10/09/2008 - 22:00

Regional push could pay off

10/09/2008 - 22:00


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Could the emergence of Brendon Grylls as a power broker in Western Australian politics create a shockwave that reverberates across the country and around the globe? It is possible that a few thousand regional and rural voters could have a major impact on

Regional push could pay off

Could the emergence of Brendon Grylls as a power broker in Western Australian politics create a shockwave that reverberates across the country and around the globe?

It is possible that a few thousand regional and rural voters could have a major impact on the Australian corporate scene, one that extends to the London Stock Exchange.

I raise the point because the win by Mr Grylls' Nationals WA party at last weekend's state poll, based on a policy of regional investment, could have a huge bearing on the state's massive mining community and, ultimately, influence the long-running Rio Tinto Ltd takeover bid by BHP Billiton Ltd.

The Nationals' policy is firmly focused on demanding that 25 per cent of royalties per year, capped at $1 billion, be put into a regional investment fund for spending on community infrastructure projects above and beyond what is already allocated for that purpose.

In looking at how they could meet this demand and therefore gain power, Colin Barnett and Alan Carpenter must both be looking at ways to increase the resources royalty streams - therefore creating the potential to offer the desired quantum but maybe not the percentage asked for by Mr Grylls.

One way would be to fast-track approvals of major projects, such as Japanese company Inpex Ltd's stalled development in the Kimberley, and a flurry of smaller ones to generate new royalties.

Allowing uranium mining would also have a similar effect, though without any financial impact for years.

Mr Barnett is also known to have flagged changing royalty rates on existing mines as a potential area to claw back some income for the state. He has mentioned this in conjunction with the BHP takeover, suggesting that if successful it would be a prompt to renegotiating state agreements.

While an ownership change is unlikely to trigger an automatic renegotiation, there may be a case for a merged company to answer, especially when we are talking such huge amounts of revenue for the state.

From what I understand, royalty rates paid now reflect state agreements and legislation drawn up in another era.

In those days, lump iron ore was the key export, attracting a royalty rate of 7.5 per cent, whereas iron ore fines were harder to market and the official royalty was set at 5.625 per cent. In order to encourage the miners to develop fines as a product, the state apparently dropped the rate to 3.75 per cent.

Between the two majors, 220 million tonnes of their 300mt of forecast output is thought to be fines material. Iron ore exports are budgeted to bring in $1.97 billion to the state this financial year. That provides a big potential to generate the kind of revenue the Nationals want.

Even unmerged, the companies might pay more if they could get a faster approvals process to take advantage of higher prices and see the money being spent to better lubricate their Pilbara machinery by developing the soft infrastructure needed up there to sustain its workforce.

There is also a belief that, if BHP succeeded in the takeover, it might agree to royalty changes if it could get a spanking new state agreement that covers all its Pilbara operations where existing agreements apparently restrict many potential synergies, such as nominating which ports it can ship out ore from certain mines.

There is also the question of BHP's headquarters. Based in Melbourne, there is a growing view that its historic home is now an anomaly, which was maintained after the merger with Billiton plc only through the will of chairman Don Argus, despite the rumoured efforts of then CEO Brian Gilbertson.

Not everyone agrees that BHP moving HQ to Perth is much of a bargaining chip in the political spectrum, but I think it would be very symbolic and show that it - as much as the state government - was looking to get closer to the region that enriches it so much.

Some of the big issues of national importance are going to have a huge impact on WA mining operations - carbon emissions, foreign investments and its own merger - so it really ought to be getting its corporate office closer to where the action is.

And closer to where its risk lies; in this instance it's the state government, not Canberra - post merger at least.

For BHP, the shift to Perth may well mollify some of the state's potential demands on royalties, especially when neither the government nor the Nationals really wants to kill the golden goose. Sticking one up the east coast would go a long way to achieving a political gain.

After the weekend, major miners and oil companies are going to have to learn to deal with politically active regions as well as state governments, of whatever hue, determined to placate these voters who have found new voice.

Those who think this is all just a flash in the pan need only look to Queensland, which has sent a succession of noisy, parochial, regionally focused politicians to Canberra to unsettle many major pieces of policy and soak up the national leadership's attention.

We've only ever had Wilson Tuckey, and his free-market views have largely stopped him being a renegade like his protectionist Queensland cousins.

Stay tuned for fascinating times.


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