as the transition into sustainable employment.

Tack li ng Sk il ls Sho rtag es

Strong focus on work readiness skills, including literacy and numeracy and ‘fitness for work’.
Support establishment of minerals industry regional skills hubs/centres of excellence.
Support priority higher education areas, particularly engineering and sciences.
Maintain flexible skilled migration program.

Cli mat e C ha nge

Implement Labor’s commitment to a $500 million National Clean Coal Fund to accelerate the
development and deployment of clean coal technologies.

Tax ati on ref orm

Bed down remaining elements of Ralph business tax reforms.
Initiate measured program of structural, but affordable tax reform.
Maintain the industry’s international competitiveness and to encourage investment, including by
improved deductibility measures, dividend imputation of foreign source income, reinstatement of the
150% R&D tax concession, and 20 year caps on the effective life of long-lived assets for depreciation
purposes.
Address ongoing concerns including the appropriate tax treatment of payments received in farm in/out
financial arrangements, the deductibility of expenses when they are ‘mine site improvements’,
improving the (tax) trusts legislation to promote Indigenous intergenerational benefits; and the
removal of ‘inefficient’ state and territory government taxes.

Mi ne ral s Ex pl oratio n

Implement Labor’s commitment to introduce a ‘flow through’ shares scheme for junior explorers.




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COM PLEM ENT ARY POLIC Y M EASURES

Fed eral State relat io ns

Using incentive payments where appropriate, promote national consistency and reduce duplication of
Commonwealth/state/territory regulation, especially in project approvals and occupational health and
safety.
Move towards a risk and performance-based approach to regulation based on COAG principles.

Buil di ng Exp o rt I nf ra struct ure

Regulatory reform to provide for effective national (not state-based) infrastructure markets which
promote the alignment of interests amongst all players in the export chain.
Introduce efficiency override to Part IIIA of Trade Practices Act to promote continued investment in
export infrastructure.

Wate r a nd Ene rgy po licy

Fully implement the National Water Initiative, including specific provisions for the minerals industry.
Promote the efficient and timely development of an integrated National Energy Market

Workf orc e Cap ab il ity a nd Sk il ls

Support an industrial relations system that promotes choice, flexibility and the development of mutually
beneficial partnerships between employer and employee.




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1.          PERFORMAN CE OF AUSTRAL IA’S M INERALS INDUSTRY

Australia’s minerals sector is performing strongly. Global demand was robust in 2006-7, keeping commodity
prices at high levels. Revenues and profits continued to grow vigorously, and with the medium term outlook for
demand very positive, investment nearly doubled. Production and exports also expanded, although rates of
growth differed considerably as the impact of capacity constraints became increasingly evident. Costs also rose
considerably, with skills shortages contributing to a 16 per cent increase in labour costs. The minerals sector’s
contribution to taxation revenues was substantial, with total payments reaching $9 billion.

1. 1        Sa fety a nd H ea lth

The safety and health of its workforce is the minerals sector’s number one value. The industry takes no
salvation from the fact that there has been a significant improvement in safety and health outcomes over the last
decade, and is frustrated that it continues to fall short of its goal of zero harm (see C ha rt 1. 1 below). The
fourteen fatalities in 2006-07 were the worst result in six years and has reinforced the need for a
comprehensive approach to occupational health and safety, including safety and health management systems,
rigorous safety induction and training programs, and behaviour-based safety initiatives.

Cha rt 1. 1: Fat alit ie s a nd Lo st Ti me I njury F re q ue ncy Rat es




                                                                                                        na




1. 2       Ind ustry Reve nues , P ro d uctio n, P ro fita bility, a nd I nve stme nt

Rev e nue s

Global supply capacity constraints and increasing production and operating costs, coupled with continued strong
demand caused by robust global economic conditions, saw prices increase for most mineral and metal
commodities in 2006-07.

The MCA’s All Minerals and Metals Price Index) (MIS) rose by 26 per cent in (nominal) $A terms between 2005-
06 and 2006-07.14 This represents a slowing in prices growth with a 45 per cent increase experienced between



14   Minerals Council of Australia and PricewaterhouseCoopers, Minerals Industry Survey Report 2007, December 2007.
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2004/05 and 2005-06. As a result, total revenue increased by 18 per cent from $56.1 billion to $66.6 billion
between 2005-06 and 2006-07 (see C hart 1. 2 below).

Pro d uctio n

Despite considerable investment and expansion activity in recent times, the MCA Mine and Smelter & Refinery
Production Indices (2007 MIS) show that Australian mine production and smelter and refinery production
increased moderately in 2006-07 – recording 2 per cent increases (respectively) between 2005-06 and 2006-
07 (see C ha rt 1. 3 below).

Iron ore production increased by 6 per cent between 2005-06 and 2006-07, while coal output grew by just 2
per cent, hampered by inefficient public/privately owned export transport infrastructure chains and bad weather.
Some geographic regions of iron ore production were also severely affected by bad weather (cyclones), with
others affected by maintenance activities.

Expo rts

According to ABARE, the value of Australian mineral resources exports (excludes crude oil, LPG, LNG, bunker fuel
and other petroleum products) increased 16 per cent to $90.8 billion in 2006/07.

This strong increase in export returns was driven by continued strong growth in global commodity prices,
continuing a trend that has been evident for the last five years. For example, the value of Australian mineral
resources exports has increased almost 100 per cent between 2002/03 and 2006/07. During the same time,
the MCA’s All Minerals and Metals Price Index shows that prices in $A increased approximately 91 per cent
during this time whilst output, as measured by the MCA’s Mine Production Index, increased by only 4 per cent.
Stronger export returns were tempered by an approximate 30 per cent appreciation of the Australian dollar
during this period.

In 2007/08, ABARE predicts that export earnings will be tempered by further global commodity price moderation
and further appreciation of the Australian dollar. Production is expected to increase for most commodities as
new projects come on line. The net effect of these influences is a forecast 3 per cent increase in Australian
mineral resources exports to $93.9 billion.




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Pro fit ability

Despite escalating production and operating costs, all profit indicators continued to increase in 2006-07 on
account of strong global demand, continued strong commodity prices, and moderate increases in production.
Compared to 2005-06, net profit increased 21 per cent from $12.3 billion to $14.9 billion. This is the highest
level recorded and is 198 per cent greater than the preceding 10-year average of $5.0 billion (see C ha rt 1. 4
below).

Profits were affected by a continued strong increase in expenses. Total expenses increased by 17 per cent from
$39.4 billion to $46.4 billion between 2005-06 and 2006-07. A breakdown is provided at C ha rt 1. 5 below.
                  Cha rt 1. 5: Pe rce nt age I ncrea se in Expe nse s 2005-06 a nd 2006-07




                      So urce : Minerals Council of Australia, 2007 Minerals Industry Survey Report

Marginal costs of production are expected to remain higher than pre 2003 boom levels given persistent
production constraints caused by global scarcity and long delivery lead times of production inputs (notably for
tyres, locomotives, draglines and grinding mills). Delivery times for these essential inputs has increased
dramatically from approximately 5-20 months to 20-50 months. Many mining operations are experiencing
project completion delays and significant increases in costs as a result.

Inve stm e nt

The amount of net cash used in investing activities increased 93 per cent from $7.7 billion to $14.9 billion
between 2005-06 and 2006-07 (2007 MIS). This reflects positive expectations of continued strong global
demand and prices. Of this $14.9 billion, $12.9 billion was net capital expenditure on mining, smelting and
refining assets and represents a 54 per cent increase compared to 2005-06 (see C ha rt 1. 6 below).

        Cha rt 1. 2: I nd ust ry Rev e nue s                               Cha rt 1. 3: P ro ductio n




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             Cha rt 1. 4: N et P ro fit                                       Cha rt 1. 6: I nve stme nt




So urce : Minerals Council of Australia, 2007 Minerals Industry Survey Report

1. 3      Tax ati on C o ntrib uti on

The total amount of government revenue derived from Australian mining activities increased 17 per cent to $9.0
billion15. Direct taxes accounted for a majority of these payments. Mineral royalties and licence fees paid to
State Governments increased by 16 per cent to $2.0 billion, and income tax expense accrued to the Federal
Government increased by 18 per cent to $5.2 billion (see C ha rt 1. 7 below).

                Cha rt 1. 7: Di rect Ta xe s (I nc om e T ax, Roy alt ie s a nd Licenc e Fe es)




Ind irect ta xe s (payroll, fringe benefits, fuel excise, land and other taxes) increased by 28 per cent to $0.73
billion. Drawing upon Australian Treasury statistics16, the industry in 2006-07 accounted for approximately 9.1
per cent of total company income tax receipts (which totalled $57.1 billion). This is significantly higher than the
1.6 per cent17 recorded in 2003/04 when the current mining expansion commenced.

1. 4      Em pl oym e nt a nd Sk il ls

Indicative of future demand expectations and expansion activities, employment grew in 2006-07 but was
tempered by a shortage of workers – notably tradespersons and semi-skilled workers. The recorded 4 per cent
growth in employment was well short of the estimated 9 per cent per annum needed until 2015 to meet staffing



15 Minerals Council of Australia and PricewaterhouseCoopers, Minerals Industry Survey Report 2007, December 2007
16 Budget papers 2007-08, Budget Paper No. 1. Statement 5; Revenue, Appendix C.
17 $0.6b divided by $36.3 billion.


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requirements. This scarcity oof skilled labour led to a 17 per cent increase in employee gross wages and
salaries.

1. 5      Envi ro nme nta l Pe rfo rma nc e

The minerals industry has continued to improve its transitioned from managing the present environmental
impact through rehabilitation and reclamation to environmental stewardship addressing longer-term
considerations for maintenance of sustainable ecosystems beyond life of mine.

Key aspects of this improved performance include that the industry has:
• been recognised in the 2006 Commonwealth State of the Environment Report as often exceeding the
     standard set by public sector groups when addressing environmental issues;
• improved water management and use, such that the minerals sector is responsible for only 2.4 per cent of
     Australia’s net water consumption with the value added per mega litre (ML) of water amongst the highest
     of all industry sectors. For example, coal mining generates $86000 for every ML used, compared with
     $162 per ML for rice production;
• shifted from a focus on the direct impacts of its activities to a ‘materials stewardship’ approach in taking a
     shared responsibility for mineral products along the supply chain;
• demonstrated a commitment to enhancing the environment and biodiversity, not just in the immediate
     proximity of its operations, but through offset programs elsewhere, in enhancing regional biodiversity
     beyond the mining lease;
• moved from a compliance mentality in emissions management for community and environmental health to
     engaging in continuous improvement and operating in a manner attuned to community expectations of risk
     management; and
• moved beyond the narrower considerations of financial performance in attracting capital and insurance
     protection towards managing a greater range of contingent liabilities [e.g. workforce safety and health,
     emissions vis a vis community health and environmental impact, contaminated sites, radiation (radio-active
     materials), groundwater contamination, etc] in financial spreadsheets.

1. 6      Co rpo rate Soc ia l Re sp o ns ib ility

The Australian minerals industry has shifted its focus beyond immediate impact on local communities to
contributing to building sustainable regional communities – centred around employment opportunities and
enterprise development.

To this end, the industry has recognised:
•     that corporate social responsibility is not an adjunct to our business, it is our business - our core function is
      to convert natural endowment to societal capital, and that can only be achieved sustainably when there are
      real mutually beneficial considerations of the environment, our host communities, and the rights and
      interests of Indigenous peoples; and
• that the intergenerational benefits to communities and the nation as a whole of natural resource
      development s ho uld ext e nd bey o nd t he lif e o f m ine .
In this the industry has:
• positioned itself as the largest private sector employer of Indigenous Australians, with 5% of current
      employees identifying as Indigenous – this figure is as high as 20% at some sites and the industry has
      targets for employment levels comparable to the surrounding community;
• moved from adversarial discussions around native title claims to building sustainable Indigenous
      communities centred around employment opportunities and enterprise facilitation and mutually beneficial
      partnerships;
• established an Indigenous leaders dialogue with the MCA Board of Directors – which comprises Chief
      Executives of minerals companies. As significant as creating this dialogue is, the real achievements to date


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    have been consensus on amendments to the Native Title Act, and collaborative work on defining additional
    opportunities for industry to contribute to the development of sustainable communities; and
•   shifted to a new paradigm of community engagement – from a tradition of deciding, announcing and
    defending, to engaging, listening and learning.




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2.        GLOBAL OUTL OOK


     •   The global economy is expected to continue expanding strongly into 2008-09, with developing nations
         such as China and India continuing to be the main contributors to world output growth.
     •   Global output growth is likely to continue to “decouple” from the United States, recording solid growth
         despite a slowdown in the US and other developed nations such as Japan.
     •   Continuing rapid growth in developing world demand for raw materials has seen prices for many
         commodities remain at record levels, with Australia’s terms of trade benefiting significantly.
     •   While the current mineral and energy price cycle is relatively mature, the potential for considerable
         additional demand growth remains:
         − the key to future price developments remains the extent of any continuing supply-demand
           imbalance in specific mineral commodities.
     •   Many industrial commodity prices are expected to moderate due to increases in supply, technological
         advances in production, as well as slower growth in Asia:
         − though the continuing momentum in the global economy means that there has been a structural
           shift in prices, implying they will stay above previous levels over the longer term.
     •   Australian business investment has leapt sharply over the past few years as minerals companies
         expand facilities, while the nation’s export port and rail infrastructure has been undergoing expansion
         and improvement.

2. 1      Glo ba l G ro wth

There are good prospects for continued solid global economic growth in 2008, as Asia’s momentum offsets a
weakening US economy. However, there are risks to global growth are increasing. The sub-prime mortgage
market in particular has become exposed, and together with the housing market downturn in the United States is
the greatest threat to global growth in 2008.

The latest data suggest that the downturn in financial markets may now be spreading to the ‘real’ economy in
the US, though the full effects remain unclear. US housing starts have dipped sharply and are now around half
the levels seen in 2004, while house prices have also fallen consistently. Weaker job growth suggests the
downturn has the potential to flow through to consumer spending – the largest component of the US economy –
which would slow US (and global) growth in 2008.

A US recession is therefore quite possible, and recent growth in both Japan and Europe has been disappointing.
Global growth is expected to weaken further in 2009, though conditions may further deteriorate before then.
Industrial commodity prices – particularly base metals – may be the most reliable early indicator of the potential
for problems.

Although the US, Europe and Japan each have problems, China remains very strong, helping Australia to record
a further year of above trend output growth in 2007. China’s and India’s strength look set to underwrite a
significant lift in coal and iron ore prices for the contract year beginning in April 2008 due to their expanding
steel industries and the extraordinary rate of increase in coal-fired electricity generation. Yet if and when China
finally slows, perhaps in 2009, then Australia would see a downturn at that time.

During this decade to date the US has directly contributed about one-tenth of global growth. In contrast, China
has accounted for a third of global growth. That said, the risk for Australia and the world economy is the
potential for the indirect effects of the US slowdown to spread.




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                      Cha rt 2. 1: M aj or ec onom ie s’ co ntrib utio n to glob al g rowt h
                Percentage point
                 5
                                                            China                         India
                                                            Western Europe                United States
                 4                                          Japan


                 3


                 2


                 1


                 0


                 -1
                  1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003
                                                                                         Source: Maddison, IMF




                            Cha rt 2. 2: Sha re of glob al GDP , se lecte d e co no mies
                                            China               India                    Western Europe
                 Per cent
                  70                        United States       Japan                    Australia


                 60


                 50


                 40


                 30


                 20


                 10


                     0
                     1950     1956   1958   1960    1970    1980        1990      2000    2002       2004   2006
                                                                               Source: Maddis on, GGDC, IMF WEO



The out lo ok fo r glo ba l growt h i n 2008 de pe nd s heavil y o n t he pot ent ia l f or ‘ deco upling’
glo ba l g ro wth f ro m t he U S eco no my – t he a bility of t he rest of the w o rld to be little
aff ected by a US s low do wn (o r re ce ss io n). I n brie f:

•   global growth is still rapid, and that means that any impact of US weakness on global growth starts from a
    high point for the latter. Consensus forecasts are being revised down, but they still have global growth in
    2008 at above 4 per cent;
•   the correlation between US and global growth has halved over the past decade. During this decade to date
    the US has directly contributed about one-tenth of global growth, whereas China has accounted for a third
    of global growth (see Chart 2.1 above). So, while the US is still important to the global outlook, it is not as
    dominant;
•   trade links to and from the US – both direct and indirect – are relatively smaller than they used to be. In
    particular, Asian trade has increasingly become intra-Asian over time, as have financial linkages; and
•   moreover, there are other offsets here: less capital being invested in the US (as perceptions of potential
    capital gains from those investments fall) could well boost such capital flows to other regions.

Even so, the US can slow world growth because it is a major driver of global financial markets (which have, for
example, adversely impacted markets in Australia), as well as a major driver of global business confidence. That

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means trade flows are not the only important transmission mechanism across economies. That said, longer
term forecasts of global and Asian growth over the next decade point to continuing solid gains, with world
growth expected to be maintained slightly above trend levels. Asia is expected to continue contributing strongly
to global growth, led by emerging nations such as China and India.

Tab le 1 in Ap pe ndi x 2. A sets out forecasts for global and Asian economic growth and inflation. It breaks the
forecast into two periods – 2007-08 to 2011-12, and 2012-13 to 2016-17. The central case forecasts show
global growth at an average annual rate of 4.1 per cent over the next five years, with North East Asian growth
(including China) forecast to grow at 7.7 per cent over the same period. W hile still ab ove the lo ng e r
term tre nd, t hes e rat es of g rowt h wo uld re p re se nt a slo wdo w n f ro m t he rap id eco nom ic
growt h o f t he pa st f ew y ea rs.

In other words, the underlying expectation is that global growth will not be able to sustain its current pace, but
that the medium term outlook remains solid, particularly in the developing world.

2. 2      World Growt h a nd Co mm odity P ric es

China has b ee n t he b igg est s ingl e c ont rib uto r to glob al growt h in ev ery ye ar s o f a r t his
deca de . That growth has led to rapid demand growth for Australian commodities such as coal, iron ore and
base metals, with prices rising sharply as a result. C ha rt 2. 3 shows the impressive nature of the current
commodity price boom. The chart tracks the price cycles of metals, and is indexed such that cyclical price
troughs have a value of 100. The current price cycle (defined here as beginning in 2002) has significantly
outlasted previous cycles.

                      Cha rt 2. 3: Cyc le s in rea l meta l p rice s since 1963 (IM F)
                        300
                                                                                      1963            1972
                                                                                      1986            1993
                                                                                      2002 U SD
                        250


                        200


                        150


                        100


                            50
                                 t          t+ 1         t+2       t+3          t+4        t+5       t+ 6           t+7



Cha rt 2. 4 shows the RBA commodity price index, which has more than doubled over the past four years.

                                       Cha rt 2. 4: RB A co mm od ity p rice ind ex
                      Index
                      280


                                            RBA Commodity Price Index
                      230                   Current forecast




                      180




                      130




                       80
                         1990        1992     1994      1996   1998      2000     2002     2004    2006      2008
                                                               Source: RBA, Access Economics, Consensus Economics




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Forecasters surveyed by Consensus Economics expect the index to rise further still, as surging Asian growth
helps to lock in more commodity price rises through 2008. The strength in commodity prices in recent years
has been a side-effect of rapid global growth being concentrated among commodity-hungry developing nations.
The projected growth in these countries suggests there is likely to be further price growth still particularly in
metallurgical coal and iron ore prices.

                                   Cha rt 2. 5: C om mod ity p rice s a nd w orld g rowt h
                   Year-to growth                                                                           Year-to growth
                    60%                                                                                                   7%

                    50%
                                                                                                                          6%
                    40%

                    30%                                                                                                   5%

                    20%
                                                                                                                          4%
                    10%
                                                                                                                          3%
                       0%

                   -10%                                                                                                   2%
                   -20%
                                                                                                                          1%
                   -30%
                                             Real metal prices (LHS)           Real world GDP growth (RHS)
                   -40%                                                                                                   0%
                            1960    1964   1968   1972 1976    1980    1984   1988   1992     1996   2000   2004 2008
                                                                                                            Source: IMF



Cha rt 2. 5 shows the effect of global growth (demand) on the price of base metals. In recent years, the world
economy has expanded by more than 5 per cent per year – rates not seen since the 1960s. That has produced
a remarkable surge in metal prices, with growth in excess of 20 per cent a year seen between 2004 and 2006.
The International Monetary Fund (IMF) has forecast metal prices to contract slightly in 2008 due to sell offs
associated with financial market turbulence on world markets.

Prices are expected to remain at high levels however, with delays and increasing production costs likely to
hamper efforts to increase supply. An eventual expansion in mine supply may ultimately catch up with the
growth in mineral demand with the inevitable impact on prices. That said, to date a series of ‘stronger-for-
longer’ revisions to global growth (and particularly to growth in developing nations) have consistently put back
the expected turnaround in the commodity price cycle.

                    Cha rt 2. 6: Rea l o utp ut g rowt h in a dva nc ed a nd dev eloping
                                                 eco no mies
                 Annual real GDP growth
                  7%
                                                                       Advanced economies                          Forecast
                  6%                                                   Developing countries

                  5%


                  4%


                  3%


                  2%


                  1%


                  0%
                       1970        1974    1978    1982     1986       1990   1994     1998      2002       2006     2010
                                                                                                                   Source: IMF




Cha rt 2. 6 shows the influence of developing economies on the recent surge in world growth, and also
highlights some of the potential risks ahead for industrial commodity prices. The IMF is forecasting growth in the
developed world to slow significantly over the next few years, while growth in the developing world is expected to


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peak, taking some pressure off commodity demand. Moreover, increased supply is already suppressing the
prices of some base metals (particularly nickel and zinc).

2. 3     Com mo dity De ma nd

Rapid industrialisation in emerging nations is driving much of the demand strength for industrial commodities,
though demand from developed nations has also been solid. Indeed, for many years commodity demand was
dominated by the demands of the developed world – notably the OECD. However, developing nations have a
greater influence on the demand for commodities and raw materials as their economies industrialise than do the
developed world. Many commodities are also important inputs for a range of manufactured products.
Manufacturing is often a larger share of GDP in developing nations compared to advanced economies (due
mainly to labour cost differentials), increasing the demand for commodities in developing nations. Developed
countries tend to have a higher-skilled labour force and a more service oriented economy, while higher incomes
allow them to purchase manufactured goods from abroad. This leads to a lower demand growth for
commodities in advanced economies, with this trend visible in the following two charts.

Cha rt 2. 7 shows base metal consumption and GDP per capita for a range of developed and developing
countries. Co unt ri es wit h low i nco me s pe r c apit a te nd t o b e low c o ns ume rs of b as e m eta ls .
Poorer countries tend to have inefficient and insufficient infrastructure and less developed manufacturing and
heavy industry sectors. This leads to lower demand for base metals. These countries, such as Thailand, Mexico
and Indonesia, are located at the lower left of the chart. As a c o untry d eve lop s a nd inco me pe r c ap ita
inc rea se s, ma nuf act uri ng sect ors bec om e m ore esta blis he d and ba se met als b eco me a n
imp ort a nt i nput to a co unt ry’ s e xp o rt p ro d ucts. South Korea is one such country, with a strong
comparative advantage in the production of cars and electronics, and a consequently greater demand for base
metals.

                                                      Cha rt 2. 7: Ba se met al c o ns umptio n a nd G DP pe r c ap ita, 2004
                                             Tons
                                             80
                                                                                                                        Taiwan

                                             70
         Base metal consumption per capita




                                                                                                        Korea
                                             60

                                             50                                                                                         Germany
                                                                                                                               Italy
                                             40                                                                              Japan
                                                                                                                                                   Canada
                                                                                                                                       Australia                     US
                                                                                                                     Spain
                                             30                                                                                 France


                                             20                                       Malaysia
                                                                                                                                       UK
                                                                China   Thailand
                                                                                     Russia
                                             10                                         South Africa
                                                        India               Brazil                                                                          US$'000
                                                                                       Mexico
                                                                Indonesia
                                             0
                                                  0             5             10          15         20            25                30               35             40
                                                                            GDP (at purchasing power parities) per capita                   Sources: IMF WEO; ANZ



As a country becomes more developed still, the skill level of its labour force tends to increase. This leads to a
greater focus on the services sector as a driver of growth, and a reduced focus on manufacturing. As a result,
the country’s demand growth for base metals diminishes, and highly manufactured goods tend to be purchased
as imports rather than produced by the domestic economy.

This transition can be seen more clearly on C hart 2.8. That chart shows the ‘boomerang’ curve that many
countries move through during their development. W he n a co untry is in t he ea rly st age s of
deve lo pm ent , it typic al ly ha s low av erag e inc om es a nd co ns ume s relat ive ly f ew res ourc es
pe r he ad. As t he c o untry dev el op s, it m ove s to the right alo ng t he b oo me ra ng, c o ns uming


                                                                                                                                                      Minerals Council of Australia | 11
                                                                            2008-09 PRE-BUDGET SUBMISSION


a g re ate r s ha re of res o urc es pe r hea d w hile g ra d ua lly inc rea sing a ve ra ge inco me s. (The
proxy used in the chart for ‘resources per head’ is the share of Australian exports per head.)

The turning point indicates a shift in the nation’s development – typically a movement away from heavy industry
and manufacturing towards higher skilled (and less resource intensive) sectors, such as services. This sees the
country typically moving back towards the left of the boomerang – with higher average incomes. Hence the
chart shows that countries such as China and India could be expected to increase their demand for commodities
substantially as their incomes per capita grow. Countries such as Indonesia, Malaysia and Thailand have already
moved along the curve, increasing both their share of Australian exports and their respective average incomes.
South Korea and Taiwan have turned the corner of the boomerang, indicating that their economies are maturing,
while Japan has (for some time now) reached the top of the boomerang curve.

The imp lic ati on o f t he relat io nship s how n in this c ha rt is pot ent ia lly im me nse : if t he
ind ust rial is ing gi ant s of C hi na a nd I ndia follo w t he bo ome rang t hat ma ny of t heir
predec es so rs hav e, the n t he c urre nt p ha se of inc rea s ing growt h in de ma nd f o r raw
mate rials w il l sl ow and eve nt ua lly reve rs e – b ut not f or a c o ns ide rable time yet.

                                    Cha rt 2. 8: T he 2006 B oo me ra ng
           Income per head (log of GDP PC)
            5.0
                                       Japan
            4.5                                             Korea                Taiwan
            4.0
                                                                                           Thailand
            3.5                                                           Malaysia
                                China+HK
            3.0                   Philippines              Indonesia
                                                  India                            Vietnam
            2.5

            2.0
                  0              0.5               1              1.5               2                   2.5
                        Relative share of Australian exports given income per head
         So urce : Access Economics

2. 4     Com mo dity s up ply

The current commodity boom has pushed the prices of many minerals above the marginal cost of producing
them. This has made mining a far more attractive investment in recent years, sparking a significant amount of
investment in the sector, both in Australia and overseas.

Cha rt 2. 9 shows the effect of high commodity prices on Australian mining profits since 2003, as well as the
sharp rise in mining investment in Australia over the same period. The lift in non-rural commodity prices has
been a boon for the Australian minerals sector, pushing up profits and encouraging investment. Mining profits
accounted for more than 5 per cent of GDP in 2006-07, up from just 2.2 per cent in 1999-00.




                                                                                         Minerals Council of Australia | 12
                                                                                                 2008-09 PRE-BUDGET SUBMISSION


                                       Cha rt 2. 9: Mining inve stm e nt a nd p ro fits
                $ billion                                                                                       $ billion
                16                                                                                                     7

                14                           Nominal mining profits (LHS)                                              6

                12                           Real mining investment (RHS)
                                                                                                                       5
                10
                                                                                                                       4
                    8
                                                                                                                       3
                    6
                                                                                                                       2
                    4

                    2                                                                                                  1


                -                                                                                                     -
                        1995   1996   1997   1998    1999   2000    2001    2002   2003   2004     2005   2006 2007
                                                                                                            Source: ABS



As prices are determined by both supply and demand, a lift in commodity production could eventually place
downward pressure on prices, particularly as commodity demand eases off. As yet, the lift in production has had
little effect on the price of most commodities. Indeed, invest me nt and t he refo re co mm od ity s upply
ha s be en he ld bac k i n m a ny m a rk ets, inc luding Aust ra lia – wit h the not able exc eptio n o f
the rm al co al prod ucti o n in I ndo nes ia – d ue to a lack of inf ra struct ure c ap acity , as well as
material and labour shortages. That has meant that the growth in export values has been far more impressive
than the growth in export volumes from Australia over the last few years.

Global production has been increasing however, and supply growth is beginning to strengthen across a range of
commodities, as illustrated by Cha rt 2. 10. G lo ba l p rod uctio n of ba se met als ha s increa se d by
ne a rly 20 pe r c e nt ov er the pa st fo ur y ea rs, wit h c oal a nd aluminium prod uctio n
inc rea sing ev e n m ore s ub sta ntia lly . This underlines the missed opportunities resulting from capacity
constraints affecting Australia’s coal sector.

            Cha rt 2. 10: Glo ba l c om mod ity p rod uction g ro wth, 2002 -03 to 2006-07
         % change, four years to 2006-07
          40%

          35%

          30%

          25%

          20%

          15%

          10%

           5%

           0%

          -5%
                         Aluminium                Coal             Base metals               Oil                  Gold
                                                                                                              Source: ABARE



Tab le 2. 1 shows that the Australian Bureau of Agricultural and Resource Economics (ABARE) expects global
mine production to continue lifting strongly through 2007-08 for many key commodities. Strong increases in
zinc and nickel production may place further downward pressure on prices, while a stronger gold price is also
expected to help lift supply over time. Much of the increase in supply, both within Australia and overseas, is due
to substantial new investment in the mining sector, which reversed a protracted contraction in investment during
the late 1990s and early 2000s. The latter lull in investment was due to a range of reasons including:
                                                                                                               Minerals Council of Australia | 13
                                                                              2008-09 PRE-BUDGET SUBMISSION


•   minerals companies barely able to recover the cost of capital;
•   excess iron and steel supply (which inevitably impacted metallurgical coal, nickel, manganese and iron ore
    prices);
•   the impacts of significant restructuring in the electricity generation sector in Asia (which impacted thermal
    coal);
•   the lack of transparency of the Chinese economy (for example, it embarked on a significant expansion of its
    exports of thermal coal under its tenth Five Year Plan and began to win market share from Australia into
    Japan until an abrupt reduction in exports from early 2004 that removed some 80 Mt of thermal coal from
    the international trading market); and
•   the impacts of the economic and financial crisis in Asia from 1997/98.

Not surprisingly, these developments initially left the international minerals industry under-prepared for the
current boom in demand. Ma ny ma jo r mi ning projects had eco nomically unv iab le . Substa nt ial
price ris es e nco ura ge d f urt he r inv est me nt, inc luding the dev elop me nt o f new a nd eff icie nt
technolo gi es .

Tab le 2. 1: Tre nd s in g lob al m i ne s up ply

                        pe r c e nt c ha ng e from p rev io us ye ar
                                                                                             2007-08
                       2003-04           2004-05           2005-06           2006-07         (f)
       Coal            7.6               5.7               7.2               8.3             6.4
       Alumina         18.9              6.4               11.2              9.5             7.1
       Aluminium       6.9               7.0               6.1               11.1            7.2
       Copper          4.1               4.8               4.3               3.7             6.3
       Lead            2.8               9.8               3.7               2.6             3.0
       Nickel          5.0               3.3               4.5               5.3            7.0
       Zinc            4.9               -1.2              4.5               5.0            5.4
       Gold (mine)     -4.9              2.4               -2.9              1.2            3.4
                                                                                            So urce : ABARE

While the rise in non-rural commodity prices has driven a sharp rise in global and Australian mining and
infrastructure investment, Australian export volume growth remains weak. To determine whether the lack of
export volume growth is unusually poor, it is useful to compare Australia’s experience in the current commodity
price boom (defined as beginning in 2001-02) with that of the previous boom (defined as beginning in 1977-
78).

That comparison suggests the current Australian minerals development cycle is broadly consistent with history.
Cha rt 2. 11 shows the level of real mining investment and non-rural commodity export volumes for a period
beginning two years before each boom. Noticeably, a reduction in mining investment precedes each expansion,
though investment then picks up strongly during the first six years. The export growth profiles are also similar,
showing that e xp ort vol ume s ta ke tim e to g ro w, a nd may not b e e xp ecte d to lift nota bly unt il
the se co nd hal f o f t he d ecad e fol lo wing the sta rt o f t he e xp ansio n. It is critical therefore to
ensure that the expansion of the sector is not artificially held back by capacity constraints.




                                                                                           Minerals Council of Australia | 14
                                                                                                    2008-09 PRE-BUDGET SUBMISSION


                                         Cha rt 2. 11: Australia’ s tw o m ining b oo ms
          Index
          400



                                                             Investment
          300




          200


                                                                                                      Export volumes

          100


                                       Previous boom (year 1: 1977-78)              Current boom (year 1: 2001-02)
                                       Series3                                      Series4
             0
                       -2       -1      0       1      2      3      4       5      6        7        8       9          10     11
                                                       Source: ABS, Treasury. Export volume in 2006-07 is an estimate



2. 5     Outl oo k f o r C om mo dity Price s: a Ne w B as e Lev el?

Just as the industrialisation of Western economies created a permanent shift in the level of demand for
commodities, the industrialisation of Asian economies is doing the same. The result of this permanent demand
shift will be a permanent price shift in those cases for commodities in finite supply – with perhaps nickel as a
possible example. Moreover, as most commodities take a notable period of time for their supply to ramp up,
that means their prices will also remain high for an extended period.

While the c urre nt cyc le is rel ativ ely mat ure , t he pot ential fo r c o ns id erab le ad ditio na l
dem a nd g rowt h re ma i ns . Some dampening in global growth is likely to occur from 2009 however
commodity prices are expected to remain elevated compared with their 2002 levels. C ha rt 2. 12 hig hlig ht s
the inc red ib le g rowt h i n meta ls p ric es ove r t he p ast f our y ea rs. It is unlikely that all the price
growth recorded over that time will be unwound, with prices expected to moderate over time as demand eases
and supply ramps up, ev e ntual ly settl i ng o n w hat is e xp ec ted to be hig he r lo ng t erm t re nd
leve l.

That said, the price of some metals has already fallen away somewhat, as increased supply suppresses price
growth. Indeed, the price of nickel fell by more than 30 per cent over the second half of 2007 (see C ha rt
2. 13).

                                            Cha rt 2. 12: C RB Com mo dity Met als I nd ex
                 Index
                 1,000



                  800



                  600



                  400



                  200



                   -
                         1947   1952    1957   1962   1967   1972   1977   1982   1987   1992    1997     2002    2007
                                                                                   Source: Commodity Research Bureau




                                                                                                                       Minerals Council of Australia | 15
                                                                                                         2008-09 PRE-BUDGET SUBMISSION


While many forecasters and analysts have been predicting a downturn in commodity prices for more than three
years, t he k ey to f ut ure p rice dev el opm e nts rem ains t he s upply-de ma nd b ala nc e. Demand has
outstripped supply consistently over recent years for many key commodities, however the expected change in
prices over the next few years varies significantly between different metals.


                        Cha rt 2. 13:P ric e indic es , se lecte d meta ls , Ma r 2000
                                                – Se p 2007
                         Index: March 2000 = 100
                         600
                                                           Copper
                         500                               Nickel
                                                           Zinc
                                                           Aluminium
                         400


                         300


                         200


                         100


                           0
                              2000       2001      2002   2003         2004          2005         2006         2007
                                                                 Source: Access Economics, Consensus Economics




             Cha rt 2. 14: Fo rec ast p rice g ro wth – Sept em be r 2007 to M a rc h 2010
                       30%

                       20%

                       10%

                        0%

                       -10%

                       -20%

                       -30%

                       -40%

                       -50%

                       -60%
                                              l




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                                                                                          at
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                                                                                     St




                                                                                                Source: Consensus Economics




Cha rt 2. 14 shows the expected price growth of key commodities from the September quarter of 2007 until the
March quarter of 2010, based on a survey of commodity price forecasters by Consensus Economics.
Notably, many of the commodities whose prices are expected to rise over that period are used to produce:
•    power generation (such as coal, lignite, gas and uranium) and transmission (e.g. copper and aluminium);
     and
•    iron and steel (which requires iron ore, metallurgical coal, manganese and nickel) and is heavily used in
     construction and infrastructure development.

Thes e f o rec asts hi ghli g ht t he po int that t he c o ntinue d industria lisat io n of dev elo ping
eco no mies wi ll be the ma in b as is of p ric e g ro wth ov er the co ming ye a rs.

Many industrial commodity prices will eventually fall back due to increases in supply and technological advances
in production, as well as slower growth in Asia – though the momentum in the global economy means that prices
are likely to remain high. That is, there has been a structural shift in prices, implying they will stay above
previous levels over the longer term.

Indeed, to put the projected price falls of up to 50 per cent in C ha rt 2. 14 into perspective, between June
2003 and June 2007, the price of lead, zinc, copper and nickel rose by 371 per cent, 374 per cent, 363 per
cent and 485 per cent respectively.


                                                                                                                              Minerals Council of Australia | 16
                                                                         2008-09 PRE-BUDGET SUBMISSION


Ap pe nd ix 2. A GLOB AL ECO NO MIC P ROJ ECTIO NS & M AJO R P ROJ EC T D EV ELO PM ENT S
Tab le 1: Gl oba l Ec onom ic P roj ectio ns
                                            2007/08 - 2011/12                 2012/13 - 2016/17
                                 low side      forecast high side     low side forecast high side
GDP
                         World         2.9%         4.1%       5.4%       2.9%      4.1%             5.4%
                        OECD           1.9%         3.0%       4.1%       1.9%      3.0%             4.1%
                United States          1.2%         2.8%       4.5%       1.2%      2.8%             4.5%
 North East Asia (excl. Japan)         6.1%         7.7%       9.3%       6.1%      7.7%             9.3%
             South East Asia           2.7%         5.6%       8.5%       2.7%      5.6%             8.5%
                         Japan        -0.2%         1.7%       3.6%      -0.2%      1.7%             3.6%
                    Eurozone           0.8%         2.2%       3.6%       0.8%      2.2%             3.6%
                     Australia         1.9%         3.7%       5.5%       1.7%      3.5%             5.3%

Industrial production
                       OECD           -0.1%         2.1%       4.3%      -0.1%      2.1%             4.3%
                United States         -0.6%         2.7%       5.9%      -0.6%      2.7%             5.9%
                       Japan          -2.6%         1.7%       6.0%      -2.6%      1.7%             6.0%
                     Australia         1.4%         4.1%       6.7%      -0.2%      2.5%             5.1%

Inflation
                        OECD           1.5%         2.3%       3.1%       1.5%      2.3%             3.1%
                United States          1.0%         2.4%       3.8%       1.0%      2.4%             3.8%
 North East Asia (excl. Japan)        -0.5%         3.4%       7.2%      -0.5%      3.4%             7.2%
             South East Asia           0.7%         4.1%       7.4%       0.7%      4.1%             7.4%
                         Japan        -0.6%         0.8%       2.1%      -0.6%      0.8%             2.1%
                     Australia        -0.1%         2.6%       5.2%      -0.3%      2.3%             5.0%

Wage growth
                        OECD           2.2%         4.3%       6.3%       2.2%      4.3%            6.3%
                United States          2.3%         4.2%       6.1%       2.3%      4.2%            6.1%
 North East Asia (excl. Japan)         2.0%         9.0%      16.0%       2.0%      9.0%           16.0%
             South East Asia           1.8%         7.6%      13.5%       1.8%      7.6%           13.5%
                         Japan        -1.3%         1.5%       4.2%      -1.3%      1.5%            4.2%
                     Australia         4.0%         4.4%       4.8%       4.5%      4.9%            5.2%

Short term interest rates
               United States           1.6%         4.8%       8.0%       2.2%      5.3%             8.5%
                       Japan          -1.2%         1.7%       4.6%      -0.6%      2.3%             5.2%
                   Eurozone            1.5%         4.0%       6.6%       1.6%      4.1%             6.6%
             United Kingdom            1.6%         4.9%       8.3%       1.4%      4.7%             8.1%
                    Australia          1.7%         6.1%      10.4%       1.0%      5.4%             9.7%

Long term interest rates
               United States           2.3%         5.1%       7.9%       2.8%      5.6%             8.4%
                      Japan            0.0%         2.4%       4.7%       0.3%      2.7%             5.1%
                   Germany             2.6%         4.4%       6.1%       2.6%      4.4%             6.2%
            United Kingdom             1.6%         4.6%       7.6%       1.5%      4.5%             7.5%
                    Australia          2.6%         6.0%       9.4%       2.5%      5.9%             9.2%

Exchange rates
 Trade Weighted Index (TWI)           50.0          61.6       73.2        53.3      56.0             58.8
                $US per $A           0.625         0.773      0.921       0.648     0.688            0.727
                 Yen per $A           30.3          90.1      150.0        65.8      80.6             95.4
                Euro per $A          0.318         0.567      0.815       0.519     0.585            0.651
       Pound sterling per $A         0.334         0.411      0.488       0.374     0.398            0.422
                 $NZ per $A          0.990         1.108      1.226       1.045     1.081            1.118
         Swiss franc per $A          0.590         0.900      1.209       0.858     0.922            0.986

Source: Access Economics




                                                                                   Minerals Council of Australia | 17
                                                                                  2008-09 PRE-BUDGET SUBMISSION


Majo r p ro ject dev el op me nts – Aust ralia ’s s up ply res p onse

The Australian minerals sector is gearing up its supply capacity to meet the strong current and projected global
demand.

In 2006/07, the Australian mining industry spent approximately $25b on new capital expenditure. Expectations
are that this rate of expenditure will increase to approximately $30b in 2007/08.

A record number of projects – some 29 minerals and energy projects – representing $7.8 billion in capital
expenditure, have been completed over the six months to October 2007. A further $34.2 billion in projects are
at an advanced stage, and a further $71.5 billion in minerals projects are at a ‘less advanced’ stage.18 As an
insight into the extent to which the minerals industry has been gearing up to improve the sector’s production
and export capacity in the short to medium term, projects competed include:
•      Rio Tinto’s Phase B of the Dampier port expansion in WA at a cost of $956 million;
•      Queensland Rail’s duplication of the Bluff to Blackwater rail line in Queensland - $59 million;
•      OneSteel’s Project Magnet iron ore mine development - $395 million;
•      Alcan’s alumina refinery expansion in the Northern Territory - $2.7 billion;
•      Mt Gibson Iron’s Koolan Island iron ore development - $147 million;
•      The Ports Corporation of Queensland’s expansion of the Abbot Point Coal Terminal - $116 million;
•      Monto Minerals Goondicum mineral sands project - $73 million;
•      AngloGold Ashanti’s Sunrise Dam gold project - $109 million;
•      Origin Energy’s Spring Gully (Phase IV) coal seam methane development - $114 million;
•      Rio Tinto’s (Hamersley Iron) Yandicoogina mine expansion - $631 million; and
•      CopperCo’s Lady Annie copper project - $86 million.


… adv a nced p ro ject s i nc l ud e:
•      BHP Billiton, Rapid Growth 3 and 4 iron ore projects (including port and rail), WA – total cost $4.4 billion;
•      Gindalbie Metals’ Karara magnetite project, WA - $1.6 billion;
•      Newmont’s redevelopment of the Boddington gold mine, WA - $2 billion ;
•      Oxiana’s Prominent Hill copper project, SA - $1.08 billion;
•      BHP Billiton’s Ravensthorpe nickel development, WA - $2.6 billion;
•      BHP Billiton’s Yabulu nickel refinery expansion, QLD - $730 million; and
•      Rio Tinto’s Yarwun alumina refinery expansion, QLD - $2.1 billion.




18   ABARE, Australian Commodities, Volume 14. Number 4. December 2007
                                                                                              Minerals Council of Australia | 18
                                                                                 2008-09 PRE-BUDGET SUBMISSION


3.          THE AUSTRALIAN ECON OMY AND FISCAL POLICY

•      Aust ra li a’ s ec o no my ha s be en e xp a nding f o r ov er 16 yea rs . Giv en the le ngt h a nd
       scale of t his ex pa nsi o n, it i s not s urp rising t hat t he s up ply cap acity of the eco no my is
       being te sted :
       −   une mp loy me nt is v e ry l ow a nd the av aila bility of sk ille d labo ur rema ins tig ht ;
       −   busi nes s inp uts a nd co nst ructio n co sts in ge ne ral a nd p art ic ula rly f or m ine ra ls
           comp a ni es have ris e n sig nif ica ntly .
•      Des pite the stre ngt h o f private d em a nd, Gov e rnme nt spe nding ha s a ls o grow n stro ngly
       in rece nt y ea rs, wit h G ove rnm e nt p olicy d ecisio ns s ince t he 2002-03 B udg et no w
       runni ng at a co st o f mo re tha n $85 b illio n a y ea r, o r som e 8 pe r c e nt o f G DP.
•      The re s ult is that t he Austral ia is s uffe ring from too muc h d ema nd c has ing to o little
       supp ly.
•      Ad dres si ng t his imb al a nce m ust be the ove rrid ing ob jective of the 2008-9 B udg et. A
       failure to do s o w il l see s ubsta nt ia l inc re as es in inf lat io n and inte re st rate s.
•      The B udg et’s res po nse s ho uld c o ntain two f unda me nt al elem ent s.
•      First, the B udg et m ust s ig nal a decisive s hift tow ard inve stm e nt in p rod uct ive c ap acity
       ove r co ns um ptio n:
       −   thi s sho ul d i nc l ud e e xp a nd i ng Australia’ s sk illed wo rk fo rce, b uild ing a mo de rn
           comp etitiv e ex po rt i nfrast ruct ure, a nd ap prop riate se rvic e p rovisio n in regio na l
           and re mote Aust ral ia , incl ud i ng in I nd ig eno us co mm unit ie s.
•      Sec o nd , t he B udg et m ust l a unc h a new wav e of po licy re fo rm s, inc luding o f Fed e ral
       State rel atio ns, a ime d at rem ovi ng t he cap acity co nst ra ints t hat thre ate n t o lim it t he
       eco no my’ s a bi lity t o b e ne fit from t he st ro nge st g lo bal ma rket expa ns io n in a
       ge ne rat io n.

3. 1        A strategy to s ust ai n Australia’ s eco no mic e xp ansio n…

Australia has experienced 16 years of continuous economic growth. This reflects the profound reforms of the
past two decades that have been critical in enabling the Australian minerals industry to better respond to drivers
of change and developments in the global economy and markets. Given the maturity in Australia’s economic
expansion it is not surprising that Australia is displaying the classic signs of an economy operating close to
capacity:
•      rapid demand growth doing little to boost real output growth, instead increasingly showing up as higher
       underlying inflation warranting a tightening of monetary policy (higher interest rates);
•      labour market conditions and the availability of skilled labour remain tight; and
•      both business inputs and construction capacity are in short supply and costs are increasing well in excess
       of underlying inflation.
The tw in i mp erativ es of f ut ure mac ro a nd m icro eco no mic po licy sett ings a re :
•      that Austral ia do es not a rti fic ia lly c o nst ra in t he sca le a nd lo ngev ity o f t he c urre nt
       mine ra ls s ecto r ex pa ns io n; a nd
•      that Austral ia ad eq uat ely i nve sts t he w ea lth ge ne rate d f ro m t he c urre nt expa nsio n to
       the s ust ai nabl e i nte rge nerati onal b enef it o f a ll Aust ra lia ns.

For the past four years the MCA has consistently advocated that Australia invest the proceeds of the current
minerals expansion in critical infrastructure to enhance the nation’s productive capacity and wealth creation to


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the benefit of current and future generations, in preference to domestic consumption, such as in the form of tax
cuts.

The MCA emphasised the need for increased public expenditure to at least match the increase in private
expenditure to:
•   address capacity constraints which are the key factors limiting Australia fully benefiting from the strongest
    global growth in a generation; and
•   prepare for the impacts of demographic change.

Ad dressing t he de ma nd/sup ply im ba la nc e …

As a result of the combination of vigorous and sustained economic growth and loose fiscal policy in recent years,
Australia is suffering from too much demand chasing too little supply. Labour capacity is at full stretch.
Unemployment is at a 33 year low, and workforce participation is at a record high (see C ha rt 3. 1). In the
minerals sector, vacancies have grown five fold since 2002-3.

                                   Cha rt 3. 1: T he w orkf orc e p a rticipat io n rat e
               65%




               64%




               63%




               62%
                  1997               1999             2001                 2003             2005           2007


              So urce : Australian Bureau of Statistics and Access Economics

Meanwhile, the potent mix of high profits, relatively cheap credit and tight capacity has underpinned the
strongest surge in business investment that Australia has ever seen. C ha rt 3. 2 shows the striking momentum
behind the rate at which businesses are investing in new capacity – new mines, ports, roads, offices, shopping
malls and computers.

                 Cha rt 3. 2: B us i ne ss i nv estm e nt/GDP & the une mp loy me nt rate
                 18%
                                                   Underlying business investment to GDP
                                                   Unemployment rate
                 16%


                 14%


                 12%


                 10%


                  8%


                  6%


                  4%
                     1984   1986     1988   1990   1992      1994   1996     1998    2000   2002   2004   2006


            So urce : Australian Bureau of Statistics and Access Economics


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                                                                                  2008-09 PRE-BUDGET SUBMISSION


There is no sign of any substantial shift in the demand/supply imbalance. The pip eline of co nst ructio n
work y et to be co mpl ete d is the largest ever seen in Austra lia . In particular, the pipeline of engineering
work to be done (mines, bridges, roads) remains remarkably robust – see C ha rt 3. 3.

                     Cha rt 3. 3: T he p ip eli ne of c o nst ructio n wo rk ‘y et to be do ne ’
            $ millions
            60,000



            50,000
                                    Residential
                                    Non-residential
            40,000
                                    Engineering

            30,000



            20,000


            10,000



               -
                     1986   1988   1990     1992      1994   1996   1998   2000     2002   2004     2006



         So urce : Australian Bureau of Statistics

In s ho rt, stro ng growt h is st rai ni ng cap acity t o t he limits . A new po licy ap p roac h is
ne ed ed w hic h re cog nis es that t he key co nstraint to f uture pros pe rity fo r Australia now lies
on the s upp ly si de. Ad dr es si ng t hi s im bala nce m ust be t he ov erriding o bjective o f t he
2008-9 B udg et. A f ail ure to do so will s ee s ub sta ntial increa se s in inflat io n a nd inte re st
rate s.

The Budget’s response must contain two fundamental elements.

First, the Budget must signal a decisive shift toward investment in productive capacity over consumption. This
means signalling a shift away from spending on consumption (tax cuts) and toward investment in expanding
Australia’s skilled workforce, building a modern competitive export infrastructure, and appropriate service
provision in regional and remote Australia, including in Indigenous communities.

Second, the Budget must launch a new wave of policy reforms aimed at addressing the capacity constraints that
threaten to limit the economy’s ability to benefit from the strongest global market expansion in a generation.

A policy shift aw ay from fisca l stimulus.. .

Over recent years the MCA has repeatedly advocated that the Australian Government spend its current
expansion on a combination of soft and hard infrastructure. That is, the MCA has championed a lift in the
(productivity-driven) supply side strength of the Australian economy. Indeed, the lift in productive capacity
involved in having a more market-oriented supply side of the Australian economy has been a unifying theme
through many of the Australian economic reforms of the last quarter of a century.

That, however, ha s not be e n t he po licy a pp ro ach a dopt e d in rece nt Fed e ral B ud get s. Rather,
these have included personal income tax cuts and a lift in family benefits. While there are some benefits
associated with that it does mean that the B ud get po licy of re cent yea rs b oo sted d em a nd rat her
tha n s up ply . There are obvious risks in such a policy stance. For example, in responding to the release of
the 2006-7 Federal Budget, the MCA Chief Executive stated publicly:



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          "we are concerned at the prospect of a fiscal stimulus to domestic consumption on account of personal
          tax cuts. The response of the Reserve Bank may be to further tighten monetary policy to dampen
          domestic activity, which not only flows into our cost structure but also inflates the $A beyond the
          underlying economic fundamentals, thereby eroding $A returns on $US denominated commodity
          exports".

That is, of course, exactly what happened and it remains a risk. At the same time, the Australian private sector
in general (and the minerals sector in particular) has been working hard to boost the supply side strength of the
Australian economy. That task could have been rather easier if government policies had also been boosting
supply and removing policy rigidities (eg. in lengthy competition policy reviews associated with expansion of the
Dalrymple Bay Coal Terminal).

While surging company taxes have served to strengthen the medium term Budget position in recent years,
offsetting changes to policy have meant little improvement in the Budget surplus since the original
Intergenerational Report (IGR) projections were released in 2002.

In fact, the und erlyi ng p os itio n of t he Fe de ra l B udget has be e n rev is ed upwa rd no le s s
tha n eleve n t im es s ince t he IG R w as relea se d. These revisions have resulted in an economy-driven
net revenue gain since the 2002-03 Budget of $87 billion for the 2008-09 financial year. As C ha rt 3. 4
shows, gov e rnme nt po licy d eci sio ns sinc e t he 2002-03 B udg et a re now running at a co st o f
$85 b illion a yea r (a lso rep rese nt i ng aro und 8 pe r ce nt o f G DP) .

In the short term, t he se tw o t re nd s have c a nce lled eac h other o ut, as ta x c uts a nd s pe nd ing
hav e bee n of fs et by st ro nge r ta x rev e nue s o n the b ac k o f surging g lob al com mo dity
price s.

Furthermore, promised additional personal tax cuts will add another $7 billion a year to demand pressures from
July 2008, rising to $16 billion (at annual rates) from July 2010.

                 Cha rt 3. 4: C hange s to F ede ral B udg et e stimate s sinc e 2002 -03
                        % of GDP
                       8%              Downward revisions due to tax cuts & new spending
                                       Upward revisions due to strength of economy
                       7%

                       6%

                       5%

                       4%

                       3%

                       2%

                       1%

                       0%
                             2002-03      2003-04    2004-05   2005-06    2006-07    2007-08   2008-09

                       So urce : Access Economics from Budget Papers

The resultant short term risk is that – absent determined moves to rein in recurrent spending in the 2008-09
Budget – these further tax cuts could further stimulate inflation and prompt further interest rate rises from the
Reserve Bank. The medium to longer term risks are also important here, given that corporate tax collections
may wane if commodity price gains prove to be shorter-lived than the demographic challenges Australia faces.

This ris k prof il e t he re fo re urg es ca utio n o n the siz e o f the pe rs o na l inc om e ta x c uts that
hav e alre ady be e n p ro mi se d fo r 2008-09 a nd beyo nd . It is im po rta nt to e mp ha sise that
to urge c a utio n o n t ax c ut s is not to urg e c a utio n o n tax re fo rm .

Tax ref orm is al mo st alw ays a go od id ea – all t he m o re so if it is ref orm whic h help s t o
ra is e e it he r p a rtici pati o n or p rod uct ivity. Rat her, if t hat t ax ref orm also invo lve s ta x c uts ,
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the n it w o uld ne ed t o b e ma rrie d to f urther (a nd at le ast off setting) c uts to sp e nding. This
approach would deliver the supply side benefits of lower (and reformed) taxes as well as limiting the impact of
those tax cuts on inflation. It would also impose a much-needed level of discipline on government spending
given how much it has ramped up over recent years.

Moreover, t he M C A co nt inues to s upp o rt a redirectio n o f B ud get f unding tow a rd s t he
prod uctiv e ca pac ity o f t he nati o n – inv est ing to day ’s prosp e rity to e ns ure a b etter
tomo rrow . Co nsi ste nt w it h o ur previ o us s eve ra l p re-B ud get s ub miss io ns, t he M C A
advoc ate s s pe ndi ng o n bot h hard a nd soft inf ra st ruct ure – bot h p hys ica l a nd hum a n
capit al . Indeed, in its last four pre-Budget submissions, the MCA has devoted considerable attention to
industry concerns about the adequacy of funding for, and regulatory arrangements affecting, Australia’s
infrastructure.

In particular, t he Mi neral s Co unci l rec om me nds t hat the 2008-09 Aust ra lia n G ove rnm e nt
Budget :
•    emp has is e i nv est i ng i n t he f ut ure in p re fe re nc e to do mest ic c ons um ption. That emphasis
     should be evident in its own spending and taxing decisions, thereby helping to lay the groundwork for
     sustainable growth;
•    add re ss ca pac ity co nstrai nts , t hereby imp rov ing Australia’ s a bility t o e xp lo it t he new
     plat ea u in g lo ba l co mm od ity d em and (which reflects China’s emergence as an industrial giant, the
     potential for India to follow suit and the related structural adjustments in global markets); and
•    cut bac k o n rec urre nt sp e nd i ng w hic h is not a chiev ing e ithe r a m ore p r osp e ro us o r a
     faire r Austral ia , t he reby t ak ing s ho rt te rm p re ss ure o f f inte re st rat es, a s w ell as lay ing
     dow n so me b ud geta ry i ns ura nc e aga inst bot h a pote ntial f ut ure w a ning in c om pa ny t ax
     strengt h, a nd /o r a p ick up i n i nt erge neratio nal p re ss ure s o n the B u dget .

A policy shift tow ard expa nd ing sup ply cap acity …

Despite the striking fiscal dividend of recent years – much of it directly or indirectly generated by Australia’s
minerals industry (about $15 billion of federal revenues in 2008-09 will be directly due to the commodity boom)
– little of it w as sp e nt o n ac hi evi ng f urt he r re fo rm .

The pros pe rity div id e nd was not re i nve sted in f ut ure prosp e rity v ia me as ures aime d at
lift ing fut ure p ro d uctivity a nd pa rti cip atio n. Instead more than half of it was handed back as
personal income tax cuts, and the remainder as a lift in recurrent spending (notably as higher family benefits,
often not means tested). For example, Federal Treasury has estimated that the eventual boost to workforce
numbers from the improved incentive effects of the tax cuts announced by the new Government in the recent
election campaign will be an additional 65,000 workers. Such gains are welcome. However, the tax cuts now in
the pipeline are very expensive way to increase workforce participation, costing $31 billion over four years. By
2010-11, these tax cuts are estimated to cost $16.0 billion in that year alone. 19

Reform of Commonwealth State relations necessary to address vertical fiscal imbalance

The re is a n ad diti o nal st ruct ural mi sm atc h, k no wn a s vertical f isc al im ba la nc e, w hic h is
als o provi ng p ro bl em atic fo r p ol icym ak e rs. Aust ra lia’ s f ed eral sy stem m ea ns t hat t he
State s are re sp o ns ibl e fo r a ve ry la rg e s ha re of p ub lic sp e nd ing, w he re as the Aust ra lia n
Gove rnm e nt rai se s t he l io n’ s s ha re of ta xe s. M oreov er, a ltho ug h t here is t oo m uc h
ove rlap i n s pe ndi ng res po nsi bil iti es a nd tax b as es be twee n t he State a nd Fe de ra l
Gove rnm e nts, t hes e are re lat ivel y f ixed.



19Estimate by Access Economics. Treasury’s costing of the slightly different Coalition version of these cuts was effectively
the same at $15.9 billion in 2010-11.
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That creates a structural issue, particularly as the revenue surge of recent years has delivered money mostly to
the Australian Government, whereas some of the key areas that need to be addressed in delivering national
prosperity and fairness (such as education, infrastructure and health) are mostly the preserve of the States.
Different levels of government are responsible for different types of spending, while different levels of
government receive funds from different types of taxes, and trends in tax bases diverge from trends in spending
needs, with the end result that needs are becoming more apparent among the States, whereas the available
funding capacity lies more with the Federal Government.

This imbalance is not necessarily a problem in itself, provided co-operation between the Federal and State
Governments works effectively. But over successive decades this has not occurred, and instead the relationship
has been characterised by mutual suspicion and blame shifting.

The end result is that, taken as a whole, the States are running fiscal deficits at a time when the Federal coffers
are bursting:
•    in its recent 2007 Article IV report on Australia, the International Monetary Fund noted that “The States are
     collectively forecasting a fiscal deficit of around ½ per cent of GDP in 2007-08”;
•    one of the reasons this is occurring is that the States are borrowing money to build infrastructure but this
     often does not appear on the state’s budget accounts as it is funded through off-budget borrowings.
     However, particularly for the resource rich provinces of WA, Queensland and the Northern Territory, royalty
     receipts have increased considerably and should be reinvested in part in such infrastructure. In the black
     coal regions in Queensland and NSW it is also noteworthy that governments typically expect coal companies
     to enter into “take-or-pay” contracts to underwrite infrastructure developments (both port and rail);
•    our federal system starts to lead to inappropriate decisions being taken when different levels of government
     face changing circumstances on their funding and their spending responsibilities; and
•    that combination can thwart the attempts of the national public sector – the Australian, State and local
     governments taken together – to achieve the key national aims of capacity, prosperity and fairness.

Among other things, the volume of physical infrastructure projects currently undertaken and planned by the
States indicates a serious commitment to freeing up the major veins and arteries of the Australian transport
network to cope with significant projected increases in traffic volumes over the next 20 years.

Ge ne ra l g ove rnme nt i nv est me nt c o ntinue s to be b oos ted a s Stat e G ove rnm e nts rus h to
add re ss i nfrast ructure ne ed s. 2006-07 saw the biggest increase in State funding for capital
expenditure, which rose by a very large $10 billion. Moreover, 2007-08 sees another big instalment of State
capital spending, with a further $6 billion added, much of it aimed at water and transport projects. Yet, as
Cha rt 3. 5 shows, total general government investment as a share of national income may be a little higher
now than it has averaged through this decade to date, b ut it re mains to o low .

                  Cha rt 3. 5: G ene ral g ove rnm e nt inv estm e nt a s a sha re o f GD P
                                                                General gov't investment

                    4%

                                                                                                                       Forecast



                    3%




                    2%




                    1%




                    0%
                      1984   1986   1988   1990   1992   1994     1996     1998     2000   2002   2004   2006   2008     2010     2012




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The Council of Australian Governments (COAG) has agreed to a National Reform Agenda which aims to re-
invigorate and broaden the microeconomic reform process. T he des ired ref orms co mp rise :
• enha nce d w orkf orc e p a rtici pat io n: through a package of measures relating to apprenticeships,
     training and skills recognition;
• ene rgy : governments will work to strengthen the national energy market by recommitting to
     implementation timelines, which have slipped at least a year; improving price signals for energy investors
     and customers; and establishing a high-level group to develop detailed implementation arrangements;
• tra ns po rt: harmonise and reform ra il a nd roa d regulation within five years;
• infrast ruct ure regulation: COAG members signed an agreement to provide for a simpler and consistent
     national system of economic regulation for nationally significant infrastructure (including ports, railways and
     other export-related infrastructure);
• best p ractic e re g ul atio n: the regulatory burden imposed by all three levels of government to be
     reduced, the efficiency of new and amended regulation improved, priority areas of regulatory reform
     identified and national consistency improved; and
• COAG has also agreed to address occ up atio nal he alt h a nd s afety a nd e nvironme nt al
     as se ss me nt a nd app roval s proce ss es as two of ten cross-jurisdictional ‘hot spot’ areas where
     overlapping and inconsistent regulatory regimes are restricting economic activity.
Fed eral a nd State Gov ernme nt s m ust move q uick ly to imp le me nt t his re fo rm a ge nd a a nd
go eve n f urt he r. Speci fic al ly CO AG need s t o e xp lic itly ad dres s:
• lack of efficient and effective, nationally consistent p roject app roval p roc es se s for exploration and
     mining - companies have to contend with 7 different State and Territory regulatory systems overlaid with
     Commonwealth regulations;
• an under-resourced complex and inefficient nativ e tit le system impeding companies and Indigenous
     Australians reaching mutually beneficial outcomes on land use;
• lack o f nat io na lly co ns ist e nt occ upat io na l healt h a nd sa fety reg ulation based on a
     preventative systems approach - companies have to contend with different State and Territory regimes and
     with differing accents on ‘after the fact’ retribution rather than ‘before the fact’ prevention;
• re gulat ory rig id ity a nd i nc ap acity of exist ing v ocatio nal t ra ining a nd e d ucatio n
     arra nge me nts ; and
• furt he r re fo rm of co mp etiti on p olicy, particularly in water, electricity & gas (National Energy Market
     Reform) and the economic regulatory framework for export infrastructure access.

Rec om me ndatio ns:
• The 2008-09 B udg et s ho uld b e co nsiste nt w it h m aint aining a n ove rall s urp lus ov er the
    course of t he ec o no mic cycl e, a nd be f ra med wit h the go al of ke ep ing inf latio n in the 2
    to 3 p er ce nt ba nd ov er tim e.
To ac hie ve t hi s, the B udg et s ho uld :
• sig nal a s hi ft tow ard inve sti ng i n phy sical a nd s ocial inf ra st ruct ure in pref ere nce to
    dom est ic co ns um ptio n;
• ado pt a pp ro priate rest ra i nt i n rec urre nt e xp endit ure ; and
• la unc h a new wav e of po licy refo rms , inc lud ing of Fe d eral St ate re latio ns , a im ed at
    re mov ing t he ca pac ity co nstrai nts that t hreat en to limit t he eco nomy ’s ab ility to
    be ne fit from the stro nge st g lo bal m arket e xpa nsio n in a g e ne rat io n, s pec ifically:
    − efficient and competitive export infrastructure;
    − streamlined project approvals processes;
    − an efficient native title system;
    − nationally consistent occupational health and safety regulation;
    − market responsive education and training systems; and
    − ambitious competition policy reforms in energy and water.

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APP ENDI X 3. A BUDG ETARY P OLICY – T HE I NT ERG ENERATIO NAL C HAL LENG E

The April 2007 release of the Intergenerational Report from Federal Treasury updated the 2002 initial release.

Five years ago the initial report pointed to underlying tension in Australia’s intergenerational compact with itself.

Every nation has a compact whereby it taxes its workers to pay subsidies to the young and the old. Both
Intergenerational Reports make the basic point that numbers of the aged are set to increase notably in coming
decades, and that the particular area of spending most subsidised by government – health spending – is still
seeing faster than average cost increases.

                                            Cha rt 3. 6: 2007 I GR B ud get projections
              Per cent of GDP
              2



              1



              0



              -1



              -2



              -3



              -4
                                                                  IGR 1     IGR 2

              -5
                2006      2009       2012    2015   2018   2021    2024   2027   2030   2033   2036   2039      2042     2045
              Source: IGR




The combination of an increased relative quantity of older people with the increased relative price of the health
subsidies they receive points to the potential for Australia’s intergenerational compact with itself coming under
strain in coming decades.

             Cha rt 3. 7: P ro jecti o ns of Aust ralia n Gov e rnme nt sp e nd ing by c ateg ory
                   Per cent of GDP
                   8


                   7


                   6

                                                                                                      2006-07
                   5
                                                                                                      2046-47
                   4


                   3


                   2


                   1


                   0
                            Health           Aged care     Age pensions     Other income       Education          Defence
                   Source: IGR                                                 support




Whereas the initial report five years ago pointed to a short fall of 5 percentage points of national income on the
Federal Budget four decades hence, the latest update trimmed that back to 3.5 per cent of GDP.




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A number of factors have changed since the original IGR report was prepared in 2002, including faster than
expected increases in workforce participation among mature aged Australians, a small lift in birth rates, a lift in
expected migration, and (adding to expected future costs) a further lift in life expectancy.

However, two key assumptions dominated the difference between the projections last time and the projections
this time.

First, is the assumption that the policy changes to the Pharmaceutical Benefits Scheme introduced after the last
IGR have been sufficient to wind back the growing increase in spending on pharmaceuticals by 1.3 percentage
points of GDP.

The second factor was the assumption that about half of the recent leap in the terms of trade continues into the
future, meaning that the high expenditure of the future can be spread across a bigger base of national income.
The latter assumption slices an additional 0.3 percentage point of GDP off the projected future fiscal deficit.

That projected reduction in intergenerational pressures estimated in the second Intergenerational Report
compared with the first report is good news. However, the IGR may be underestimating the longer term risks to
fiscal policy.

For example, the IGR simply assumes that tax revenues will remain a constant share of national income.
However, the starting point is one in which the revenue raising capacity of the Australian economy has been
considerably enhanced as a result of the boom in industrial commodity prices. If the latter fades in the future,
then the IGR figuring would worsen.




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4.         POLICY ADV OCACY AND THE FEDERAL BUDGET
4. 1       Re g ulat ory Ref o rm

New Budget measures will be a necessary, but not sufficient, response to the capacity constraints that confront
the Australian minerals sector. They must be complemented by a concerted commitment to address the lack of
consistency and duplication of approaches amongst various Federal and State jurisdictions to key regulatory
issues, the chronic blame-shifting between jurisdictions over responsibility for shortcomings in infrastructure
provision, and overlapping, complex and contradictory competition policy settings.

The Rudd Government has made an early and important commitment to substantial and sustained reform of
Commonwealth State relations to overcome these artificial barriers. But the real test of success will be in the
achievement of nationally consistent regulation, streamlined approvals processes and competition policy settings
that promote rather than deter infrastructure investment. Resistance, both overt and covert, should be
anticipated. In some cases a shared national purpose and goodwill may be insufficient to achieve much needed
reforms. In such cases, the Federal Government should also consider the use of incentive payments to
encourage the States and Territories to accelerate the harmonisation of the content, administration and
enforcement of regulation and approvals processes.

Specific regulation of the mining and minerals processing industry has in general been embraced and adopted
by the industry as an essential element underpinning the industry’s ongoing ‘social licence to operate’.
However, regulations should be employed to enhance rather than impede the minerals industry’s contribution to
achieving an enduring balance between the financial viability of the industry, its environmental performance and
its positive social contribution.

Government legislation, regulations and codes set the minimum standards for mining. A focus of government
regulation should be the provision of appropriate support for voluntary and co-regulatory industry initiatives. It
is in the industry’s interests to promote a level of performance above the minimum standard expected by the
community and for poor performers in the industry to have their shortcomings brought to their attention and
encouraged to adopt good practice. For this reason, the Australian minerals industry has for many years been a
leader – both here and internationally – in developing self and co-regulatory processes.

Australia’s regulatory systems governing the minerals industry in occupational health and safety and project
approvals are now so excessive and complex, so inconsistent across and within jurisdictions, and so
disaggregated from progressive, modern company practice, that they are a fundamental capacity constraint.

The MCA also strongly advocates the principle of minimum effective regulation – specifically, that the
development of good regulatory process should be informed by the following principles:
•      regulation should only be adopted in cases of demonstrated market failure, and there should generally be
       an assumption that the open and transparent operation of markets will lead to efficient outcomes
•      regulatory approaches should not be used unless a clear case for action exists, including an evaluation of
       why existing measures are not sufficient to deal with the issue;
•      regulation should only be adopted after a range of policy options (including self-regulatory and co-
       regulatory approaches) have been assessed and found wanting;
•      the regulation represents the greatest net benefit to the community;
•      the regulation developed is the most efficient means of achieving the desired outcome at least cost to
       industry;
•      effective guidance is provided for both regulators and stakeholders to ensure that the regulations are
       correctly implemented and monitored;
•      mechanisms such as sunset clauses or periodic reviews are built into the legislation to ensure that the
       regulations remain relevant over time; and

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•    there is effective consultation with stakeholders at key stages of the development and implementation of
     the regulation.

The MCA recognises the Rudd Government’s commitment to progressing regulatory reforms through the Council
on Australian Governments (COAG) as a matter of priority, and its plan to adopt a ‘one in, one out’ principle for
all new business regulations.

Much more needs to be done at the State, Territory and Local Government levels to improve national
consistency, coordinate regulatory reporting and minimise the overall regulatory burden on business. Clearly
the Commonwealth must play a key role in this process not only where Commonwealth legislation intersects with
other jurisdictions – though that is important – but also in the national interest to ensure continuous
improvement in the Australian economy.

Governments should also include an assessment of whether self-regulation, co-regulation or no regulation is the
most efficient response.

The philosophy of Enduring Value – the Australian Minerals Industry Framework for Sustainable Development is
consistent with the COAG regulatory principles and is a widely acclaimed example of the industry taking the
initiative in establishing a guideline of leading operational principles and practices. Signature to Enduring Value
is a condition of membership for the Minerals Council of Australia. However all exploration, mining and minerals
processing companies and contractors are eligible to become signatories to Enduring Value, provided that they
commit to meeting the Enduring Value obligations.

Enduring Value provides a program of continuous improvement and encourages companies to achieve
sustainable development performance outcomes beyond the minimum standard set by regulation. The overall
strategic objective is for continuous improvement in financial, social and environmental performance in
exploration and mining projects that is attuned to community expectations and, where possible, recognised and
rewarded in statutory approval processes that are nationally consistent and efficient.

However, attempts to achieve performance above minimum standards can be frustrated when juxtaposed with
prescriptive rather than performance-based regulation, especially when it does not make allowance for risk.

4.1.1     Occupational health and safety

The MCA seeks occupational health and safety regulatory reform to deliver improved safety and health
outcomes, and greater efficiency for companies operating in multiple jurisdictions. The current approach based
on eight separate State / Territory legislative regimes is inefficient, adds cost, complexity and uncertainty for
industry, and undermines the industry capacity to share information and learn from experience. Priority should
be given to implementation of the National Mine Safety Framework (NMSF) as the basis for achieving national
consistency in OH&S regulation, with reforms necessitating changes to both legislation and regulatory practice.

The MCA considers that in developing nationally consistent legislation, policymakers should avoid the approach
embodied in the draconian workplace deaths/industrial manslaughter legislation of NSW – which imposes
absolute liability, automatically assigns guilt to the company and management, removes a test of gross
negligence or wilful misconduct, and removes any assignment of responsibility to other organisations or
individuals. Prosecutions are heard in the NSW Industrial Relations Court with no provision for trial by jury, no
right to silence, and no right for appeal beyond the Industrial Court – if criminally convicted, then there is a right
to appeal in the Criminal Court. The MCA supports the prosecution of individuals in circumstances of
demonstrable gross negligence or wilful misconduct, but is vehemently opposed to a separate statutory offence
of industrial manslaughter.

The MCA supports the Government’s proposal to establish a new national independent body to drive policy
development and deliver consistency across OHS legislation and workers compensation schemes. It will be
important to ensure the new body has the resources and capacity for policy development, research, data


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collection and analysis. This initiative should complement the NMSF and enhance the prospects for achieving a
nationally consistent OHS framework.

Rec om me ndatio n:
•    Prio rity be giv e n to the i mp le me ntat io n of t he Natio nal Mine Sa fety Fram ew ork ( NMSF)
     as t he b as is fo r ac hi evi ng nati o na l co nsiste ncy in occ up atio nal hea lt h a nd s af ety
     re gulat io n:
     −    all l egi sl ati on s ho uld b e ri sk ma nag em e nt ba se d a nd frame d aro und t he co nc ept of
          accept ab le ri s k;
     −    re gulat ory reg im es s ho uld e nco ura ge repo rting of inc ide nt s to s ha re les so ns
          lea rne d and provi de t he b as is fo r c o ntinuo us imp rove me nt in s afety o utco me s;
     −    sta nd ards ap pl ie d a nd act io ns ta ke n by re g ulators s hould be co nsiste nt w ithin a nd
          acros s j uris dicti o ns ; a nd
     −    code s of practic e a nd g uid el ines s ho uld b e d eve lo ped a nd ap plied o n a nat io nal
          bas is a nd p rov id e co nsi ste nt pa ra mete rs f or m ining o pe rato rs ;
•    The re s ho uld be a natio nall y co nsiste nt a pp ro ac h to enfo rce me nt po lic ie s w ith
     grad uat ed e nfo rc em e nt m ea sures ap plie d. P ro sec ution s ho uld be lim ited to c as es
     where t he re i s evid e nce of g ro ss neg lige nc e, wilf ul misco nd uct o r rec kle s s b e hav io ur
     causi ng f ata liti es o r ot her s erio us injurie s. I n d eve lo ping a natio nally co nsiste nt
     app ro ac h, Fe de ra l a nd Stat e a ut ho ritie s s ho uld not introd uc e a s ep arate stat uto ry
     off e nce of i nd ustria l m a ns la ug ht er.
•    The propo se d new nat io nal bod y f oc us ed o n O HS a nd wo rk ers’ co mpe nsat io n po licy
     sho ul d b e ade q uate ly re so urce d, a nd co mplem e nt t he im plem ent atio n of the NMSF.

4.1.2     Project Approvals and Environmental Protection

Given the differing responsibilities of government in Australia, regulations impacting on exploration, mining and
mineral processing inevitably involve a multitude of controls at all three tiers of government and, where
approved by the Australian Parliament, international regulations. These regulations vary from jurisdiction to
jurisdiction. The variability in content, administration and enforcement of these regulatory processes represents
a significant constraint on the effective operation of the minerals sector. The Productivity Commission recently
highlighted the critical importance of simplicity and consistency in regulation:

          ‘Establishing the clarity, simplicity and even-handedness of the regulatory regimes for water, labour,
          land use and greenhouse gas emissions will be crucial to ensuring that, as industries compete for
          scarce resources, those resources go to their highest value uses and enhance the wellbeing of
          Australians as a whole.’20

COAG has identified development approvals as one of the ‘hot spots’ for regulatory reform. The MCA
recommends an urgent and sustained commitment (and resources where necessary) to a comprehensive
regulatory reform process under the COAG umbrella, particularly focused on improving red tape reduction and
duplication associated with project approval processes.

A glaring example of the potential duplication is the approvals processes relevant to the Environment Protection
and Biodiversity Conservation Act 1999. While bilateral agreements between Federal and State governments
can avoid this duplication, only a handful of these agreements have been developed. The MCA’s concerns have
been reinforced by the Productivity Commission, which said recently that:



20Productivity Commission, Annual Review of Regulatory Burdens on Business: Primary Sector, Commonwealth of Australia.
2007.
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          “Governments should give high priority to completing all assessment and approvals bilateral
          agreements.”21

Rec om me ndatio n:

Bilate ral Ag re em e nts
•    The Fed e ral G ove rnm e nt m ove p rom ptly t o co nc lud e b ilat eral ag ree me nts
     [as se ss me nts a nd a pp rov al s] w it h t he St ates a nd T errito rie s to red uce co mp lia nc e
     costs a nd d el ays i n app ro val p roc es se s.

Enviro nme nt Protecti o n a nd t he N atio nal Po lluta nt I nvent ory

In late 2006, significant amendments to the EPBC Act were approved by the Parliament, covering several areas
of the Act impacting directly on the minerals industry. While many of the amendments to the EPBC Act will
improve the efficiency and effectiveness of its administration, the MCA also recognises that a number of the
proposed changes requires significant additional resources. The Commonwealth provided additional resources
in the 2007-08 Budget, but the influence of the additional funding is yet to be realised or documented as
improved efficiencies in the project approval process. Accordingly, the MCA advocates the continued review of
additional resources into the Department to ensure the effective implementation of the amendments, to enhance
their ongoing administration and to further resource the development of bilateral agreements.

The MCA has been actively involved in the development of the NPI since its inception, and mandatory data
collection by member companies to support the scheme represents a significant cost to business. Given this
ongoing contribution, it remains a significant disappointment that despite a large number of reviews to date, the
NPI remains a little known and under-utilised resource, with poor alignment to company environment reporting.
For those members of the public who do visit the NPI website, the lack of accurate, current and plain English
guidance on the interpretation of the data means that using the site is extremely difficult to interpret for the
majority of users. These shortcomings, and the fact that DEW has not had the resources to properly update the
Emissions Estimation Technique manuals for the collection of data, are undermining the effectiveness of the NPI.
Additional resources should be devoted to the NPI to ensure that it is capable of meeting its stated objective

Rec om me ndatio n:
•    The G ove rnm e nt sho ul d e ns ure re so urce s are ava ilable to fac ilitate t he e ff icie nt
     imp le me ntat io n of t he Enviro nme nt Protectio n a nd B iodiv ersity C onse rv atio n Act .
•    The G ove rnm e nt sho ul d co nsi de r a s ubst a ntia l a nd s ustained increa se in t he leve l o f
     re so urci ng f or the Nat io na l P ol l uta nt I nve nto ry to ens ure it m eet s t he go als f o r w hic h
     it wa s orig i nal ly esta bl is hed.

Cult ural he rita ge

Cultural heritage identification and assessment processes differ across the nation. This unnecessarily adds
transaction and other costs to business in ensuring that they meet regulatory requirements whilst also providing
effective protection of sites and artefacts.

There is a need for a single, consistent, national approach for cultural heritage identification and assessment
and supports consideration of this issue through the Aboriginal and Torres Strait Islander Heritage Protection
Act 1984 reforms. Furthermore, it is critical that there be stronger reconciliation between the risk posed by the
proposed minerals operation to the level of cultural heritage assessment.




21Productivity Commission, Annual Review of Regulatory Burdens on Business: Primary Sector, Commonwealth of Australia.
2007.
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The MCA supports the proposal for Indigenous cultural heritage information to be made accessible through a
single, consolidated, national portal, as this will facilitate more comprehensive, simplified and more cost effective
access to information for companies. The portal is to be based on:
•    clearly established rules and guidelines designed to promote consistency in the listing, collection and
     presentation of consolidated information and regarding access;
•    the protection of knowledge required to be kept secret by Aboriginal and Torres Strait Islander tradition or
     for other relevant purposes; and
•    maintaining a record of those who have accessed the register for legal reasons.

Such an approach would be consistent with the environmental heritage protection arrangements as defined
under the Environmental Protection and Biodiversity Conservation Act, which includes the provision of a single,
searchable national register of sites of State/Territory and national environmental significance.

It would also be important that a clear statement is provided to users each time they access different
jurisdictional information to make sure:
•    they understand the purpose of each jurisdiction’s contribution to the national portal in the context of that
     jurisdiction’s legal system; and
•    that while efforts are being made to develop greater consistency, an indication is provided of where key
     difference exist.

Rec om me ndatio n:
•    That a s i ngl e heritag e re gi ste r i s ma intained by t he C omm o nwe alt h, inc orpo rat ing site s
     and arte fact s o f bot h Nati o na l a nd Stat e s ig nific a nce .
•    That t he Co mm o nwe alt h adv ocate s natio nally co nsiste nt c ult ura l he ritag e ide nt ific ation
     and as se ss me nt proce ss es a nd , w here app ro p riat e, t he d evelop me nt of bilate ral
     ag ree me nt s to ac hi eve de si rab le eff icie ncy im prove m ent s a nd re d uce c om plia nc e co sts
     and d el ays i n ap prova l p roce ss es .




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4. 2       Sust ai na bl e Re gi o nal De vel op me nt

Australia’s minerals sector operates predominately in rural and remote Australia, and is often the major
economic activity in these communities. The industry is also often the key employer, providing skilled, semi-
skilled and professional employment opportunities for Indigenous and non-Indigenous people.

The industry is committed to developing its 'social licence to operate' as a complement to the regulatory licence
issued by government. To the minerals industry, 'social licence to operate' is about operating in a manner that
is attuned to community expectation and which acknowledges that businesses have a shared responsibility with
governments, and more broadly, society, to help facilitate the development of strong and sustainable
communities.

The minerals industry, however, cannot achieve sustainable outcomes in this area alone. Strong support and
engagement from government at all levels and the community are critical in ensuring that regional development
outcomes are sustainable in the longer term. Unfortunately the key physical and social infrastructure in regional
Australia is suffering from years of inadequate investment. Under-funded education and health services, and
inadequate transport and communication links are a significant deterrent to the attraction of employees and
their families to regional and remote communities, thus representing a further and unwelcome constraint on the
sector expansion. Moreover, this under-funding of infrastructure in these communities often contrasts with the
contribution made by minerals operations in these communities in taxes and royalties. A senior minerals
industry executive highlighted this concern recently:

            “…we see more than $100 million being paid annually in royalties alone by mining companies
            operating in Northwest Queensland, with very little reconciliation to the social development funding
            being redirected back to the local communities.”22

Governments – Federal State and Local – must avoid complacency in meeting their responsibilities for the
provision of social and physical infrastructure, assuming that the minerals industry will act as a surrogate for
their responsibilities. There is a presumption on the part of both Governments and host communities that the
minerals industry will meet the obligations vacated by Governments in these communities yet so readily provided
for in the more populous eastern seaboard communities.

The minerals industry draws a clear distinction between its own responsibilities and those of various levels of
government viz:
•      government’s core role and responsibility is to address areas of social development and capacity building
       through the delivery of integrated social services and essential basic social infrastructure (social fabric),
       and adequate physical infrastructure (eg, public roads, ports, rail); and
•      industry's responsibility is to provide opportunities for economic development through employment, training
       and business opportunities (commercial fabric).

The minerals sector considers the twin imperatives of future macro and micro economic policy settings are to
ensure that Australia:
•      does not artificially constrain the scale and longevity of the current minerals sector expansion; and
•      invests the wealth generated by the current expansion to the sustainable inter-generational benefit of all
       Australians

The 2008-9 B udg et m ust i nc l ud e d eci siv e step s to d e velo p, re novat e a nd re b uild
infrast ruct ure i n rem ote a nd reg io na l area s o f Aust ra lia. T he B udget s ho uld also a dd re ss
the q ua lity of i nf ra struct ure a nd s ocial se rv ice s in re mote a nd reg io na l I nd ig e no us
comm unitie s, wit h em p ha si s o n i mp rov ed ed uc atio n o utco me s, wo rk rea dine s s a nd s kills


22‘Sustainability Issues in a Super Cycle” The AUSIMM Julius Kruttschnitt Lecture reprinted in AUSIMM Bulletin, No.6.
November/December 2007.
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deve lo pm ent i nit iativ es , a nd bette r acce ss to hum a n and f ina nc ia l ca pit al t o f acilitat e
Ind ig eno us e nte rp rise d eve lop me nt.

Rec om me ndatio n:

The Aust ra li a n G ove rnm e nt s upp ort t he f urt he r deve lo pme nt of st ro ng a nd s ustainab le
re gio nal co mm unit ie s t hro ug h:
    •    the est ab li s hme nt of a Co unc il of Australia n Gov ernm ent init iativ e on reg io nal
         deve lo pm ent w hic h i ncl ude s a f oc us o n e nha ncing t he provisio n o f phy sical a nd
         soci al i nf rast ructure ; a nd
    •    pa rtici pati o n and re so urci ng o f a reg io nal dev elop me nt d em o nst rat io n project that
         enga ge s i nd ust ry, gov ernme nt s a nd t he com m unity in se ek ing t o b uild ca pac ity,
         comm unity a nd e co no mic dev elop me nt at the re gio nal lev el.




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4. 3       Buil di ng Susta i nab le Indi ge no us Co mm unit ie s

The minerals sector is committed to playing its part in building sustainable Indigenous communities in regional
and remote locations in Australia. With more than 60 per cent of mineral operations in Australia neighbouring
Indigenous communities minerals industry engagement with Indigenous people is founded in mutual respect and
in the recognition of Indigenous Australians’ rights in law, interests and special connections to land and waters in
Australia.

4.3.1      An effective native title system

The minerals industry is committed to respecting the rights, interests and special connections of Indigenous
people to Australia’s lands and waters. This reflects a fundamental shift over the last decade from an
adversarial, litigious approach to native title to a new approach based on mutually beneficial agreements for land
access and sustainable Indigenous communities. An effective functioning native title system represents a critical
element in building sustainable Indigenous communities, characterised by higher living standards, and better
health and education outcomes.

How eve r t he e ff ective nes s o f I nd ig e no us Rep res e ntative o rg a niz atio ns ( includ ing Native
Title Re pres e ntativ e b od ie s a nd P resc ribe d B odies C o rp orate) is b eing ha mpe red by
inad eq uat e re so urci ng a nd ov e rly rest rictiv e ope rating p aram ete rs . In particular, the under-
funding of NTRBs is delaying the negotiation of agreements and therefore the benefits received by Indigenous
communities. Better funding of Prescribed Bodies Corporate is also necessary. T he re a re also ref orms ,
with no f undi ng imp lic ati ons, that c an b e ta ke n t o imp rov e t he ef fectiv e ne ss of thes e
orga nisat io ns . More specifically, NTRBs should be provided with a greater degree of flexibility for
expenditure of government monies, while their broader role as a potential contributor to regional economic
development should also be recognised.

Rec om me ndatio n:
•      The Aust ra li a n G ove rnm e nt e ns ure ade q uate , pe rf orm anc e -ba se d re so urcing to Native
       Title Re pres e ntativ e B od ie s, bot h in te rm s of huma n and f ina nc ia l ca pit al, to as sist
       the m i n p rov id ing a c riti cal p latf orm to the minerals ind ustry to negot iate m ut ua lly
       be ne fic ial o utco me s w it h I nd ige no us Australia ns.
•      The Aust ra li a n G ove rnm e nt p rov id e c ore f unding to Presc ribed Bo dies Co rpo rate to
       ens ure t hat they are f unct io ni ng a nd eff ectiv e o rg a nisatio ns wit h c ap acity to :
       −    meet thei r stat uto ry re qui re me nts a nd o bligat io ns ;
       −    enga ge i n ag re eme nt ma ki ng w it h t hird pa rties ; a nd
       −    sec ure f urt her a ss ista nc e from exist ing p rog ra m s.
•      The Aust ra li a n G ove rnm e nt s upp ort t he f urt he r deve lo pme nt of reg io na l I nd ig eno us
       re pres e ntativ e st ruct ures to:
       −    supp ort Indi ge no us enga ge me nt in t he dev elopm e nt a nd implem e ntatio n o f
            re gio nal pl a ns ;
       −    supp ort Indi ge no us enga ge me nt in a gree me nt -m ak ing a nd im plem e ntatio n of
            re gio nal ag ree me nts wit h gov ernme nts a nd t he privat e s ecto r;
       −    buil d t he c ap acity of Indi ge no us le ade rs hip at t he reg io na l leve l; a nd
       −    supp ort ef fecti ve I ndig e no us g ove rna nc e a nd ot her c apac ity b uilding initiat ive s at
            a reg io nal lev el .




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4.3.2     Building economic development in Indigenous communities

The industry’s capacity to contribute to stronger economic development in regional and remote Indigenous
communities is hampered by inadequate social and physical infrastructure. Constraints on the industry’s ability
to contribute to more sustainable Indigenous communities include:
•    inadequate education outcomes, particularly literacy and numeracy, thus limiting the number of Indigenous
     employees available for employment in the sector;
•    poorly resourced indigenous representative bodies, causing delays in the negotiation of mutually beneficial
     land use agreements;
•    inadequate physical infrastructure, including all weather transport links and housing; and
•    anomalies in existing taxation rules that present obstacles to the transition from welfare reliance to
     economic development.

Taxation and other arrangements…

The MCA considers that the current minerals boom in Australia presents a greater opportunity to enhance
institutional and economic capacity by which Indigenous people may become long-term contributors to, and
drivers of, regional and community development. There are however a number of impediments in Australia’s
social, economic and tax policy frameworks impeding progress and attainment of these objectives.

For example, the tax treatment of Native Title payments (for both the payer and payee) is very complicated and
needs to be streamlined and simplified. Under current arrangements, an array of different GST and Income Tax
consequences are possible and dependent upon such things as whether Native Title is extinguished or not;
whether the payments are of a capital or revenue nature (thereby determining whether payments are deductible
or not); and/or whether payments are ‘compensation’ or some other type of payment. Depending on the
specific circumstances of particular cases, the tax consequences can be radically different and can greatly affect
the material value of the agreement.

For instance, in attempting to maximise the value of compensation and other related payments under the Native
Title Act, parties to Indigenous land Use Agreements (ILUA) often utilise the provisions of the Charity Tax Law.
These provisions are confusing and inadequate however, as they do not provide enough flexibility to tailor
agreements that are both tax effective and consistent with the terms of the ILUA (i.e. mainly to provide for, and
accommodate, intergenerational benefits). Charitable trusts if structured to conduit compensation payments
from mining companies to Traditional Owners (TO) for example, cannot accumulate for more than 10-12 years.
This is a major impediment as compensation payments should provide compensation for current and future
Traditional Owners in recognition that they are holders of a perpetual life estate.

At a broader level, greater economic independence is essential to increasing the socio-economic status and
community empowerment of Indigenous Australians. The MCA supports the implementation of tax incentives (for
eg greater deductibility of expenses, granting of Deductible Gift Recipient status for contributors etc) to enhance
capacity building (i.e. improved training and employment services in Indigenous communities etc), and to
support Indigenous enterprise development.

Mineral Sector initiatives

In addition to its policy advocacy efforts, the minerals sector has embarked on a range of practical initiatives
aimed at building socially and economically prosperous Indigenous communities including:
•    a Memorandum of Understanding between the Federal Government and the MCA on building sustainable
     Indigenous communities, centred on a platform of collaboration in education and training for employment,
     enterprise facilitation and the building of social infrastructure; and



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•   the establishment of an Indigenous Leaders Dialogue with the MCA Board to build common understanding
    and discuss capacity building initiatives of mutual interest and benefit;

The MCA welcomes the Rudd government’s commitment to establish a national representative body and regional
representative structures for Indigenous Australians. There is a need for regional Indigenous representative
structures to facilitate and support Indigenous interaction with Government and the private sector in pursuing a
development framework at the regional level.

Rec om me ndatio ns:
•    The Aust ra li a n G ove rnm e nt st re ngthe n its c om mitm e nt to the provisio n o f a de q uate
     and app ro p riat e c om munity i nfrast ruct ure and soc ia l se rvic es to re mote a nd reg io nal
     Ind ig eno us co mm unit ie s. In p art ic ula r ad ditio na l f unding s ho uld be m ade av ailab le to
     ens ure:
     −    imp ro ved acc es s to l ite racy a nd nume racy e d ucatio n; work re ad ine ss init iativ es
          such a s F it ne ss fo r W o rk p rog ram s; a nd t he ac q uisition of st anda rd ve hicle
          lice nc es ;
     −    imp ro ved acc es s to d rug a nd alc o ho l s e rvic es , f ina ncial planning se rv ice s; fa mily
          supp ort s erv ice s inc l ud i ng c hild ca re a nd co unse lling se rvic es ; a nd imp roved
          acce ss t o hum a n a nd f i na nc ia l ca pita l to f acilitat e I nd ige no us e nte rp rise
          deve lo pm ent ; a nd
     −    imp ro ved acc es s to ad eq uate housing.
•    The Aust ra li a n G ove rnm e nt a gree to c o ns ide r am e nd me nts to ta xat io n a nd financia l
     leg is lati o n and arrange me nts a im ed at re duc ing ba rriers to eco nom ic deve lo pm e nt in
     Ind ig eno us co mm unit ie s

4.3.3    Indigenous Employment

The minerals sector is the largest private sector employer of Indigenous Australians and more than 60 per cent
of mineral operations in Australia neighbour Indigenous communities.

At present, approximately 5 per cent of current minerals sector employees identify as Indigenous Australians. In
some remote areas, and at specific sites, Indigenous workers account for up to 20 per cent of those directly
employed or employed through contractors. For example, 25 per cent of employees at the Argyle mine in the
East Kimberley are Indigenous, with a target to reach 40 per cent of the site workforce by 2010. The industry’s
capacity to contribute to stronger economic development in Indigenous communities is considerable. The
industry is expanding significantly, including in remote regions of Australia and demographic projections suggest
strong growth in Indigenous populations in many of the same and neighbouring regions.

There are however, substantial constraints that threaten to limit the potential contribution of the minerals sector
to expanded Indigenous employment and enterprise development. These include failing transport and housing
infrastructure, inadequate health and medical services, and inadequate education outcomes, particularly literacy
and numeracy. All these factors are limiting the number of Indigenous employees available for employment in
the minerals sector.

The Community Development and Employment Program (CDEP)

The Community Development Employment Program offers considerable potential as a pathway to long-term
sustainable employment. Practical work experience can play a significant role in acquiring and refining the skills
necessary for sustainable employment. Experience to date however, has shown that the ‘graduation rate’ from
CDEP programs has been low. In other words, the CDEP has often operated as a permanent placement, rather
than as a transition to permanent employment in the private (or public) sectors. Some employees have spent as
many as 10 years on CDEP projects.


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In the MCA’s view, a critical theme of reforms to CDEP should be to shape the program as a pathway to
sustainable employment, rather than an alternative to it. The MCA’s view, there are a number of practical
reforms that should be considered:
•   CDEP work should be combined with relevant on-the-job and competency based training. The notion of
    developing appropriate skills should be a central theme of CDEP programs;
•   CDEP programs should be augmented by culturally appropriate literacy and numeracy education;
•   CDEP programs should include an emphasis on development of work readiness attributes (fitness for work,
    e.g. drug and alcohol free, physically able, punctuality etc) and job ready skills (e.g. literacy, numeracy, and
    basic technical skills, such as standard vehicle licences);
•   CDEP needs to be linked to real jobs so that successful completion of training performance guarantees
    employment. To enable this link with real employment, CDEP reform needs to be linked with regional job
    mapping and a commitment from employers (mining jobs, community based jobs and jobs in other sectors);
•   CDEP participants should be ‘case-managed’, and be provided with individual support including mentoring;
•   CDEP community development plans should be developed in collaboration with a broader range of
    stakeholders, including industry;
•   experienced and skilled CDEP managers should be recruited who have the capacity to transition CDEP from
    a basic work for the dole scheme to a pathway to permanent mainstream employment; and
•   there should be an opportunity for ongoing collaboration with industry, including input from industry on the
    identification and development of skills requirements.

Rec om me ndatio ns:

•   The G ove rnm e nt sho ul d co nsi de r a ra ng e of re fo rm s t o CD EP to bette r s ha pe the
    prog ra m a s a g e nui ne p athway t o susta inab le e mploy me nt.




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4. 4        Ex pl orati on – I ncrea si ng Aust ra lia’ s M ine ra ls Inve nto ry

Australia’s economic demonstrated resources (EDR) of the following mineral commodities increased during
2006 – black coal, copper, gold, iron ore, rutile, zircon, platinum group metals, silver, tin, tungsten and
vanadium. EDR of bauxite, cobalt, diamond (gem and industrial), lead, manganese, nickel, uranium and zinc
decreased in the same period.

Increases in EDR were due to on-going drilling and evaluation of known deposits resulting in the transfer (re-
assessment) of resources from inferred or sub-economic categories into EDR, and discoveries of new deposits
or extensions of known deposits. Sustained increases in prices for most metal and mineral commodities over
recent years has allowed companies re-assess the economic viability of lower grade resources and deposits
which were previously considered to be uneconomic. Overall this has contributed to an increase in EDR for many
metal and mineral commodities.

From Cha rt 1 below, Australia experienced strong increases in base metal and ‘other’ (coal, iron ore etc)
exploration expenditures in 2006, although gold decreased.

Cha rt 1, Austra li a n mi ne ral ex pl oratio n e xp endit ure s by co mm od ity in c o nst ant 2005 – 06
dolla rs (B as ed o n AB S data d efl ate d by Co ns um e r P rice I nde x se rie s)




(Source: Australia’s Identified Resources 2007, Geoscience Australia)

Whilst this is encouraging, a number of significant issues remain, namely:
•      Exploration expenditure in real terms remains well below the peaks achieved in previous periods.
•      Australia is drilling significantly less metres than in previous periods with total metres drilled in 2006-07
       (8,418) being well below the peak achieved in 2001/02 (12,857).
•      Significant cost inflation exists. The MCA estimates that the real cost of one metre of minerals drilling has
       increased from $79 in 1994/95 to approximately $139 per metre drilled in 2006-07 – representing a 75
       per cent real increase.
•      According to the Minerals Economics Group, Australia’s share of global non-ferrous mineral exploration
       budgets fell to 10.6% in 2006, the lowest yet recorded.
•      Australia is a less attractive investment destination than other countries who are just as geologically
       prospective. The independent Fraser Institute based in Canada assesses how public policy factors such as
       taxation and regulation affect exploration investment of mining companies around the world. Of the 64
       jurisdictions surveyed, and in terms of relative attractiveness, the best Australian State was Western
       Australia which ranked 11th, with the other Australian States/Territories ranking between 12th and 30th.
•      Tab le 1 presents a comparison of the accessible economic demonstrated resources (AEDR)/production
       ratios as assessed over a 10 year period. The assessment provides an indication of the length of time that
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    mining of AEDR could continue at rates of production for each year. There is a markedly lower
    AEDR/production ratio for coal, iron ore, manganese ore and uranium, which are the net result of major
    increases in production and reassessment of resources.
•   Resource life duration for gold (about 20 years at current rates of production), lead and zinc (both around
    30 years), and diamond (about 7 years) are relatively low. Increases in the price of gold have contributed
    to increased expenditure on exploration for this commodity since 1980. However, despite a progressive
    increase in EDR of gold since the mid-1980s, there is still a need for ongoing successful exploration in the
    short and medium terms to ensure sufficient available resources to maintain gold as one of Australia’s main
    exports.
•   There is a need for significant new discoveries of lead and zinc just to maintain production at current levels
    beyond the next 25 years, when almost all existing base metal mines will have closed. In this regard the
    focus is on discovery and development of new high quality, metallurgically attractive lead- zinc deposits.

Tab le 1, Y ea rs o f acce ss ibl e eco no mic d em onst rate d re so urce s ( AED R) at t he p ro ductio n
leve l fo r t he yea r (ro unde d to nea rest 5 y ea rs)




(Source: Australia’s Identified Resources 2007, Geoscience Australia)

The MCA supports a suite of measures to address these concerns. Given that there is typically a lag of as much
as 10 years between the initial discovery of a deposit and the commencement of production, an early policy
response is necessary.

Flo w-T hro ug h Shares

The minerals sector welcomes Government’s commitment to the introduction of a flow through shares scheme
(FSSS). A FSSS would enable the transfer of tax deductions of individual exploration companies to individual
investors. Such a scheme would directly address one of the root causes of Australia’s dwindling exploration
effort – the fact that much exploration is undertaken by start-up mining companies with little income against
which they can deduct exploration costs. A similar policy shift in Canada is credited with a strong surge in

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exploration spending there.

Since Canada introduced a FSSS there has been an exponential growth in Canada’s equity financings. The
Toronto Stock Exchange Group is home to 60 per cent of the world’s public mining companies and Canada has
the world’s largest mining analyst community that covers both issuers on both Toronto Stock Exchange and TSX
Venture Exchange. These Exchanges have become the world’s leading markets for raising equity capital for
mining.

A FSSS comparable to that operating in Canada, would enable the transfer of tax deductions of individual
exploration companies to individual investors. In this, the tax deduction of the exploration expenditure is
leveraged in the capital markets in the subject year, attracting external investors rather than being accumulated
as tax losses, which will only be realisable when the company earns a taxable income. Australian Stock
Exchange (ASX) data clearly indicates that IPOs (Initial Public Offerings) and secondary raisings of capital of
mining companies are increasingly migrating to Canada.

The ASX attributes this migration to the ‘network effects’ of equity markets, meaning the Canadian market has
developed critical mass and is now a major centre of expertise and resources. The ASX suggests that the FSSS
in Canada was a major building block in the development of Canada’s critical mass, and has resulted in an ‘un-
level playing field’ between Canada’s capital market and Australia’s. Once this network effect develops, buyers
and sellers flock to the market which offers greater scale, higher liquidity and lower cost of capital, and the whole
process is a self-reinforcing cycle which once entrenched, is difficult to reverse.

Rec om me ndatio n:

•    In c lo se c o ns ultati on w ith the MC A, the Aust ra lia n G ov ernme nt p roce ed im me diat ely in
     deve lo pi ng the pa ra mete rs o f a b ro ad FT SS that e nc o urag es g re ate r d om est ic
     exp lo rat io n activ ity to ad dres s Aust ra lia’ s f alling leve ls of acce ss ib le eco nom ic
     dem o nst rate d re so urce s.




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4. 5       Tack li ng Sk il ls Sho rtag es

The Challenge

As at July 2007, the Australian minerals industry employed 137,000 people, representing approximately 1.5 per
cent of the Australian workforce. It is one of the fastest growing industry sectors in Australia with employment in
the sector increasing by 66 per cent in the last five years. But the industry has reached the upper limits of
labour market capacity, and both acute and chronic skills shortages have emerged.

The pace of the current expansion of global demand for minerals commodities is presenting substantial new
challenges for the minerals industry. Projections based on 2005 data suggest that the industry would need to
expand by 70,000 employees by 2015 – a growth rate of 9 per cent per annum and on current figures likely to
be greater. Job vacancies in the minerals sector have grown five-fold since 2002, and skills shortages are
causing delays in some projects, the indefinite mothballing of others, and higher costs across the sector.

These shortages also represent a significant opportunity cost in foregone employment opportunities fin remote
Indigenous communities where the minerals sector offers considerable further potential, both as an employer
and contributor to Indigenous enterprise development.

Current skills shortages are in the professions, skilled trades, and experienced operators, specifically:
•      mining engineers, earth scientists (for exploration and mining), metallurgists and mechanical and electrical
       engineers;
•      mechanical trades (heavy diesel mechanics, maintenance fitters, mechanical technicians and schedulers,
       welders etc.) and electrical trades and technicians - in both construction and operational roles;
•      experienced plant operators and underground miners; and
•      in management – the key shortages are in mine managers, production supervisors.

The high profile nature of the current minerals boom, combined with the industry’s attraction and marketing
strategies has generated considerable interest from potential employees. Currently there appears to be no
shortage of applicants for unskilled positions, although many lack the basic literacy and numeracy prerequisites
for the industry. However, there continues to be a critical shortage of skilled trades people, experienced miners,
supervisors, technicians and mining professionals. That is, the minerals industry has a shortage of skilled
people. This shortage is chronic in some areas and can only grow as the industry continues to expand.

Medium term outlook

Research commissioned in 2005 under a National Skills Shortage Strategy Project provided the MCA with an
authoritative forecast of labour force requirements to 2015. The research found that:
•      the minerals industry will require an additional 70,000 workers by 2015;
•      there are significant regional differences – demand will be highest in Western Australia and Queensland;
•      there are discipline-related differences – most acute shortages will be for mechanical and electrical
       tradespeople and mine operators;
•      there are commodity sector differences - the greatest shortages are projected to be in coal, iron ore,
       bauxite, copper and nickel; and
•      specifically, the industry will require an additional 27,000 trades people, 22,000 skilled operators with VET
       qualifications and skill sets, and over 7,500 mining industry professionals.




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An effectiv e nat io na l e d ucat io n a nd t ra ining sy ste m

In order to meet the skills requirements of the broader Australian economy, and the minerals sector in particular,
Governments and industry must work together to develop an effective national education and training system.
The MCA considers that the national education and training system should :
•   possess the requisite institutional and intellectual capacity to deliver quality educational outcomes at all
    levels, schools, vocational education and training and higher education;
•    be market driven
     −   market pull, not supply push - a system that can identify and respond to the needs of the industry,
         rather than simply accommodating the needs of the institutional providers;
•   be flexible enough to cater for divergent demands of the Australian economy, and ranging from school-
    based learning to trades and vocational training to postgraduate research:
     −   provision of quality higher education in areas directly relevant to Australia’s comparative advantage in
         minerals resources, particularly earth sciences, mining engineering and metallurgy;
     −   a strong focus on improving work readiness skills, most particularly the literacy and numeracy of all
         school leavers, while also addressing the ‘fitness for work’ issues (e.g. drug and alcohol free,
         physically able, punctuality etc) that currently prevent many disengaged young people from being
         capable of working in the minerals industry;
     −   provision of schools based apprenticeships and the specific requirements of various and varying
         workplaces;
     −   to be capable of fast tracking those with pre-qualifications and/or quick learners - strong business
         case for bringing them on quickly and competently; and
     −   provide a range of delivery modes (e.g. online, short course, workplace based, skills sets) and
         locations – this is especially vital for the minerals industry characterised by small numbers of
         employees, working in remote locations, in small regional communities, and often in specialist
         disciplines.
•   be equipped to develop a more diverse workforce
     −   including initiatives to promote greater female employment in the minerals sector; and
     −   by expanding the number of Indigenous Australians with the job ready skills to enable participation in
         the minerals sector; and
•   be national in orientation whether in the development of national curricula for core school subjects, or in
    the mutual recognition of competencies and qualifications across Australian States and between industries,
    and internationally as appropriate.

Skilled Migration – An Acute Response...

In the short to medium term, it is likely that the development of an effective national education and training
system will need to continue to be complemented by acute responses, including a skilled migration system with
the following characteristics:
•   457 Visa arrangements are flexible and avoid unnecessary processing delays;
•   fast tracking processes are available for pre-qualified companies to ensure recruitment times are less than
    3 months; and
•   fast tracking of processing times is available for skilled occupations paid over a minimum salary cap;
•   highly skilled occupations and those with identified skills gaps remain exempt from labour market testing;




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•    other skilled occupations to be registered with a Job Network member or other recruitment company to be
     done concurrently with the skilled migration application process rather that a mandatory 28 day registration
     period;
•    continued access to employer sponsored visas for “labour hire” companies and their associated
     obligations, provided the labour hire company remains the direct employer of the 457 visa holder; and
•    employers are to be denied access to the 457 Visa if they misuse the process.

The Industry’s Response

The minerals sector is playing its part in building and sustaining a skilled labour force. Consistent with the
industry’s commitment to a collaborative partnership with Government in policy and implementation, the MCA, its
member companies and related State representative organizations have committed in the order of $10 million
dollars annually over the past decade to capacity building in schools and tertiary education. This includes
approximately $2 million per year on the MCA’s National Education Program, in excess of $3 million under the
MCA’s Minerals Tertiary Education program, and complementary funding in the order of $5 million from member
companies’ direct involvement in schools and the higher education sector.

Further, the minerals sector spends more on vocational education and training per employee than any other
sector - $1,643 per employee compared with the national average of $458, almost all of this (90 per cent)
training was industry funded due to the public sector’s inability to meet the industry’s training needs.

In recognition of the scale of the challenge posed by skill shortages, the MCA has developed a national
education and training framework, founded on four key objectives, to give effect to growing the pool of skilled
labour for the minerals industry: which is:

1. Raising awareness of industry career opportunities through the industry’s own proactive initiatives and in
   collaboration with all levels of the education and training system.

2. Improving attraction of employees to the industry by providing ready access to relevant industry information
   and jobs.

3. Increasing retention, by addressing industry-level impediments to long-term employment in the industry.

4. Building institutional capacity in the higher education and vocational education and training sectors through
   policy advocacy and collaborative partnerships.

MCA’s Current Initiatives

The MCA’s current initiatives include:
•    Careers promotion initiatives creating awareness of minerals industry career and job opportunities and the
     variety of entry pathways.
•    Higher education initiatives that build collaborative relationships with and between key participating
     universities.
•    Improving the relevance and quality of vocational education and training including through a leading role in
     the Institute of Trades Skills Excellence and strong support for the minerals Industry Skills Council
     (SkillsDMC) in its role to establish the competencies, standards and training materials for minerals industry
     VET training.
•    A series of collaborative cross-sectoral regional initiatives to grow the pool of skilled labour.
•    A ‘Women in Mining Dialogue’ designed to address structural and cultural impediments limiting women’s
     participation in the minerals industry workforce.



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•   A MoU on Indigenous employment between the MCA and the Australian Government aimed at building
    practical solutions to employment in a range of Indigenous communities.
•   A collaborative partnership with the Australian Government and five member companies with operations in
    the Northern Territory to review and identify opportunities to train young Indigenous people from
    neighbouring communities for potential employment through apprenticeships and traineeships at the mining
    operations.

An industry and Government partnership…

The minerals sector is keen to work with the Government on a range of fronts to build the pool of skilled labour
with particular emphasis on the following areas:
•   ensure that the minerals industry’s priorities are reflected in the implementation of Labor’s plan to increase
    skilled training places by 450,000 over 4 years;
•   ensure that Australia’s TAFE sector is responsive to the minerals industry’s needs;
•   develop linkages between Labor’s Trades Training Centres initiative and the development of minerals
    industry skills centres of excellence (or hubs) in key mining regions. These skills centres should aim to
    deliver high quality and nationally consistent training to qualify people for specialist minerals industry
    occupations;
•   ensure that Australian universities are sufficiently well-funded to deliver leading education in science and
    engineering, particularly in the disciplines of earth science, mining engineering and metallurgy;
•   ensure that arrangements for temporary business migration (457 Visa) are flexible and response to
    industry needs; and
•   develop and expand initiatives to promote greater female and Indigenous employment in the minerals
    sector.

Rec om me ndatio ns:

In orde r to p ro gres s ex isti ng initi ative s und e rway in pa rtners hip w it h t he Australia n
Gove rnm e nt a nd i mp le me nt t he p olic y o bjective s id ent ified ab ove it is reco mm ende d t hat
the 2008 B udg et acc om mod ate the f ollow ing :

Hig he r Ed uc atio n
•   Move Sci e nce a nd Engi ne e ri ng i nto a hig her f und ed Clust er to allow Australia ’s k ey
    univ ersit ie s to attract hi g h q ual ity ac ad em ics to d eliv er wo rld-c la ss unde rgrad uate and
    post grad uat e d eg re e prog ra ms .
•   Maint ai n t he C ol lab o rati o n a nd Struct ura l Re fo rm f unding that p rov id es fina ncial
    re so urce s to the Hi g he r Ed uc atio n s ecto r f or co llabo rative p rog ram s t hat ext end t he
    re ac h, a nd im prove the qual ity o f ed ucat io na l outc om es, p art icula rly in sc ie nc e a nd
    enginee ri ng:
    −    Fundi ng to est abl is h the c oop e rativ e Mine rals G eo scienc e Ho no urs and Ma ste rs
         prog ra ms (a sp eci fic o ne -o ff g ra nt o f $500, 000), a nd
    −    Fundi ng to est abl is h the c oop e rativ e Meta llurgy Ed uc atio n Pa rt ne rs hip prog ra m ( a
         spec if ic one -of f g ra nt of $500,000) .
•   Maint ai n f undi ng o f t he Co op erativ e Re se arc h C ent re s initiativ e.




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Sc ho ols Ed uc atio n
•    Inc rea se res o urce s to im prove the quality a nd c onsist ency o f Eng lish, scie nce,
     mat he matic s a nd t ec hnol ogy teac hing ava ilable in b oth t he p rima ry a nd sec o nd ary
     sc hoo l syste m s.
•    In c oll ab orati on w ith St ate a nd Te rrito ry Gov ernme nt s provide ad dit io na l f unding to
     attract, trai n a nd retai n teac hers a nd t o a dd re ss inad eq uate sc hoo l infrast ruct ure.
•    Prov id e add itio nal res o urc es to e ns ure all I nd ig e no us st ude nt s hav e t he op po rt unity
     to ac hi eve the lite ra cy a nd num eracy sta nd a rd s o f t heir no n -I nd ige no us pe ers.
•    Maint ai n t he e xi sti ng co mm itme nt t o f und C a ree rs Adv ice Australia to 2008 -09. T his
     nat io na l c aree r netwo rk o f 57 reg io nally b as ed c a re e rs adv is e rs s up po rts yo ung
     peo pl e’s tra ns itio n i nto the w orkf orc e und e r t he g uid anc e of 10 Nat io na l I nd ustry
     Ca ree r Spec ia li sts, i nc l udi ng a Re so urce s a nd I nf ra struct ure ind ust ry sp ecialist.


Vocat io na l Ed uc atio n a nd T ra i ni ng
•    Fundi ng f or dev el op me nt of a b usines s mod el fo r sp e cialist mine rals ind ustry s kills
     cent re s 23 fo r imp le me ntat io n i n key mining a rea s in 2009/2010. It is envisag ed that
     the ce ntres wo uld be netw orke d nat io na lly ac ro ss a re as of sig nific ant m ining activ ity.
     Eac h wo uld be uniq ue, harnes si ng a nd e nha ncing e xis ting training inf ra struct ure a nd
     initiative s a nd re fl ecti ng the pa rtic ula r ne ed s o f t he ir loc al regio n. How eve r, there
     wo uld b e co nsi ste ncy ac ro ss i n t he natio nal netw ork t hro ug h use o f hig h q uality a nd
     consi ste nt t ra i ni ng m ate ria ls d el ive re d by a s mall numbe r of hig hly sk illed teac hers.
     The c e ntre s wo ul d be gov erned by a p a rtners hip o f industry a nd training provide rs .
•    Ens ure that t he co re el em e nts of t he w ork of T he I nst itute f or T ra de Skills Excelle nc e
     are int eg rate d int o f ut ure gov e rnme nt init iativ es a nd activit ie s to c o ntrib ute to
     imp ro vem e nt o f V ET secto r pe rf orma nc e and re wa rd ing e xce lle nce.
•    Inc rea se f und i ng fo r V ET prog ra ms d elive re d in rem ote a nd reg io nal a rea s t o a dd re ss
     the is s ue s of hig he r unit co st and loc al disa dva nta ge, the reby im p roving o pp ort unit ie s
     fo r p eop le l ivi ng a nd w orki ng i n thos e a rea s to c o ntribut e to t he m ainstrea m e co no my.
•    Prov id e add itio nal res o urc es to SkillsDM C ( minerals s ector I nd ust ry Skills C o uncil) to
     enab le t he p re pa rat io n hig h q ua lity t ra ining m ate rials fo r use by mine rals ind ust ry
     sk ills c e ntres – ( $200,000 pe r y ea r fo r 5 y ea rs ).
•    Of a m ore g e ne ra l nature , provi de ad ditio na l re so urc es t o imp rov e t he q ua lity of
     technica l a nd e ngi nee ri ng trai ning in t he V ET sect or, pa rtic ularly to e ns ure t he
     ongo ing s upp ly of ad eq uat ely traine d te ac hing st aff a nd tec hnic al t ra ining f acilities .
Ind ig eno us Ed ucat io n a nd Emp loym e nt
•    Sig ni fica nt ly i nc rea se f undi ng to ad d re ss t he lite racy and num e racy a nd fit nes s f or
     work im ped im e nts s uf fe re d by I ndige no us Australia.
•    Prov id e f undi ng f or i mpl em e ntatio n o f t raining init iatives fo r re mot e a pp re ntic es hip
     traini ng i n t he N ort hern Te rrit ory .
Fem ale P a rtici pati o n in the Mi neral s Sect or
•    The Aust ra li a n G ove rnm e nt co nt inue to co -o pe rate close ly in e ff ort s to inc rea se
     pa rtici pati o n of w om e n in the mi nerals secto r, inc luding thro ug h p ractica l s upp o rt fo r
     re se arc h a nd ot he r i niti ativ es.




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4. 6         A Nat io na l Ene rgy M a rk et

Reliable, sustainable and efficient energy supply and services have long been of critical importance to Australia.
Given that Australian primary energy demand is expected to grow between 35 and 50 per cent by 2020, the
ongoing development of a competitive and efficient energy market will be required to underpin our capacity to
meet forecast energy needs in a secure, cost effective and sustainable manner.

In order to achieve such an outcome the MCA continues to be a strong advocate for an open, competitive and
integrated national energy market that is:
•       governed by nationally consistent regulation of generation, transmission and distribution to promote
        efficiency and to eliminate unnecessary costs and risks;
•       transparent, with no artificial barriers to entry;
•       non-discriminatory and therefore non-distortionary between energy sources;
•       devoid of price controls, unless and only in circumstances of demonstrable ‘market failure’ with capacity for
        long-term supply contracts; and
•       attractive to further investment in world’s best practice generation and transmission capability and in new
        technologies to meet the burgeoning energy demands of the future and the need to reduce greenhouse
        gas emissions.

The National Electricity Market (NEM) – the world’s longest interconnected power system – comprises the
wholesale market for electricity supply in the Australian Capital Territory and the states of Queensland, New
South Wales, Victoria, Tasmania and South Australia. It commenced operating on 13 December 1998.

An Expert Report completed for the 2007 Owen Inquiry into Electricity Supply in NSW concluded that the NEM
has worked well since its inception in meeting the market objective to ‘promote efficient investment in, and
efficient use of, electricity services for the long term interests of consumers of electricity with respect to price,
quality, reliability and security of supply of electricity and the reliability, safety and security of the national
electricity system’.24 The Owen Inquiry also concluded that “In general there has been a high reliability of
generation in the NEM and sufficient capacity from the energy market to meet consumer demand.” (page 6-16).

Recent developments in the NEM include:
•       commencement of the National Electricity Law, Rules and Regulations on 1 January 2008;
•       the National Gas Law legislation is close to finalisation and introduction into the South Australian Parliament
        is expected in an early 2008 sitting period; and
•       2007 was characterised by upward pressure on spot and forward market prices as a result of generator
        capacity and energy restrictions due to the drought. While the impact of the drought has eased, supply
        conditions remain tight. This will continue to put pressure on electricity prices, but, consistent with the
        National Electricity Market Management Company's regular drought reports, is unlikely to impact on
        reliability.

The MCA supports the Council of Australian Governments’ on-going approach to developing the NEM. Even so, it
estimates the timetable has slipped by some two years with the states of NSW and Queensland reported in the
media as delaying efforts to move the timetable forward.

In this regard the 13 December 2007 Communiqué by the Ministerial Council on Energy noted:
        “Delayed finalisation of the economic regulatory package, and the complex range of state and territory
       legislative and regulatory instruments that need to be synthesised into an efficient and effective national
       package for regulation of the non-economic aspects of distribution and retail services, has required
       rescheduling of the retail legislative package for introduction to the SA Parliament by no later than 30

24   Morgan Stanley, Expert Report 3 to the NSW Government’s 2007 (Owen) Inquiry into Electricity Supply in NSW, p.49

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    September 2009.”

The MCA reiterates its position that progress on energy market reform must be quickened.

Rec om me ndatio ns:

The Aust ra li a n G ove rnm e nt a nd State /Te rrito ry Gove rnm e nts c o ntinue to w o rk t o:
•   prog re ss o ng oi ng ref orms i n eco nom ic re gulat io n, e nergy acc es s, tra ns miss io n
    pla nni ng, co nsume r adv ocacy , e me rge ncy re sp o ns e a nd de ma nd-side pa rticip atio n;
•   fina li se t he va rio us State a nd Te rrit ory National Ga s Law leg is latio n ap plicatio n Acts t o
    ens ure t he i mp le me ntati o n o f im po rta nt re fo rm s to the g as acce s s reg im e as we ll as
    the ap pl icati o n o f natio nal gov erna nce a rra ng eme nt s to the e co no mic reg ulatio n o f
    gas tra ns mi ss io n a nd di strib uti o n by the middle of 2008;
•   tra ns fe r re g ul atio n of d ist rib ut io n ( no n-eco nom ic) and reta il (no n-p ric e) f unct io ns to
    the Austral ia n Energy Re g ul ato r a nd t he Australia n Ene rg y M a rk et C om miss io n;
•   esta bl is h a nat io na l si ngle e nergy ma rk et o pe rat or fo r e lect ric ity and ga s, to b e ca lled
    the Austral ia n Energy Ma rk et O pe rato r by 1 J uly 2009; a nd
•   ens ure t he d ro ug ht do es not adv erse ly imp act re liability of s upply.




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4. 7       Nati o na l W ate r Re fo rm

It is essential that adequate resources are provided to fully implement the National Water Initiative, including the
specific provisions for the minerals industry. Water availability and security is a key issue for the minerals
industry, and climate change brings further elements of risk that can be partly mitigated through the
implementation of the NWI.

The National Water Commission should continue to drive water reform to ensure allocation of water to users and
the environment based on sound science, allowing for security of supply and trading to be established in an
equitable market whilst pricing reflects source, quality and water infrastructure investments. The Australian
minerals industry has a strong reputation as both an efficient and innovative manager of water, and is a strong
supporter of national water reform processes to maintain Australia’s economic prosperity and environmental
quality.

The minerals sector is responsible for only 2.4 per cent of Australia’s net water consumption with the value
added per mega litre (ML) of water amongst the highest of all industry sectors. According to official data, coal
mining generates $86000 for every ML used, compared with $162 per ML for rice production and $3870 per
ML for vegetable production.25 While water remains an essential input for minerals processing, water also
represents a community resource that should not be completely ‘owned’ by any one user, but rather a resource
that can fulfil a variety of roles as it moves through its value cycle.

Lack of water resource security can threaten the viability of existing mining operations and potential new
developments (expansions or Greenfield sites). In 2007, the continued operation of Cadia, in the Murray Darling
Basin, was threatened due to a scarcity of water, with the livelihoods of 400 local employees in a regional town
at risk (Orange City Council 2007). More rapid implementation of the NWI will help improve this situation 25, by
enabling trading of entitlements across multiple sources of supply, providing enhanced resource security for
mining operations.

Water reform has been hampered by the difficult process of establishing the nature and extent of existing
property rights, establishing the legal and market processes for trading those rights, and of ensuring demands
for non-commercial uses (such as ensuring ecological flows and cultural entitlements) are accounted for. The
minerals industry welcomes the recognition by governments in the National Water Initiative that the minerals
industry’s use of water involves unique factors for each project, which can include (but is not limited to)
isolation, relatively short project duration, water quality issues, as well as the obligation to remediate or offset
impacts.

Given the constraints on existing and future supplies, the MCA considers efficient and cost-effective access to
limited water supplies for all competing uses (including in the minerals industry) can be achieved.

Rec om me ndati o ns

The Aust ra li a n G ove rnm e nt’s i nv est me nt in the NWI s ho uld be e nha nc ed t o e xp ed ite t he
proce ss a nd e ns ure :
•      all wat er m a nag em e nt d eci si o ns a re ba se d o n so und scie nc e a nd sta ke ho ld er
       enga ge me nt, be transp a re nt and have ag re ed tim ef ra mes f or review;
•      env iro nm e ntal f low s are g ive n p riority to e ns ure ec os ystem inte grity is ma intained a nd
       that t he se f low s are all ocat ed o utside of a ma rket arrange me nt;
•      wate r e nt itle me nt s f or c ult ural he rit age va lue s a re re cog nise d a s distinct a nd sep a rate
       to e nvi ronme nt al fl ows , and w he re ap prop riate, ca n b e trad ed in t he ma rket;



25ACIL Ta sm a n, W ater Refor m and Industry , Rep ort prep are d for t he Depa rt me nt of Industry,
To uri sm a nd Re so urc es, Ap ril 2 00 7
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•   sec urity of s up ply a nd reco g ni ses a m arket -b as ed ap proac h t hat e na bles ad dit io na l
    wate r supp ly t hro ug h se cure trad ing sy stem s;
•   wate r a ll ocat io ns a re g ua rant ee d – t hey s ho uld not b e a ble to be alt ered (red uc ed o r
    re mov ed) by gov ernme nt exc ept in e xce ptio nal circ um sta nce s s uch a s dro ug ht;
•   risk s as soc iate d w ith c ha ng es to wate r alloc atio ns d ue to exc eptio na l c irc umst anc es
    are s ha red b etwe en g ove rnm e nt a nd indust ry – t his is c ritic al a s t he ext re me ly
    varia ble nat ure of wate r s up ply i n Austra lia has t he p ote ntia l to creat e s ubsta nt ia l
    risk s;
•   the est ab li s hme nt of a natio nal wat er ma rket wit hin a nd bet wee n State s a nd
    Te rrito ri es t hat i s b as ed o n t he releva nt pa ra met ers of t he reg io n (c atc hm e nts or
    bas ins) ;
•   wate r t rad i ng sc he me s are struct ured to allow fo r allocations t o b e a vaila ble to the
    hig he st va l ue use rs;
•   the ef fecti ve op eratio n of a natio nal wat er m arket s hould not b e limite d by the
    app lic atio n of a ny sect or b as ed s ub sidie s or reb ate s, or a rtific ial b arrie rs o r
    imp ed im e nts to trad e; a nd
•   wate r p rici ng s hould b e b as ed o n a n o pe n ma rk et t ha t inco rpo rates the f ull co st o f
    capt uri ng, st ori ng, treati ng, di strib uting and ma na ging the w ate r, disco unt ed whe re
    ind ust ry ha s ma de i nve stm e nt i n t he p rov is io n of p ub lic w ate r infrast ructure, w hic h
    meet s b ot h t he nee ds of i nd ustry a nd co mm unity. Alt ernative ly, ind ustry s ho uld be
    able to s el l a ny al loc atio ns ge ne rated thro ug h it s inv estm e nt in inf ra struct ure : a nd
•   the p ric e o f w ate r sho ul d b e set irres pectiv e o f its e nd-use, a nd s ho uld a ls o inc lud e
    an e xte rnal ity c omp o ne nt t o p ro mot e re so urce stew a rds hip. Im po rta ntly , p ric ing
    arra nge me nts s ho uld al so ref lect wate r so urce a nd q ua lity .




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4. 8       Com petit ive a nd Eff ici e nt Ex po rt I nf ra struct ure

The proliferation of regulatory and ownership complexity within Australia’s coal supply chains is creating severe
bottlenecks and inefficiencies. Alternatively, the Pilbara iron ore model is considered highly efficient and
responsive because the industry owns and operates highly integrated mining, transport and ship loading assets.

Substantial investment is occurring to remedy the issues on the Eastern seaboard – including $2 billion of public
and private sector investment in the NSW Hunter Valley, with an additional $3.9 billion ‘committed’ and $4.5
billion ‘under consideration’ in the Queensland coal sector. This investment will however be of little benefit if the
capacity of the whole supply chain does not improve to match the capacities of the ports, or the rail system for
example.

Two models of export infrastructure development…

Infrastructure provision and associated funding and regulatory models have become substantially more complex
within the Australian minerals industry. The Pilbara iron ore industry owns and operates highly integrated
mining, transport and ship loading assets. This has produced very high levels of efficiency and responsiveness.
These efficiencies are a major source of competitive advantage for Australia’s globally traded iron ore as the
facilities operate as a unified production process. In their responses to this year’s MCA Minerals Industry
Survey, Rio Tinto and BHP Billiton indicated record production at these facilities.

In contrast, on the East Coast, where coal infrastructure construction was carried out by the mining companies
directly or by the Government and underwritten by minerals companies, a proliferation of regulatory and
ownership complexity has emerged. For example, the majority of rail track in Australia (excluding the Pilbara) is
now provided by four government agencies and three private companies, with at least six different access
regimes. Further, the rail track providers, freight service providers, terminal operator and port operators are
typically owned and operated independently of each other.

This misalignment of economic interests has lead to fragmentation in these supply chains – leading to
inefficiencies and bottlenecks. Coal company participants to this year’s 2007 MCA MIS indicated a poor 2 per
cent increase in production between 2005/06 and 2006/07. The magnitude of the problem is demonstrated at
Figure 1 which compares vessel anchorage data at coal ports compared to iron ore ports in the Pilbara.

FIGURE 1




           Source: M. Spreadborough, Rio Tinto Iron Ore, Financial community visit presentation, 12 June 2007

The supply-side investment response….

Considerable investment is occurring to expand the current capacities of Australian export corridors – including
mining. Specifically in relation to the coal sector, $2 billion of public and private sector investment will proceed
in the NSW Hunter Valley, and $3.9 billion is ‘committed’ and $4.5 billion is ‘under consideration’ in the
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Queensland coal sector. Of this $3.9 billion in Queensland, $1.2 billion will be invested in the Dalrymple Bay
Coal Terminal; $0.12 billion in Gladstone Port; and $1.0 billion (public investment) in various rail line upgrades
and expansions, with an additional $1.7 billion in new rolling stock.

Table 1 looks at the impact this will have on Australia’s global market share for thermal and metallurgical coal
(combined) against world growth forecasts26.

TABLE 2
The rma l a nd Met al lurgica l Co al ( Mtp a)
            Port Exp a ns io ns     World              Aust ra lia n
                                    Trade              % of
                                    Fo reca sts        World
                                    (AB ARE)           Trade
Year        QLD         NSW
2007        205         118         887.6              36
2008        225         126         919                38
2009        240         132         946                39

Will substantial amounts of investment address the issues?...

One cannot assume that bottleneck concerns will be addressed by the significant investment and port expansion
activity at present – for, as Table 2 shows, the investment at the ports if fully utilised will substantially increase
Australia’s world market share.

It will be of little benefit if the capacity of the whole supply chain does not improve to match the capacities of the
ports, or the rail system for example. That is, the efficiency and effectiveness of Australia’s export corridors,
when there is high-interdependency between mine production, track, trains and ports, is only as strong as the
weakest link in the chain. It is of little benefit for example if there is 60Mtpa capacity at a mine site, 45Mtpa
capacity in available (rail) rolling stock, 48Mtpa in track capacity and 60Mtpa capacity at the port.

The MCA’s advocated solutions….

The success of the Pilbara model of planning and expanding infrastructure offers a template for reform, and
further, it is essential that reforms seek to improve the efficiency and effectiveness of the whole export
infrastructure chain as a collective, integrated system. The MCA supports the following six foundation strategies
for Australia’s infrastructure (being energy, transport, water, communications and export):
•      effective national (not state-based) infrastructure markets, including national or uniform regulation;
       market-based prices that send the appropriate signals to consumers and suppliers (cover long-run
       marginal costs and reflect time of use);
•      public investment processes that are integrated across governments, forward looking, based on
       consideration of all options and favour efficient, integrated mining, processing and transport projects with
       the highest (and published) benefit cost ratios;
•      effective competition in all contestable (non-network) market segments;
•      private ownership as the preferred model in all contestable market segments;
•      regulation of infrastructure that does not discourage investment seeking to meet expected demand.

Further, the MCA calls for co-ordinated master planning which would, amongst other things, ensure that future
capacity is in line with robust forecasts; define the contractual triggers when parties can proceed; and, oversee
short term planning and the establishment of business rules for the daily optimisation of system capacity. The
MCA also supports improved accountability of performance of those in the transport chains.


26   ABARE, Australian Commodities, September Quarter 2007.
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Investment impediments exist in the Trade Practices Act 1994…

As noted above, the MCA considers that the Pilbara model of infrastructure investment represents a template for
reform. In this region, vertically integrated mine, rail and port arrangements have been a key factor in the rapid
expansion of the iron ore trade to meet the rapid growth in demand from China and India. These efficiencies are
a major source of competitive advantage for Australia’s globally traded iron ore. These facilities are far more
than a transport operation but represent an integrated logistical and production process. The Reserve Bank in
its Statement on Monetary Policy in February 2005, the Prime Minister’s Exports and Infrastructure Taskforce
report, May 2005 and the Australian Bureau of Agricultural and Resource Economics’ study, Export
infrastructure and access: key issues and progress, June 2006, have all recognised that this model has been the
most responsive to changes in market demand.

But the Pilbara model is under threat from misguided competition policy that risks undermining export chain
arrangements that work efficiently and effectively. In particular, part IIIA of the Trade Practices Act 1994 (TPA)
provides a legal right for third parties to seek access to nationally significant infrastructure services. The
Federal Court held in 1999 that Part IIIA had no application to the Hamersley Iron rail line, to which access was
sought, because it was a part of a production process used in the production of export quality iron ore. In
2006, however, Fortescue Metals Group (FMG) made an application for declaration of parts of the BHP Billiton
Pilbara rail system even though it was building its own rail line to transport significant quantities of its product.
The full Federal Court found that part of the BHP Billiton rail system was not protected by the “production
process” exception. This case is now on appeal.

If confirmed, this decision will serve as a major disincentive to continued investment and expansion by private
sector investors. Of particular note, five Federal Court judges have now ruled on two cases regarding access to
Pilbara iron ore railway systems. This has resulted in four conflicting decisions (including the minority decision in
the latest full Federal Court case) on essentially the same facts. It is clear that the current legislative framework
is creating unnecessary investment and operational uncertainty and clearly indicates confusion about the intent
of Part IIIA – a confusion that needs to be remedied as a matter of urgency through the legislative process.

The most comprehensive recent review of Australia’s export infrastructure - the Prime Minister’s 2005 Taskforce
- recommended that Part IIIA be amended in order to protect vertically integrated, tightly managed logistics
chains (and especially those related to export industries) from third party access and thereby preserve their
efficiency. This position was reached after analysis of the superior efficiency performance of the vertically
integrated iron ore over multi-owner coal export infrastructure chains to the remarkably strong growth in world
demand for iron ore and coal since 2005 (see F ig ure 1).

The MCA has strongly supported the Taskforce’s recommendations as achieving the right regulatory balance:
•    system efficiency is best served by market based solutions in the first instance;
•    regulation should only be applied where the market is demonstrably failing; and
•    a national regulator is preferred where there is a failure in national consistency and timely response across
     existing State regulators.

Rec om me ndatio n:
In orde r to d eliv e r s ig nif ica nt imp rove me nts in Austra lia ’s co mpet itio n, p ro d uctiv ity a nd
int ernatio nal com pet itive nes s as we ll as b etter coo rdinat e infrast ruct ure p la nning a nd
inv est me nt acros s t he nati o n, ac ro ss gov ernme nt s a nd the privat e s ecto r, the C o uncil o f
Aust ra lia n G ove rnm e nts s ho uld:
•    ado pt a 5 p art strate gy to dev el op Australia’ s natio nal expo rt infrast ruct ure inc lud ing:
     −    eff ective nati o na l ( not stat e-ba se d) infrast ruct ure ma rk ets, inc luding natio nal o r
          uni fo rm reg ulati o n; ma rk et-ba se d p rice s t hat se nd t he a pp ro priate s ig na ls to
          cons um ers a nd s up pl ie rs (cov er lo ng -run ma rgina l c o sts a nd re flect time of use );


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    −   publ ic i nv est me nt proce ss es that a re inte g rate d a cro ss gov er nme nt s, fo rwa rd
        loo ki ng, ba se d o n co ns id eration o f a ll opt io ns a nd f a vour ef fic ie nt, integ rated
        mi ni ng, proce ss i ng a nd tra nsp o rt p ro ject s w ith the highest (a nd p ub lis he d) b e ne fit
        cost rat io s;
    −   eff ective co mp etiti on i n al l c o ntest able ( no n-netwo rk ) ma rket seg me nt s;
    −   private ow ners hi p a s t he p re fe rred m od el in a ll co nte stab le ma rket se gm ent s;
    −   re gulat io n of i nf ra struct ure that d oe s not disco ura ge inv est me nt se ek ing to m eet
        exp ecte d d em a nd
•   simplify natio nal reg ulato ry p roce sse s inc luding t hro ugh a CO AG review of t he sc op e
    fo r e stab li s hi ng a s i ngl e natio nal reg ulato r o r in othe r w ays red uc ing t he num be r o f
    re gulat ors aff ecti ng Aust ra lia ’s e xp ort orie nt ed inf ra s truct ure .
•   ame nd P art IIIA of the Trad e P ract ice s Act to p rov ide fo r an ‘ eff icie ncy ove rrid e’ ,
    whereby k ey i nfrast ruct ure f aci lit ie s co uld be dec la re d e xe mpt from third -pa rty acce ss .




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4. 9       Ma riti me T ra nsp ort

4.9.1      National Ballast Water Management and Biofouling Framework for International and Domestic Shipping

Approximately 95 per cent by volume of Australia’s trade is dependent on shipping (99 per cent for the minerals
sector). It is estimated Australia ‘imports’ through these shipping movements around 150 million tonnes of
ballast water per year. The minerals sector is responsible for over 100 million tonnes.

Thus Australia and the minerals industry are highly vulnerable to the risks of introducing harmful aquatic
organisms and pathogens from the discharge of ships’ ballast water and via fouling on ship hulls. Responsibility
for managing this risk in Australian waters is shared between federal, state and territory jurisdictions, with the:
•      Australian Government responsible for managing foreign ballast water consistent with the relevant
       International Maritime Organisation (IMO) Treaty (Australia has signed with a view to ratifying the
       International Convention for the Control and Management of Ships' Ballast Water and Sediments); and
•      state and territory governments responsible for managing domestic ballast water.

The MCA advocates:
•      the implementation of a nationally consistent, regulatory framework for ballast water management aimed at
       managing the risk of marine pest incursions and translocations around Australia’s coast and into its
       waterways. This framework should also be consistent with the IMO Ballast Water Convention and other
       existing international maritime regulation frameworks;
•      establishing such regulatory requirements through an appropriate balance between environmental, financial
       and social (including safety) outcomes while optimising overall performance;
•      the principle of minimum effective regulation to achieve this desirable outcome; and
•      application of the set of high level principles endorsed by Government and industry.

However, the states have been slow in establishing nationally consistent requirements for managing domestic
ballast water, despite the development of an Intergovernmental Agreement on a National System for the
Prevention and Management of Marine Pest Incursions in April 2005.

The MCA supports the “applied approach” concept, which will encourage, State and Northern Territory
governments to apply the Australian Government’s legislative approach in mutually consistent ballast water
management legislation

In late 2006, the Australian Quarantine and Inspection Service’s (AQIS’s) developed proposed biofouling
management regulations. These logically extend the marine pest incursion regulatory approach for ballast water
management to biofouling.

AQIS recommended that internationally trading bulk vessels be assessed as presenting a relatively low risk for
biofouling. This is due to their commercial interests in applying the best fouling control paints, their short stay in
port and their comparatively fast transit speeds. The MCA concurs that such vessels should not need to provide
a pre-arrival report to AQIS on hull treatment, as they are low risk for biofouling.

The MCA has lent its in-principle support to the new biofouling management procedures being underpinned by
the following principles:
•      all actions will be performed in cooperation with relevant agencies and be nationally consistent;
•      a vessel shall experience no undue delay whilst inspection and/or identification is being made;
•      dry dock and cleaning in Australia should be conducted in accordance with the Guidelines for the Prevention
       of Biofouling on Commercial Vessels;
•      the vessel owner/operator may provide AQIS with an alternative treatment option for consideration and

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       approval; and
•      AQIS informs vessel owners/operators that the vessel will not be granted permission to berth, upon
       returning to Australia, until evidence or information is provided that appropriate action has been conducted
       prior to arrival.

Rec om me ndatio n:

The MC A s up po rts:
•      ado ptio n of a natio nal ly c onsi ste nt a nd harmo nize d, no n -p resc riptive m od el fo r
       nat io na l bal la st w ate r ma na ge me nt a nd biofo uling m a na ge me nt to m inimize t he ris k o f
       ma rine p est i nc ursi o n o r t ra nsl ocatio ns ; a nd
•      a s ing le natio nal cha rge b e l evi ed t o co ve r ro utine inspect io ns o n a q ua rte rly ba sis fo r
       ship m ove me nts a ro und the Austra lia n c oa st rat he r t ha n ea ch jurisd ictio n hav ing its
       ow n a rra ngem e nts a nd s epa rate c harging reg im es .

4.9.2        Coastal shipping cabotage arrangements

Coastal shipping’s most important function is the transport of bulk cargo. Such cargo accounts for around 88%
of coastal cargo with much of the coastal shipping task undertaken “in-house”, i.e. many of the major users of
coastal shipping are themselves ship operators.

The Navigation Act 1912 requires all vessels trading interstate on the Australian coast to be licensed or have a
permit. When Australian licensed bulk carriers cannot meet inter-state domestic dry bulk demand, it is met by
overseas flagged vessels trading domestically under Australia’s Continuous Voyage Permit (CVP) or a Single
Voyage Permit (SVP) regime.

The MCA strongly supports maintaining the current SVP/CVP regime while ensuring it is administered consistent
with its objectives and in a transparent manner:
•      the bulk commodity industry has no alternative but to use f oreig n flagged and crewed bulk carriers (eg to
       meet seasonal fluctuations and demand spikes) given the small number (17) of Australian flagged dry bulk
       carriers, the majority of which are already dedicated for bulk cargoes; and
•      the use of the CVP/SVP system is now integral to the efficient transport of domestic dry bulk commodities
       with the Australian economy being the obvious beneficiary.

The MCA also strongly supports national consistency in regulatory approaches. In that regard intra-state
licensing arrangements for foreign vessels differ between Australian States and need to be harmonized.

In the absence of any change to cabotage arrangements aimed at improving efficiency and reducing transport
costs, the MCA supports the regulatory position on CVPs and SVPs as it has applied over the past decade or so.
This is particularly important given recent structural changes in the bulk transport industry: fewer bulk shippers
own their own ships and must rely on chartered unlicensed tonnage.

The current arrangements have stood the test of time and involve granting of permits regulated under Ministerial
Guidelines for Granting Licences and Permits to Engage in Australia’s Domestic Shipping.27 This means that the
permits are not simply granted without limitation. They must satisfy specific criteria under the Guidelines to
ensure the Australian Government’s specific objectives are achieved and minimum standards are not
compromised. Consistent with the Navigation Act that includes only granting a permit where:
•      there is no suitable licensed ship available for the shipping task; or
•      the service carried out by Australian licensed ships is inadequate; and


27   see http://www.infrastructure.gov.au/maritime/freight/licences/guidelines.aspx
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•   it is considered to be desirable in the public interest that an unlicensed ship be allowed to undertake that
    shipping task.

As a result of the liberalisation of the permit system, shipping costs have been lowered and more efficient
delivery of shipping services achieved and that has flowed on to the rest of the economy. The approach is
consistent with most other comparable OECD nations who have liberalised coastal shipping and rejected
cabotage as a shipping policy.

The MCA is strongly of the view that to “go back to the future” using cabotage as the national model and limit
CVPs/SVPs or substantially change the arrangements under which Permits can be issued would be flawed
because:
1. the demand for dry bulk-commodities is both seasonal and responsive to national and international
   markets. Consequently Australian shipowners will only be attracted to new bulk shipping investment when
   their financial models indicate that the demand is appropriate and the financial risks manageable;
2. it would simply add to costs and provide a regulatory regime aimed at providing locally owned ships a
   greater share of the domestic freight market at the expense of the more efficient alternative. That
   alternative involves allowing an international flagged ship to provide a domestic service where a domestic
   ship of the right type is not available; and
3. the attractiveness of a sea going career for young Australians is limited. Finding human resources to fill
   vacancies caused by fleet expansion would be a significant challenge. Given the evidence emerging from
   other developed economies it is suggested that a career option at sea is no longer seen as an attractive
   option for young school leavers. The Australian Transport Council should separately consider examining the
   implications of this problem along with other problems in attracting people to work in maritime related
   areas, such as port pilotage.

Rec om me ndatio n:
•   A rev ie w o f Aust ra li a’ s ca bota ge rest rict io ns s ho uld b e unde rta ke n by t he P ro d uctivity
    Com mi ss io n t hro ug h co mp leti o n o f t he Aust ralia n Gov ernme nt’ s Le gislatio n Review
    Pro g ram :
        − thi s sho ul d a ls o i nvolv e a rev iew o f t he re q uire me nt s fo r unlice nsed int ra -st ate
          voyag es , w hic h va ry betw ee n ind ivid ua l State s, wit h a vie w to sta nda rd is ing t he m.
•   If cab ota ge is p re se rve d it i s v ery impo rta nt t hat the curre nt p olicy p os ition reg arding
    tra ns pa re nt Co nt inuo us Voy ag e P ermit (CV P) a nd Single Voy ag e P e rmit ( SVP)
    arra nge me nts rem ai ns i n p lace noting t hat:
        − pe rm its may o nly b e g ra nt ed: w he re t he re is no s uit a ble lice ns ed s hip ava ilable fo r
          the s hi pp i ng t as k; or t he se rvice c a rrie d o ut by Aust ralia n lice nse d s hip s is
          inad eq uat e; a nd it is c o ns id ered t o b e de sira ble in t he p ub lic inte rest; a nd
        − the ca se fo r c abot ag e i s prim arily b as ed o n p rev e nting co mp etitio n f ro m f o reig n
          fla gg ed v es se ls wit h lo we r l ab o ur co sts from unde rmining t he co nd itio ns a nd rat es
          of pay of Austral ia n se af arers.
•   The Aust ra li a n T ra nsp o rt C ounc il b e req uest ed t o e xa mine the sk ills s ho rta ge in
    ma riti me a nd rel ated l a nd t ra nsp ort a rea s t o m ak e a caree r in m aritime t ra nsp ort
    mo re attractive .

4.9.3      International Convention on Liability and Compensation for Damage in Connection with the Carriage of
           Hazardous and Noxious Substances by Sea (the HNS Convention)

Shipping in any nation’s waters presents an inherent risk of a major marine pollution incident. Such an incident
may result in significant losses for coastal communities and industries that rely on the marine environment, such
as commercial fishing and aquaculture operations and the tourism industry.


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In order to ensure that shipowners engaged in the transport of HNS cargoes are able to meet their liabilities, the
International Maritime Organization (IMO) has developed the HNS Convention. The most significant benefit of
the Convention is that it will make strict liability insurance compulsory for shipowners.

The IMO has for various reasons found nation states are unwilling to ratify the Convention as it stands. Late last
year it decided to develop a Protocol to the Convention to facilitate its entry into force – although it is unclear it
has correctly identified all the reasons retarding entry into force. It is proposed that the Protocol will be
submitted to the IMO’s Legal Committee meeting in October 2009, with the intention that a Diplomatic
Conference be held as soon as practical to adopt the Protocol following the settlement of its text by the Legal
Committee.

Commercial shipping is a global business. In general, therefore, internationally agreed mechanisms to regulate,
manage and control shipping are preferred as they seek to minimise any commercial cost disadvantages that
may accrue through the unilateral imposition of national or regional procedures. This is particularly important
for a nation such as Australia that has an open economy and relies almost entirely on the seaborne carriage of
its export and import cargoes.

However, the MCA has some remaining reservations regarding the detail of the HNS Fund arrangements and
how calls on the Fund will be put into effect in the event of a significant maritime incident. The MCA expects that
in that circumstance, Australia will be a net contributor to the Fund.

The MCA also has reservations about the lack of a risk management approach in the development of the rules to
operate the Fund. For example, it is our understanding that Member States requiring ships to satisfy safety and
navigational standards to reduce the risk of adverse maritime incidents contribute at the same rate per tonne as
all other Member States. This does not provide adequate incentive to improve performance in the operation of
ships and is therefore not an equitable distribution for States such as Australia, which have such an effective
port State control system.

In order to assess if it is appropriate for Australia to accede to the Convention the MCA has long advocated an
assessment process that involves:
•    the regulation of the carriage of HNS cargoes being considered from a sustainable development
     perspective. This represents an approach that seeks to achieve an appropriate balance between
     environmental, safety, financial and social outcomes while minimising the negative impacts on overall
     performance;
•    limiting the number of solid bulk commodities included in the Convention as hazardous and noxious cargoes
     based on scientific knowledge;
•    ensuring sound and transparent governance of the Fund established by the HNS Convention;
•    ensuring a fair and equitable shared liability for a maritime incident arising from the contracted service of
     carriage of HNS cargo by cargo interests in Australia;
•    establishment of a clear, equitable and comprehensive strict liability arrangement for the shipowner and the
     conditions on which the shipowner can rely to partly or totally be exonerated from the obligation to pay
     compensation;
•    ensuring contributions to the Fund’s management are based on trade in HNS cargoes with the importing
     State being responsible for collecting and remitting the contributions to the Fund; and
•    mandating shipowners obtain a minimum level of insurance through P & I Clubs for their limited liability and
     the requirement that they carry evidence of such insurance on the vessel to be made available to inspectors
     as part of port State control.

Rec om me ndatio n:
•    Aust ra li a as si st the I nte rnati o na l Ma rit im e Org a niz ation’s Le ga l Com mitt ee to dev elop
     a P rotoc ol t o t he c urre nt I nte rnatio na l C o nve ntio n o n L iab ility a nd C om pe nsatio n for

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    Dam ag e in Co nnect io n w it h the C a rria ge of Haz ardo us a nd Noxio us Sub sta nce s by Sea
    (the HN S C o nve nti o n) to faci litat e its e ntry int o fo rce . Ind ust ry to be invite d to as sist
    in this p roc es s.
•   As it tak es so me ye a rs to d eve lo p a nd im ple me nt legislatio n to acce de to a n
    int ernatio nal co nve nt io n, i n t he e ve nt t hat t he a me nd ed HNS Co nv ent io n is f ully
    exp ecte d to rec eiv e s uf fic ie nt s up po rt to ent er int o forc e the Aust ra lia n Gov ernme nt
    sho ul d co ns ult f urt he r wit h Aust ra lia n ind ust ry a nd o the r stak e ho ld ers p rio r to tak ing
    the dec is io n t o rati fy.




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4. 10     A Co mpet itive B us i ne ss T ax Env iro nm e nt

Despite the current expansion, the industry continues to operate in an intensely competitive global environment
with relative (country) tax burdens becoming an increasingly significant criterion of investment. Complacency
cannot occur in the pursuit of efficient and effective company (and personal) tax regimes.

The Australian minerals industry contributed in excess of $9 billion in company income and royalties to the
Australian and State and Territory Governments in 2007. As well as this direct cost, significant additional
deadweight costs are placed on industries and the economy from poor tax design, implementation and
administration. Whilst the MCA applauds the Government’s commitment to progressive tax reform, evidence
suggests that elements of Australia’s tax regime are not optimal and investment attractiveness and
competitiveness could be improved via a number or targeted reforms.

The 1999 Ralph reforms have produced variable benefits for mining companies. In the short term, the MCA
does not advocate for another significant tranche of Ralph like reforms, but a ‘bedding down’ of current laws and
the successful implementation of the yet to be enacted Ralph proposals (eg Consolidations).

The Ralph reforms since 1999 have seen considerable changes to Australia’s business tax laws. It is difficult to
assess whether the Ralph reforms have met their objectives (i.e. improve competitiveness, enhance stability,
improve simplicity) as the Income Tax Act has grown by 4100 pages since this time – leading the MCA to believe
that Australia may have had massive tax change, and not tax reform per se. For example, whilst the
Consolidations provisions have reduced the compliance burden of intergroup transactions and significantly
improved the integrity of the tax system for mining companies, it has on the other hand added complexity and a
significant additional compliance burden without a commensurate increase in efficiency.

In the short term, the MCA does not advocate for another significant tranche of Ralph like reforms, but a
‘bedding down’ of current laws, the successful implementation of the yet to be enacted Ralph proposals (eg
Consolidations), the implementation of a number of new measures to encourage investment and improve
competitiveness, resolution of a number of ongoing mining specific policy and tax administration matters, and a
solution to the growing disconnect between policy intent and tax administration.

New m ea s ures s oug ht o f G ove rnm e nt inc lud e:
•    deductions for overseas mining exploration expenditure so as to bring Australian taxation treatment in line
     with a number of the industry’s global competitors;
•    dividend imputation of foreign source income to encourage greater investment;
•    amortisation of acquired intangible assets;
•    reinstatement of the R&D Tax Concession at the 150 per cent level, and a review the functionality of the
     175 per cent concession; and
•    20 year caps on the effective life of long-lived assets for deprecation purposes.

Ongoing p ol icy a nd ad mi ni st rati o n i ss ues that req uire re so lutio n

The following issues have been the subject of MCA discussions with Governments and/or associated agencies for
a period of time and should be resolved as a matter of priority.

Removal of inefficient State/Territory Government taxes

The MCA estimates that there are currently $44 billion28 (per annum) in ‘inefficient’29 State/Territory taxes that


28Consisting of $9b in non-residential real property transfer duty. $3b in insurance duty, $3b in motor vehicle registration
duty, $1b in fire service levies on insurance, $14b in payroll tax, $5b in land tax, $5b in gambling taxes and $4b in motor
vehicle registrations.
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are not subject to the current Intergovernmental Agreement (IGA) between the Federal and State/Territory
Governments.

The most ‘inefficient’ for the mining industry are stamp duties on non-residential real property, payroll and
acquisition (land-rich) stamp duties. The MCA calls on Governments to honour and bring forward the timing of
all IGA commitments, and address the perceived GST distribution inequities (vertical fiscal imbalance) as an
avenue to have more of these inefficient taxes abolished.

Technical amendments to the Uniform Capital Allowance (UCA) regime

The ATO recently released two ATOIDS (ATO Interpretative Decisions) that prohibit mining companies from
claiming deductions for mine site improvements – stating that improvements previously claimed aren’t mining
per se, just reshaping the land (the latter being an activity that is not deductible). This is contrary to
Parliament’s intent. The MCA has commenced a dialogue with Treasury officials.

Improving the (tax) trusts legislation to promote Indigenous intergenerational benefits

Mining companies put monies into trusts (from Native title or as compensation) with the beneficiaries being
Indigenous communities/Traditional Owners. It is preferable for these trusts to accumulate in perpetuity beyond
the life of the mine so intergenerational benefits can be accrued, and for the beneficiaries of these payments to
incur little or no tax consequences. The only way at present to do this is to make the trust a ‘Charitable trust’. A
concern is that the ATO will only allow the trust to accumulate for 10-12 years before it must be disbanded (i.e.
anything longer does not meet the definition of a ‘charity’). Companies do not wish to renegotiate terms every
10-12 years as this is restrictive and problematic. The MCA understands that the Government is reviewing its
position on such matters and consultation will occur in 2008. The MCA is preparing a position paper on this
matter and this will be provided to Government by the middle of 2008.

Clarifying GST and Div 40 treatment of farm in/out arrangements

The ATO in a recent draft discussion paper concluded that given the current wording of the new UCA provisions
in the Income Tax law, it may be the case that when a mining company farms out (as the farmor) to another
company (the farmee) a percentage of their mining right (for example, 50 per cent of the right is given in
exchange for $3m in exploration), then the company who receives the $3m in payment (the farmee) may be
obliged to pay company tax at 30 per cent on the $3m.

Prior to the enactment of the new UCA laws, the $3m was considered tax exempt under the ATO interpretation of
the Capital Gains Tax legislation. The CGT laws allowed the income to not be treated as income per se because
the expenditure is high risk (i.e. there are no guarantees that $3m of ‘benefit’ will be received as the drilling may
incur no benefit).

If the ATO’s preliminary thinking is concluded, the effect would be profound as the ‘farmee’ is usually a junior
exploration company with variable cash flows. Anecdotally, a number of these companies have said that they
would move offshore if this outcome were to be enacted through the ATO’s interpretation. If this were to
become the eventual outcome, the MCA would pursue an immediate legislative fix. Discussions with the Treasury
and ATO are ongoing.

Aligning policy intent with ‘on the ground’ administration of the ATO

Whilst welcoming the Government’s support for the findings in the recent Board of Taxation report - Australia’s
Tax Consultation Processes, the MCA supports a number of additional, whole of government improvements to


29Inefficient is defined as taxes that exhibit one or more of the classic characteristics of ‘bad taxation’ – i.e. they are
complex; they are inefficient (for they levy higher than necessary rates on a narrower than necessary base); they distort
behaviour and therefore generate high deadweight losses; and they are often driven more by social and political objectives
than by the concern to maximise revenue raising.
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address the rowing disconnect between parliament’s policy intent and the eventual ‘on the ground’
administration of the ATO, including:
•   clearer statements of policy intent from government;
•   improved stakeholder consultation at all stages of development, including the infant stage – not only in the
    time afforded for consultation but the breadth of issues that can be canvassed. The adverse impact on
    taxpayers and capital markets emanating from the then Assistant Treasurer’ Press Release (No. 124 –
    scrip for scrip rollovers in a tax consolidated environment) of October 2007 is a substantive case in point.
    The MCA welcomes the commitment of Government to expeditiously address this matter (Assistant
    Treasurer Press Release No. 001);
•   ATO to be more intensely involved in the development process to set out their interpretation so Treasury
    can insure this interpretation is consistent with the draft legislation and policy intent. This should not be
    interpreted as meaning the administration and policy setting bodies should be rejoined;
•   more rigorous assessment of options against a number of important principles (i.e. simplicity, increased
    competitiveness, transparency, reduce compliance etc);
•   greater resourcing within key supporting agencies (i.e. Treasury and the Office of Legislative Drafting
    notably) to appropriately pursue and draft quality legislation consistent with the policy intent;
•   tax administrators given greater discretion to interpret the law to achieve the policy intent; and
•   instil a greater level of trust between taxpayers and tax administrators.

MCA members are experiencing ongoing issues with the ATO in relation to very strong auditing and review
processes with the relationship remaining by-and-large adversarial between taxpayers and the ATO. Mining
companies are seen as high ‘risk’, despite rigorous systems being in place by companies and the ‘social licence
to operate’ and other legislative (SOX etc) requirements placed on companies. The rhetoric of a renewed ATO
approach isn’t yet being felt on the ground.

Rec om me ndatio ns:

That t he Gov ernme nt:
•   Com mit ad diti o na l re so urce s in the area s of t ax po lic y dev elopm e nt a nd leg is lat ive
    drafti ng to p urs ue o utst andi ng co mm itm e nts ( eg Co ns olidatio ns) a nd new ref orms to
    promot e i mp roved g lob al co mpet itive nes s a nd inve st me nt att ract ive ne ss
•   Co ns ult w ith i nd ustry i n p urs ui ng a numb e r o f ne w re f orms , inc lud ing allow ing fo r:
    −    ded ucti o ns fo r ove rse as mi ning exploratio n e xp e ndit ure ; a llowing d ivide nd
         imp ut atio n of fo re ig n s ourc e inc om e;
    −    amo rti sat io n of acq uired i nta ng ib le a sset s;
    −    re i nstat em ent of the R&D Ta x Co nce s sio n at t he 150 pe r ce nt lev el a nd :
    −    a revi ew t he f uncti o na lity of t he 175 p er ce nt c o nce s sio n; a nd a ca p o f 20 y ea rs
         on the eff ectiv e l if e o f lo ng -live d as sets f or de p recat ion p urpo se s
•   Re so lve a numbe r of o ng oi ng m i ning s pec if ic p olicy a nd tax a dm inistrat io n matte rs;
    spec if ica lly
    −    re mov al of i ne ffi cie nt St ate /Te rrit ory ta xe s o f p art ic ular co nce rn t o t he minerals
         secto r
    −    technica l a me ndm ent s to the U nif orm Cap ita l Allow a nc e (U C A) re gime
    −    imp ro vi ng the (t ax) trusts le gislat io n t o p ro mot e I nd ige no us int erge ne ratio nal
         be ne fits
    −    cla ri fyi ng G ST a nd Di v 40 treat me nt o f fa rm in/o ut arrange me nts .
•   Foc us o n e ns uri ng a li g nm ent bet wee n the policy inte nt of ta x -relate d leg is lativ e
    cha nge s a nd adm i ni strativ e o utco me s.

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4. 10     Workp lac e Arra nge me nt s

The Australian minerals industry considers that direct employer-employee relationships have provided the
foundation for improved safety and health performance, improved productivity and business performance,
greater job satisfaction and increased wages and salaries and greater benefits to communities through
employment opportunity and prosperity.
The Australian minerals industry uses the full range of employment instruments – including Australian Workplace
Agreements (AWAs), union and non-union collective agreements, and common law contracts underpinned by
Awards. Many operations offer multiple options. Some operate under a single employment arrangement, and
prospective employees are able to choose whether they wish to be employed under the terms and conditions of
that operation.
The industry needs workplace arrangements that promote rather than impede the development of direct
collaborative relationships between employers and employees – developing a culture of shared objectives, and
recognition of contribution and performance.
If the Australian minerals industry is to continue to grow and fully capitalise on the strongest global market
growth in a generation to the benefit of all Australians, the industry must:
•    have continued access to the full range of employment instruments, including the transitional arrangements
     governing statutory individual contracts (AWAs), underpinned by an effective safety net (the National
     Employment Standards and ten basic conditions and entitlements in all awards);
•    have the freedom to determine whether or not to collectively bargain and the freedom to determine, by
     mutual agreement, the nature of the terms and conditions of employment;
•    have freedom of association – the right to belong and the right not to belong to a union and the right to
     choose or to refuse to be represented in any negotiations;
•    have the right to determine who has entry to businesses; and
•    be a reliable supplier and therefore must have certainty in what is and is not lawful industrial action, with
     effective controls in place to deal with unlawful industrial action.

Above all, a national workplace relations system must enable the industry to continue to engender a culture of
collaboration and direct relationships, of individual enterprise and personal accountability, and of mutual
dependency and prosperity. This will not be delivered by a retrograde approach to two decades of progressive
industrial relations reforms that provide for modern and progressive workplaces in a dynamic global market.

The MCA recognises the extent to which the ALP’s Industrial Relations Policy – Forward with Fairness Phase II
endeavours to improve flexibility, address transitional concerns and provide greater certainty and stability for
business, specifically in relation to the right of entry and compliance provisions. The MCA made a public
statement at the time to this effect, and detailed the key areas upon which the industry is looking for further
detail for clarity and certainty, specifically:

•    calculation of the $100,000 income threshold determining access to individual common law contracts that
     are not subjugated to Awards but subject to a safety test of “10 National Employment Standards”;
•    clarification of the application of collective bargaining re the extent of employee support required, and the
     extent and nature of union involvement;
•    clarification of the grounds for union right of entry;
•    unprotected industrial action - clarification of what constitutes “related matters” as the basis/justification
     on which employees can strike;
•    “flexibility” clause – clarification of the extent to which individuals will be able to vary their terms and
     conditions over and above the Award;
•    transitional arrangements – what arrangements will apply for the termination/expiry of existing AWAs?; and

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•   clarification on the application of “multi-enterprise bargaining” specifically with regard to project agreement
    arrangements.

Rec om me ndatio ns:
•   The Aust ra li a n G ove rnm e nt a ll ow em ploy e rs choic e in the f ull ra ng e of wo rk place
    arra nge me nts to c ate r f or m ut ua lly be nef icial pa rt ne rship s betw ee n em ploy e r a nd
    emp loy ee fo und ed i n fl ex ib le wo rk place arra nge me nt s that cate r fo r em ploy me nt
    optio ns, ge nde r a nd c ult ural div e rs ity, sk ills dev elop me nt, t rust a nd m ut ua l re ga rd.
•   The Aust ra li a n G ove rnm e nt co ns ult wit h t he m ine rals ind ustry w he n dev elop ing t he
    Fo rwa rd wit h Fa i rnes s le gi sl atio n.




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4. 11      Cli mat e C ha nge

Australia has substantial economic demonstrated and reliable energy resources. This underwrites a competitive
advantage in relatively low-cost energy that underpins a significant part of the economy and earns significant
annual export income.

Pressing climate change concerns are driving consideration of whether the energy fuels and related transport
and electricity technologies Australians currently use will continue to be appropriate for our future. This is a key
question not just for Australia but for all nations. In particular, substantial investment in stationary energy
infrastructure is necessary throughout the world to meet economic and societal development objectives.
Moreover, electricity investment is highly capital intensive and long-lived (for 5 or more decades), meaning that
new investment brings with it implications that last for decades.

While the impacts of climate change due to human actions will be experienced locally, the greenhouse gas
emissions that lead to the impacts are global and unrelated to those local impacts. The local externality is
caused by a multitude of global actions − not by the local actions in themselves. Furthermore, abatement
actions today will only have climate effects in many years to come as past emissions already influence climate
changes occurring now. This means the response to climate change will remain a challenge over the lives of
many government administrations now and in the future and all around the world.

The ne ed fo r a c o he re nt suite o f p olicies

Australia’s response to the challenge of climate change should include 5 elements:
•    efficiently designed market-based mechanisms including a cap and trade Em is sio ns Trad ing Sc hem e
     (ETS); 30
•    a focus on providing i nce ntiv es fo r the d em o nst ratio n and de ploy me nt of new ste p-cha ng e
     technolo gi es ;
•    ada ptati o n p ol ici es for industry and, more broadly, Australian society to change to fit new
     circumstances and conditions resulting from climate change;
•    int ernatio nal is atio n: to ensure Australia’s climate change policies form part of a realisable
     international solution to the impacts of human induced greenhouse gas emissions; and
•    comm unicat io n of t he rati onal e fo r e ac h ele me nt of climat e c ha nge po licy to the Australian
     community.

While all five elements are important, technology demonstration and deployment will be fundamental, and will
underpin the long-term effectiveness of market-based measures like an ETS. This is because the achievement of
environmental outcomes at least cost is that only possible when economic agents have technological
alternatives. As Professor Ross Garnaut points out:

        “The presence of large external benefits from private expenditure on research and development, and more
        generally on innovation, mean that putting a price on carbon alone will not lead to economically optimal
        levels of activity.31

The public policy response to this challenge can be understood by considering two distinct but related market
failures that need to be addressed:
•    first, there is no formal pricing mechanism for carbon emissions: to address this, one policy target involves
     creating the recognition of the need for ‘carbon constraints’ and hence price based incentives to reduce

30 The Mandatory Renewable Energy Target was assessed by a recent independent Review as not satisfying the test of
minimum effective regulation of achieving clearly enunciated and desirable public policy outcomes at least cost.
31 Professor Ross Garnaut, ‘Will climate change bring the end to the Platinum Age?’ S.T. Lee Lecture on Asia & the Pacific,

Australian National University, 29 October 2007, page 13.
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    emissions and to adopt low emission practices. This first target is amenable to a range of carbon pricing
    policies including emissions trading.
•   second, the public good nature of R,D&D: to address this, a second target involves creating incentives to
    find new, low emission technologies, to demonstrate them, and to jump the hurdles faced by the ‘first
    movers’ in adopting these new technologies. While this second set of targets will be influenced by
    emissions trading, other more direct policy instruments will also be required to address them. The need for
    different instruments to address these targets is illustrated in F ig ure 1.

For the foreseeable future, Australia and the world will continue to rely on coal and other fossil fuels to meet
energy demand. The development of an environmentally effective, socially acceptable and economically efficient
long-term greenhouse gas adaptation and abatement policy will need to include all major emitting countries. It
will also require the widespread deployment of cleaner, less emissions intensive technologies. The challenge is
to invest in technology that will deliver emissions reductions, while maintaining both a robust economy and
industry competitiveness.

The immediate focus must be on developing technology solutions to achieve reductions in greenhouse emissions
over the next 50 years. The MCA strongly supports coordinated Australian/State/Territory Governments’
encouragement of joint government/industry innovation, demonstration and ‘clean development’ both
domestically and in cooperation internationally.

Fig ure 1: Ac hievi ng tw o o bj ective s re q uire s tw o inst rume nts
     TW O OBJ EC TIVES                                        TW O INSTRU MEN T S
                                            Carb on pricing                     Sp ecif ic R& D, d emonstra tio n,
                                                                                deploy me nt and ‘f irst move r’
                                                                                            mea sur es

Aba te me nt in v ario us    • Creates incentives for abatement           Do not create incentives for adoption
forms inc luding upta ke     • Creates incentives for adoption of new     of newly developed technology
of lo w e mission              technologies and practices by inducing the
tec hnologies a nd             adoption of innovative technologies when
prac tic es (existing o r      they are commercial at the expected
ne w)                          emission price; but will not induce early
                               demonstration and adoption of these
                               technologies much before that time
                             • Creates additional incentives for improved
                               energy efficiency

Fur ther dev elo pment,      Will create some incentives for R,D&D, but will   Provides direct incentives for
demonstra tio n and          not be sufficient if there are risks or ‘first    development and early deployment of
deploy me nt of ne w low     mover’ costs                                      new technologies, but does not
emissio n tec hno log ie s                                                     guarantee full market diffusion or
                                                                               uptake

To this end, the m i ne ra ls sect or l oo ks fo rw ard to the ea rly implem e ntatio n o f La bo r’ s
comm itm e nt to a $500 m il lio n N ati onal C lea n C oal F und to acce le rate t he dev elo pm e nt a nd
dep loy me nt of c le a n co al tec hno log ie s. T his Australian co al sect or ha s lo ng recog nis ed
the im po rta nc e o f c lea n co al t ec hnolog ie s, having f unded res ea rc h into its c le a n
prod uction a nd us e si nc e 1992. The sector has also committed $1 billion over 10 years to support the
pre-commercial demonstration of low emissions technologies in the power generation sector, where over 95 per
cent of emissions from coal occur.

There is also an urgent need to achieve national consistency, reduce duplication and improve the efficiency of
Australia’s climate change policies and programs.



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The December 2007 Council of Australian Governments (COAG) meeting reiterated a longstanding commitment
by all governments to implementation of a “plan for developing a coherent and streamlined set of climate
change measures across jurisdictions to complement Commonwealth implementation of the ETS”.32 This was
welcomed by the MCA, as was COAG’s new Business Regulation and Competition Working Group’s objective of
accelerating and broadening the “regulation reduction agenda” in the same context.

In the area of greenhouse and energy reporting there is an evident commitment – if, not yet, any tangible
regulatory change – to avoid duplication and to achieve coherent and consistent data definitions, metrics and
formats across programs of both Commonwealth and State agencies, with reporting through a single portal. The
MCA supported the National Greenhouse and Energy Reporting Act 2007 as a means to establish a nationally
consistent reporting framework as an important and necessary component of the ETS. Notwithstanding its
importance, data reporting is but one component of the regulatory burden and must not be the only focus of
attention in streamlining.

The MCA therefore advocates a review of existing climate change programs33 to determine their complementarity
with a national ETS from 2010. Professor Ross Garnaut has spelt out 34 broad criteria for government
intervention beyond the ETS, and the MCA would endorse these for use in a critical evaluation of all programs
ostensibly designed – sometimes amongst other objectives – to address greenhouse emissions. Many involve
government expenditures and may be more efficiently achieved via other means, many more impose costs on
consumers, and all impose a regulatory burden on business.

Rec om me ndati o ns

Aust ra lia’ s co nt ri b utio n t o g lo ba l act io n o n clim ate c hange nee ds to:
•    be fo und ed o n so und p ub lic po licy p rinc ip les t hat balanc e e nviro nme nta l e ff ective nes s,
     social e quity and pol itic al acce ptab ility, a nd eco nom ic ef fic ie ncy;
•    cove r a ll g re e nho us e ga ses , al l e miss io n so urc es a nd sinks , a nd all ec o nom ic sect ors;
•    inc lud e a n ef fic ie ntly d es ig ne d c ap a nd t ra de Emiss io ns T ra ding Sc he me (ET S)
     comp le me nte d by ot he r effic ie nt ma rk et-ba se d m ec ha nism s to b e d eve lo ped in clo se
     cons ult atio n wit h i nd ust ry a nd ot he r key sta ke ho ld e rs . T his s hould inc lude :
     −    app lic atio n of the add iti onal op e ratio na l g uid ing principles fo r est ab lis hing the
          ET S s et o ut in Bo x 1; a nd
     −    urge nt co ns ultati o n to p rov ide clarity o n the def initio ns o f “t ra de e xpo se d
          emi ss io ns int e ns ive i nd ustry ” and ind ust ries f acing a “disp ro po rtio nate lo s s” as a
          re s ult of t he i nt ro duct io n of t he ET S;
•    enha nce t ec hnol ogy de vel op me nt a nd de ploy me nt t hroug h t he p rovisio n of ince ntiv es
     fo r t he de mo nstrat io n a nd de pl oym e nt of new ste p -c hange e ne rgy g e ne ratio n
     technolo gi es that a ll ow c o nti nue d ec o no mic activ ity b ut w itho ut a ss ociated clim ate
     risk s;
     −    inc l ud i ng ea rly i mp lem e ntati o n o f L abo r’ s c om mit me nt to a $500 millio n Nat io na l
          Cle a n C oa l Fund to acc el erate t he d eve lop me nt a nd d eploym e nt o f clea n coa l
          technolo gi es .
•    inc lud e s uita ble a dapt atio n po lic ie s fo r Aust ra lia n ind ust ry a nd, m ore broa dly,
     Aust ra li a n s oci ety to cha ng e to fit new circ um sta nce s a nd c o nd itio ns re s ulting f rom
     clim ate cha ng e;
•    be c o ns iste nt wit h a s usta i nab le inte rnat io na l so lut io n to clim ate c ha nge :



32 COAG communiqué, page 7.
33For example the 17 listed in Table 1 of the streamlining paper Reducing the Burden, published for the Environment
Protection and Heritage Council and Ministerial Council on Energy by their technical working groups, April 2006.
34 Garnaut, op.cit.


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    −   Aust ra li a’ s cl im ate c ha ng e p olicies t o f orm pa rt o f a realis ab le, g lob al a bate me nt
        and ada ptati o n s ol ut io n to the im pacts o f hum a n ind uced gree nho use g as
        emi ss io ns; a nd
    −   Aust ra li a’ s e mi ss io ns t rad i ng sc he me b e ca pa ble o f b eing linke d to bot h ind ivid ual
        count ry a nd re gi o nal i nitiat ive s (to m axim is e e miss io ns trad ing opp o rtunitie s –
        bot h a bate me nt a nd of fs ets) as it evo lve s to a mo re broad -b as ed ET S;
•   inc o rpo rate a co mm unicati o n strategy to ens ure t he ratio na le fo r eac h e le me nt o f
    clim ate cha ng e p ol icy is we ll a rtic ulated ; a nd
•   inc lud e a revi ew of e xi sti ng cli mat e c ha nge p rog ram s to e ns ure:
    −   only t ho se that a re e ffi cie nt a nd co mplem e nta ry to a nat io na l ET S f ro m 2010 a re
        reta i ne d; a nd
    −   mi ni m um ef fect ive reg ul atio n is ac hiev ed ag ainst clea rly e nunciated e nv iro nme nt al
        and ot her g oal s.




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       Box 1: O pe rat io na l guid ing p rinciples fo r est ab lishing the Aust ra lia n Em issio ns Trad ing Sc hem e
1. The ET S sy stem sho uld ba la nc e t he eq ually imp ort a nt goa ls of ac hieving e nv iro nm e nta l e ffect ive ness,
   eco no mic effic ie ncy a nd socia l acce ptab ility.
2. The ET S sy stem sho uld me et we ll e stab lishe d crite ria of simp lic ity, transp a re ncy a nd eq uity . It sho uld
   also minim ise unce rta inty a nd meet its o bjective s at le ast co st suc h that it s rules a nd a rra ng em e nts
   will sta nd t he te st of tim e. T his inc lude s the dev elo pme nt o f a lo nge r term tim e horizo n a nd futures
   ma rket wit h ap p rop riate risk sha ring betw ee n g ove rnm e nt a nd ind ust ry to inc re ase the ce rtainty o f
   business inv est me nt.
3. (a) T he ET S sy stem sho uld m inimise the im pacts o f the int rod uct io n of a p rice o n ca rb o n o n indust ry
   and firm c omp etitiv e ne ss in a way t hat do es not e xpose Aust ra lian ind ustry to co sts its c om petit ors
   do not face a nd by c o ntrib uting to a climat e c ond uc ive t o inv est me nt in b est av ailab le tec hno log ie s
   fo r the giv en class o f assets in Australia includ ing in tra de expo se d a nd e missio ns int ensive activ itie s
   – b ot h c urre nt a nd ne w inv est me nts.
    (b)     T he ET S sho uld t hus p rov id e a de q uate p rov isio n of ad minist rativ e pe rm its:
          (i) to trad e e xpo se d a nd em issions inte nsiv e ind ustry to comp e nsat e fo r co sts t he ir c omp etito rs
                do not fac e in int ernatio nal ma rkets;
          (ii) to com pe nsate fo r the d isprop ort io nat e impact of t he int ro d uctio n of a c ost o n ca rb on o n t he
                present va lue of firm inv estm e nts w he n c om pa re d to the av erag e e ffect o n t he ec o no my; a nd
          (iii) comp a nies t hat fail t he ‘em issio ns inte nsive ’ test b ut are c le a rly t rad e e xp osed sho uld a lso
                be eligible fo r co mp e nsatio n fo r a ny d isp rop ort io nat e lo ss.
4. The ope ratio n of the ET S sho uld not act to delay t he nec essa ry com plem e nta ry foc us o n:
   (a) re se arc h, d eve lo pm ent a nd de mo nstration ( R,D &D ) ac tivity;
   (b) int ernatio nal diplom acy a nd c oop e ratio n; a nd
    (c) ada ptatio n m ea sures.
5. The ET S a dm inist rat ive a llocat io n sy ste m sho uld not allow d o uble d ipp ing , sho uld p rov id e sy mm etry o f
   treat me nt a nd allow fo r a n app rop riate app ea ls m echanism.
6. The ET S to evolve so it c an link wit h indiv id ual c o untry a nd reg io nal ET S initiat ive s a nd m axim ise
   trad ab ility o f b oth d om estic a nd inte rnat io na l ab atem ent pe rmits a nd o ffset c re dits.
7. Natio na l co nsiste ncy sho uld be p ro mote d v ia c o nsiste nt a pp ro ac he s to :
    (a) stream line d ata c ollectio n,         re po rting a nd v erificatio n aga inst ap prop riate int ernatio nal
        sta nd ards;
    (b) the ap plicat io n of t he ET S throug ho ut Australia c ove ring all secto rs, all g ree nho use ga se s a nd all
        sinks; a nd
    (c) the sub sum ing into the ETS o f all State /Te rrito ry clim ate c ha ng e sc he me s w hile maint aining
        esta blishe d prop erty rig hts.
8. The ta x t re atme nt fo r t he ne w p ro pe rty rig hts c re ated unde r t he ET S sho uld be c o nsist ent wit h
   esta blishe d ta x p olicies t hat are sim ple, eq uit ab le and e fficient . T hey sho uld avo id t he do uble
   taxat io n of b usine ss inco me a nd e nsure ta x re lief fo r all a ssociated b usine ss e xpe nse s.
9. The ET S sho uld t ake acco unt o f differe nt se ctora l circ um sta nce s a nd not unnece ssarily imp ed e
    orga nisat io na l re struct uring.
10. The de sig n, a dm inistratio n a nd op e ratio n o f t he ET S sho uld b e und e rtake n w ith full a nd effectiv e
    consult atio n wit h re lev a nt st ake holde rs inc luding t he business c om munity using the b est av ailab le
    eco no mic a nd tec hno logy info rm atio n.




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4. 12     Trade a nd i nv est me nt

The MCA is a strong supporter of trade liberalisation, primarily through the World Trade Organisation, but also
through the pursuit of regional and bilateral trade agreements.

The MCA remains disappointed at the slow progress of the Doha Round. While the difficulties are due to
circumstances beyond the control of Australian negotiators, the MCA welcomes moves by the Government to
intensify its efforts to bring about an early conclusion to the negotiations.

Three principles should underpin Australia’s approach:
•    the outcome must be ambitious. Multilateral trade rounds occur very infrequently, with only one completed
     in the last 26 years. Therefore the market liberalisation achieved by the negotiation should be deep and
     broad;
•    the outcome must be comprehensive, with deep and broad liberalisation commitments in all areas of the
     negotiation – agriculture, industrial goods and trade in services; and
•    the negotiations should remain focused on trade and trade related issues, and not be distracted by efforts
     aimed at justifying the use of trade sanctions and other trade restrictive measures to achieve non trade
     (environmental and social objectives).

While ensuring it does not spread its negotiating resources too thinly, the Government should also continue
efforts to conclude commercially meaningful trade agreements with China, Japan, ASEAN economies and the
countries of the Gulf Co-operation Council. Prospective free trade agreements with Indonesia and India also
offer considerable promise.

Investment liberalisation

The progressive liberalisation of global investment regimes has been a significant contributor to the expansion
and consolidation of the global minerals sector. Australia should remain at the vanguard of efforts to promote
the reform of investment regimes, and the dismantling of ‘beyond the border barriers’ in markets of priority
interest to Australian exporters and investors.

The current expansion in global commodity markets – and the likelihood it will continue in the medium term - has
generated considerable further foreign investment in Australia’s minerals sector. This is a welcome
development, and has been facilitated by Australia’s open and transparent approach to inward investment.

A notable development in global investment markets is the emergence of government-owned investment entities.
These entities are not new but the scale of their impact on markets has increased substantially. Morgan Stanley
expects government-owned investment entities, also known as Sovereign Wealth Funds, will grow to $27.7 trillion
by 2022, from $2.5 trillion today. Consistent with its longstanding support for a liberal approach to trade and
investment flows, the MCA considers that Governments should not react by imposing blanket new protectionist
measures or investment restrictions. Instead the MCA considers that existing policy settings for the scrutiny of
investment by foreign governments are appropriate. This policy states that all direct investments by foreign
governments or their agencies irrespective of size must be notified for prior approval under the Government’s
foreign investment policy. This approach applies whether the investment is made directly or through a company
that is owned 15 per cent or more by a foreign Government.

The Australian Government should also support and participate in international efforts, including through the
International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) to
develop a set of best practices for sovereign wealth funds, and similar understandings covering other cross
border investments.

Rec om me ndatio n:

The MC A s up po rts:
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•   the Gov ernme nt’ s eff o rts to b ri ng a bo ut a n e a rly c o nc lusio n to the D o ha round o f
    ne goti ati ons.
•   the t im ely com pl etio n of ne goti atio ns on co mm erc ia lly me a ning f ul f ree trad e
    ag ree me nt s w ith C hina, Ja pa n, ASEAN a nd the G CC .
•   the Gov ernme nt’ s pa rtic ipat io n i n int ernatio nal ef fo rt s, includ ing thro ug h t he
    Inte rnati o na l Mo net ary F und (IM F) and t he O rga nis ation fo r Ec o no mic Co -o pe rat io n
    and D eve lo pm ent (O ECD ) to dev elop a set of be st p ra ctices fo r sov e re ig n w ea lt h
    funds , a nd s im il a r und ersta nd i ng s cov e ring ot he r c ro ss bo rd er inv est me nts .




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