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Wednesday, October 27, 2010

Mining Royalties and Renewable Energy

Mining Royalties and Renewable Energy

Revenue from mining is a one off. Minerals are not renewable and once gone they can not be mined again. There is no justification whatsoever for mining our family jewels if we plan to waste this money on current consumption. All the revenue from mining must be used to set up infrastructure which will benefit future generations . These minerals belong to them just as much as they belong to us. One very good sector in which to invest this money is renewable energy. The benefits of having New Zealand totally independent of overseas energy are too obvious to warrant rehashing yet again and the benefit of energy independence extends far into the future to benefit our great great grandchildren.  Thankfully, our grandfathers built the hydro electric dams which provide us with half of our electricity today.

One thing must be guarded against. Mining revenue must not be used to displace money from other sources which otherwise would have been put into renewable energy. This is creative accounting at its worst. Mining revenue must be added to the other funds to add to our already high proportion of renewably generated energy. Such funds can be invested directly, in, for instance a State Owned Windfarm (SOE) or instead, can be leveraged by providing research funds or incentives which tip the viability of a renewable energy source towards economic feasibility.

Mining royalties have been reported as 1% of the sales value of the mineral sold. If this is the "whole story" then there is no justification for selling off our family jewels for a mess of pottage. I note the intention mentioned in the New Zealand Energy Strategy to review the royalty situation, presumably the way the Australian Rudd government recently attempted. This is good. Once sorted out, these increased royalties should be paid into the Mine Revenue Account for use in development which creates long term benefits. However, the bare royalty payment is not the whole story.

Does a mine pay income tax in addition to its royalty payment? If so, the tax must be credited to the Mine Revenue Account. Without the mine, this stream of revenue would not come to the government. Next, every employee of the mine pays income tax. This is a revenue stream  to the government which would not exist if the mine was not operating. Into the Mine Revenue Account also. Every purchase by the mine and its employees of everything from a new vehicle to a roll of toilet paper attracts GST at 12.5% (soon to rise). Into the Mine Revenue Account. And then there are the downstream effects. For instance, a mine employee buys his food at a local super market which pays taxes and whose employees pay taxes. Give this one to your resident math boffin. It is an infinite converging series with a finite sum. If you have a good mathematician on board, he will be able to work out how much more of the tax take should go into the Mine Revenue Account.

Looking at the above, it turns out that the revenue from a mine to the government goes far beyond the bare royalties and all this revenue should be used for development that benefits future generations. (in addition, remember, to funds that would have been spent on this if the mine didn't exist).

The next question is what we do with the minerals we have mined. Let's use iron sands as an example. Are we going to sell off the raw mineral with just the gangue (waste) removed the way Australia does. This is like selling off a
Fabergé egg for the price of the gold it contains. At the very least we should be selling refined ingots of steel but let's get more ambitious. How about selling railway lines, machine tools and even car parts. How about selling our own electric car with a difference.

We are fixated on the idea that we could never compete with the big boys overseas. We could never, for instance compete with Hollywood, could we? Well we could and we did. Lets not sell New Zealand short. By adding value to our mineral resources, far more money will go into the Mine Revenue Account to be used for renewable energy infrastructure and other long term development. If, at present, we are not able to beneficiate our mineral resources and sell value-added-products, let's leave them in the ground until we have achieved the necessary level of sophistication. They are only going to increase in value as the years go by and other countries use up their non-renewable resources.

However we use our minerals, let us use this windfall, one-off source of revenue to benefit future generations. We couldn't do better than to use this revenue to ensure New Zealand's energy independence.

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