29/10/2008 - 22:00

Policies hurt success stories

29/10/2008 - 22:00


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THERE has been an intense focus in recent weeks on the impact of global financial trends on Western Australia's economic prospects but recent policy decisions have highlighted the equally important impact of government.

Policies hurt success stories

THERE has been an intense focus in recent weeks on the impact of global financial trends on Western Australia's economic prospects but recent policy decisions have highlighted the equally important impact of government.

The iron ore and liquefied natural gas (LNG) industries, which are widely acknowledged as major drivers of WA's strong growth, both in recent history and prospectively, are particularly affected.

This column has previously discussed at length the adverse impact of the Rudd government's proposed emissions trading scheme on the LNG industry.

The proposed trading scheme is likely to push up costs for LNG projects, eroding their commercial viability.

The Barnett government added to the debate this week by calling for a delay in the scheme's introduction beyond the target date of 2010.

The WA submission said the proposed scheme depended on very little accurate emissions data and the economic modelling on which all parties would rely had been delayed.

It also called for a lot more work on the compensation arrangements for disadvantaged firms.

The prospect of an emissions trading scheme follows the Rudd government's shock decision earlier this year to withdraw tax concessions on condensate, which will add to the costs facing the Woodside-managed North West Shelf venture.

It also follows the Carpenter government's introduction of a domestic gas reservation policy, which requires a portion of gas reserves to be set aside for the domestic market.

Collectively, these decisions confirm a very strong impression that governments have focused on what they can extract from a successful industry, rather than thinking about how they can encourage the expansion of what could and should be a great export success story.

The big players in the iron ore industry also believe they have drawn the short straw, after treasurer Wayne Swan's decision this week to "declare" three Pilbara railways.

This gives junior iron ore miners the right to gain access to the region's existing railways, owned and operated by BHP Billiton and Rio Tinto.

The majors have argued that the railways are part of an integrated production process that includes multiple mines and port operations, and that allowing third parties to run their own locomotives and rolling stock would be highly disruptive.

The majors also point out that they simply don't have spare capacity on the railways.

Their arguments failed to sway the National Competition Council or Mr Swan, who concluded that "on balance I consider that these are outweighed by a range of benefits, including increased competition, avoiding inefficient duplication of facilities and reducing further adverse impacts on native title rights and the environment".

Mr Swan's decision is significant but there is a long way to run before third parties gain access to the existing railways.

Aspiring miners must negotiate a commercial agreement with the "infrastructure provider", meaning BHP or Rio.

If this is not possible, they have recourse to binding arbitration before the Australian Competition and Consumer Commission (ACCC), which has the power to impose access terms and conditions.

Mr Swan's decision followed an application by a Fortescue Metals Group subsidiary. Ironically FMG has since built its own railway, which means junior miners have the right to seek access to that railway.

The industry majors have pointed out that there are alternatives to third party access.

A second option is third party haulage, which means Rio or BHP would use their own rolling stock to haul ore for new miners.

A third option is mine gate sales, which effectively means junior miners would become contract miners for one of the majors.

Rio Tinto negotiated the first of these deals earlier this year with Iron Ore Holdings, which plans to mine 1.5 million tonnes per year from its proposed Pilbara mine.

Other junior stocks with more substantial mining plans complain that they have tried to negotiate deals with the industry majors but have been unable to make progress.

Despite the treasurer's decision, the industry majors are likely to stick to their guns.

Rio Tinto, for instance, said it is considering its options, but is likely to take the matter to the Australian Competition Tribunal for a review of the decision.

This debate constitutes a high risk game.

Rio's iron ore output is running at an annual rate of nearly 200 million tonnes while BHP expects to deliver 137 million tonnes of ore to its export customers this year.

They are two of Australia's biggest exporters and they are investing furiously in expansion projects.

It is foolish of government to put this expansion at risk, but equally it is foolish for the majors to take such a hard line that juniors feel no option but to go to the competition tribunal.


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