EXECUTIVE SUMMARY
Minerals and mineral processing are major fields of Australian economic activity. Australia clearly has a natural advantage in this area and the energy of its explorers, miners and processors has supplemented this natural advantage so that the industry today is a world leader. Mineral and processed mining products account for about half of Australia's exports, and mining comprises 7% of value added in the economy. Australian mining industry output has shown an eight-fold real growth in the past quarter of a century, with output surging strongly in the late 1960s/early 1970s and again after the early 1980s (see Chart 6.1).
Australia's prominence as a producer ranges across a wide variety of mineral and energy products including coal, iron ore, bauxite, gold, natural gas and copper lead and zinc. We are also the world's most important supplier of mineral sands and in recent years have become a leading producer of diamonds. Although government restraints have prevented Australia becoming a major supplier of uranium, located within the country are some 30% of the worlds low cost reserves.
Exploration expenditure in Australia is significant on a world scale (see Chart 6.2).
Chart 6.1: Gross Domestic Product -- mining (1984-85 prices)
Source: ABS Cat. 5205.0
Environmental and sustainable development issues stemming from mining can be divided into two parts. The first involves the direct and intentional effect of the activity -- the management of a potentially depletable resource. The second is at the heart of the matters examined in this book and concerns the potential for mining activity to generate pollution and land degradation.
MANAGEMENT OF A DEPLETABLE RESOURCE
Man neither creates nor destroys matter.
No metal is ever depleted in the sense of becoming irretrievably changed and no longer available. Metals are modified. They are extracted from their location, used elsewhere and -- at least in principle -- are available for continual re-use, through recycling. Where recovery is more economic than the development of virgin resources, it will be the preferred approach. More commonly, recycled materials will be used alongside virgin extraction as both have highly variable extraction costs. Low cost sources of both types will be used first.
Energy materials, the "banked" reserves of the product of solar radiation, are used up where their burning transforms them into energy and residual matter. But this too is simply a transformation of their components back into a form of their original state.
Chart 6.2: Exploration Expenditure in Australia compared to selected countries, 1982 to 1987
Source: CRA Ltd
CHOICES CONFRONTING A MINE OWNER
Owners of a depletable resource confront choices similar to those facing owners of a renewable resource. In both cases, the objective is to maximise its value. For the owner of a renewable resource, the decisions encompass trading off expenditures which assure a future income stream, against the expected value of that stream. The owner of an individual ore deposit does not have the option of maintaining it in perpetual use, still less the possibility of its future use being made more productive. Nonetheless, the owner of the ore deposit will take similar steps in weighing up the merits of the pace of development and in evaluating future strategies on capital expenditure -- including searching for new resources -- against simply consuming the income derived.
Robert Solow, in his 1973 Ely Lecture to the American Economic Association (Solow, 1973), noted the thinness of economic analysis of resource depletion at the time. He chose that subject for his own address because of the outbreak of concern spawned by the Club of Rome's "Limits to Growth". In doing so, he drew heavily upon Hotelling's 1931 article, The Economics of Exhaustible Resources (Hotelling, 1931). According to Hotelling, a resource must earn the same net income return as others in its risk class. This may be achieved by either extracting it today, or leaving it in the ground and allowing its capital value to increase prior to extraction at some future date. For the owners to leave it in the ground means taking a view that the net returns will increase at an exponential rate at least equal to the rate of interest.
It follows that if the rate of interest increases, or if there is an expectation that future price levels will fall, extraction rates will increase. For the resource owner, one nightmare is to be left holding a resource after it has been technologically superseded. Thus, at the time of the discovery of gas in the Netherlands during the 1960s, all parties were anxious to expedite its extraction in the expectation that nuclear power would mean its value would fall. Similar concerns are a part of the Saudi oil production strategy.
Solow drew attention to an empirical ambiguity in this relationship, namely that when prices were generally expected to fall, owners would increase their production rates with the extra supply thereby bringing a marked reduction of existing prices. Conversely, when future prices were generally expected to rise more rapidly than interest rates, supply would be constricted and present day prices would rise. Noting that chronic instability of this nature did not occur, he introduced the potentiality for asset revaluations. Existing reserve stock values will adjust up or down in response to changing price expectations. The "flow destabilisation" is thereby offset.
More important than the sleight-of-hand explanation involved in using asset revaluation is the cost side of the equation. Where increased output requires capital expenditure, higher levels of interest also add to the costs of extraction. The relationship between the two forces will depend upon the present value of expected resource rents, and the cost of the additional capital requirements.
Stollery (1990) conducted a simulation exercise on copper and US eastern bituminous coal and concluded that real pre-tax discount rates of 9-10% were required before the depletion rate is accelerated. He noted that these levels of return are similar to those required of mining investments and hence the discount rate is approximately neutral in its effects on the rate of depletion.
Influential though Hotelling's analysis may have been to economists, it rarely finds a place in mineral development decisions. It would take a firm or nation with unusual market power (as De Beers has in diamonds or as Saudi Arabia may have in oil) and with considerable confidence in its foresight, for it to be able to forgo the development of a profitable field in the expectation of a price increase. There is rarely a universal view on whether prices are set to rise or fall -- at least a view that is sustained for any length of time. Moreover, there is no uniform cost profile of mining activities. It may be that assets are revalued in response to expectations, but extraction costs will vary markedly between mines and deposits
Unless a firm has market power in supply of a mineral, it would be pursuing an extremely high risk strategy if it were to sit on a resource it could profitably mine in the expectation of prices rising. Sitting on a genuine mining prospect means deferring income from something found in only one in a thousand search attempts. It would be even more risky to adopt such a strategy in the expectation of prices rising faster than the prevailing rate of interest. In the main, real prices of resources have fallen, notwithstanding lower grades or less accessible reserves progressively becoming available. This fall is a function both of market demands (greater technical efficiency of use for basic materials and higher income elasticity of demand for services rather than goods) and improvements in extraction technologies.
It is, of course, a different matter to defer development of a marginal find in the expectation that improved extraction techniques will, at some future date, make it more viable. Where technology changes are bringing greater falls in extraction costs than the price falls caused by action on the demand side, deferral may make good business sense.
SUSTAINABILITY OF MINING
In principle, a nation's mineral resources are depletable in much the same way as those of an individual mine. As discoverable resources are ultimately finite, there is a potential case for society placing a limit on expenditures allocated to searching. Indeed, without a limit it is arguable that excessive expenditures will be incurred during a scramble to prove and take up resources. Such a situation would be akin to having no mining lease available in a highly prospective area and has been known to occur especially in alluvial gold recovery. When reserves are large or unknown, limitations to search activity would be inefficient.
In its submission to the Industry Commission, the Australian Conservation Foundation (ACF, 1990) argued that ecological sustainability was a pre-condition for the maximisation of consumer welfare. The ACF quoted extensively from Dr H.C. Coombes, who draws attention to what he regards as the finite nature of mineral resources and "the appalling history of the mining industry in its damage to the environment". Although they also drew on Hicks, (who saw the need to substitute renewable for nonrenewable resources when the latter were used up), the ACF's focus was on nondevelopment. They defined ecological sustainability as "... the passing of the natural environment from one generation to the next in a condition relatively unaffected by human activity such that the ability of future generations to provide for their own needs is not compromised by the present generation." It should be noted that this definition follows the narrow view of sustainable development favoured by Pearce et al. (1989: 48), and not the broader view, which they also found acceptable, that allows substitution between man-made and "natural" capital.
In strict terms, it is very difficult to see this narrow view as being compatible with any mining whatsoever.
A more measured view was presented in the Brundtland Report (1989), which it focussed upon use of non-renewable resources in reducing the stock available for future generations and added,
But this does not mean that such resources should not be used. In general the rate of depletion should take into account the criticality of that resource, the availability of technologies for minimising depletion, and the likelihood of substitutes being available. ... With mineral and fossil fuels, the rate of depletion and the emphasis on recycling and economy of use should be calibrated to ensure that the resource does not run out before acceptable substitutes are available. Sustainable development requires that the rate of depletion of non-renewable resources should foreclose as few future options as possible. (Brundtland Report, 1989: 45)
The processes envisaged by Brundtland are in fact precisely those performed by markets. A rising need for a resource increases its price. On the one hand this stimulates the search for more of the resource and for substitutes for it; at the same time, it provides incentives for dispensing with or economising on its use.
The quantum leaps in oil prices in 1973-74 and six years later brought an intensification of exploration, a substitution into other fuels (one which was severely hampered by restraints on nuclear power station building in most countries) and greater economy in fuel, especially oil, usage.
The upshot was a shift in the relationship between energy and GDP in OECD countries from over 1:1 to 0.7:1 and of oil from 1.6:1 to 0.4:1. The amount of energy required to produce a dollar of US GNP has fallen 28% since 1973 and further savings in electricity usage are underway (Picket et al., 1990)
Much of the history of mining has been a saga of shortage driving up prices followed by glut as both supply and demand have responded. Furthermore, we should not be overly concerned that the future emphasis of this process will be on the demand side as a result of previous depletions of resources.
It is our own view that resources are best regarded as being infinitely available. Substitution and discovery of new reserves has meant that no resource is approaching depletion. Even if it were, the appropriate framework would be to arrange for its depletion to be allocated over a time path rather than assume it to be more valuable in the future.
On a plausible assessment of the distribution of minerals around the globe and of the costs of recovering these at current rates of growth in usage, no metal (or coal) will need to see its production reduced over the next 300 years (de Vries, 1989). And those metals which might be approaching such a position -- copper, lead and zinc -- have ready substitutes. The most important metals -- iron and aluminium -- could never be mined out.
We have inadequate information on the limits of unmined mineral availability, and of the value of that availability in relation to the costs necessary for its discovery. It follows that there is no case for limiting search activity. Decentralised market forces, through the pricing mechanism and interest rates, provide sufficient signals to explorers when to pare their expenditures.
If prices rise faster than the interest rate, there will be an incentive for known resources to be reserved from present use and increased activity in searching for new sources -- the owners are better off holding present resource stocks than developing them. The fact that this so seldom occurs is purely a function of the expectations (which have proven to be well founded) that the pay off would not warrant such action.
The collective wisdom of the marketplace, in its price signalling and its capital demand signalling (interest rates), has proven to offer adequate accuracy as to the ranking of future as opposed to present needs. Where governments have sought to intercede -- for example, by subsidising new energy types in the expectation of shortages not anticipated by market participants -- the activities have generally proven to be ill-advised.
Similarly, it is difficult to justify government intervention, in expectation of future shortages, to tax or otherwise discourage the search for new mineral deposits. (This is not to argue against charges which compensate for services rendered.) It is even less likely that highly distortive measures like export taxes and extraction of additional profit taxes by monopoly rail freights would contribute to efficiency and sustainability.
PROPERTY RIGHTS AND EFFICIENT RESOURCE MANAGEMENT
The basic principles on how policies should be formulated to bring about efficiency require secure, privately vested property rights, together with government allowing markets to operate freely, and occasionally taking steps to facilitate their operation. Where things cannot be individually owned, charges should be introduced so that their use can be allocated among competing needs. In these respects, secure vesting of property rights need not mean that everything must be owned. It is not necessary, and might indeed lead to inefficiencies, if things without scarcity value are required to be owned. Nor should charges be levied on things with no scarcity value.
Within the framework of the rule of law, individual ownership ensures that adequate care is taken of property and that, where its use imposes costs on others, redress is available. Ownership creates efficiency. Inefficiency occurs where things are unowned and users lack incentives to allow resources to be used for the purposes which offer greatest value. With an ability to trade, resources are generally drawn to their most socially useful purpose.
Where assets are not presently vested in firms or individuals, there is a powerful case that they should be given -- or sold -- to the party valuing them most. This, of course, may well have equity implications, but, the key to efficiency is individual vesting, and greater efficiency gives the capacity to better afford goals like income redistribution.
Higher income levels are commonly designated as economic goals which, together with environmental goals, form part of the well-being which each of us seeks to maximise. However, income is too narrow a definition of economic goals and the efficiency stemming from market-based instruments, like property rights and charging mechanisms, extends beyond the generation of income. Private property rights and charges for using common property will also foster the trade-offs between alternative uses of resources, which individuals (and, as a result, the community as a whole) wish to see. Foregoing any use is among these alternatives. Market-based instruments also offer incentives to bring about wider goals like the avoidance of both waste and environmental degradation. They do so through two mechanisms: providing a basis by which conflicting needs can be traded off; and improving overall wealth levels which allows more of all needs to be satisfied.
Just as there are trade-offs between work and leisure in achieving this well-being, so there are trade-offs between environmental goods and income levels. Moreover, just as higher income levels offer us a greater ability to afford increased leisure, those higher income levels also offer us greater capacity to afford environmental goals.
The issue is how we might best optimise income, leisure, environmental and other goals. The keys to this process are founded on a comprehensive vesting of property rights, whereby owners seek to maximise the value they obtain from their assets while providing adequate compensation for any costs they impose upon others. This process has a relevance way into the future. The trade-offs between uses allow resources to be held back from present day usage in the way Hotelling posited. If it seldom pays to reserve goods from use in the present or near future, this indicates that owners have little confidence that they will have a higher value in the future.
As has been previously discussed, that lack of confidence is firmly based -- the experiences of the past tell us that technological advance has resolved what might have been shortages. Whether or not markets will prove accurate in the future, we have little alternative but to allow them to remain the arbiters. It is doubtful that governments can claim a greater prescience than individual owners about the future worth of resources, if only because they have a diminished interest in obtaining maximum value from those resources. Governments are, moreover, driven by political considerations which may well override the efficiency generated by markets arbitrating between willing buyers and sellers.
OWNERSHIP OF MINERALS AS A MEANS OF PROMOTING SUSTAINABILITY
Although it is convenient to discuss property rights as though they conform to some universal definition, this can be misleading. There are many varieties of property rights, none of which confer absolute jurisdiction. In fact, ownership of property simply signifies access to a number of service streams which might derive from an asset, together with obligations for certain adverse impacts the ownership of that property might generate.
Rights accrue with or without a formal title. Some of these rights are spelled out in statutory law, whilst others are left to common law. Thus, where a mining company undertakes authorised work on land owned by someone else, it obtains certain rights to exclude others (including the owner) from making use of that work. Whether as a result of law or tradition (and the two notions converge), legitimate claims or benefits are generated.
There are things for which a case for vesting can rarely be made. These include solar radiation, which is infinitely available -- its use by one party seldom detracts from the value of the residual amount available to any other party. Widely vesting rights to solar radiation would simply create transaction costs, which would reduce usage of an infinitely available resource.
Solar radiation is an extreme case of an abundantly available good with no exchange value. Fisheries offer a contrasting case. Most fisheries are unowned and have a positive value, but with limits on the ability to exclude anyone from participating in the catch. This lack of vesting has led both to excessive effort being employed in taking the catch, and to depletion of the resource because each fisherman attempts to maximise his catch without regard to the on-going value of the fishery. Where rights to fish can be defined and protected, depletion will occur only when this is the rational outcome for society as a whole.
A mineral lease performs similar functions. It gives the miner the right to extract value at the time of his choosing (unless other arrangements are contracted for). In many respects this is similar to fishing rights, although the latter give the right to "mine" a specific quantity of fish within a designated time. With this caveat, delineating a mineral lease is akin to granting rights to a fishery. The owner is given exclusive rights and incurs expenditures to prove the resource so that the expected value, less the expected costs, maximises the income available. Unlike a fishery, the development process of generating income from a mine is likely to follow a plan involving depletion of the resource.
The initial value of an exploration lease is likely to be very low; but mineral reserves, once discovered and delineated, do have a high value. The primary issue is to devise means by which the appropriate amount of effort is allocated towards searching out potentially valuable unknown resources. Part of this involves establishing rules by which such valuable resources may be developed (or be maintained for other uses should search reveal value in their not being developed). The greater the likelihood of successful search activity being followed by denial of subsequent development, the less the incentive to conduct searches. Expenditure on search activity will be encouraged when there is certainty and clear rules on when a successful search will be permitted to proceed towards development.
With the foregoing qualifications, in the development phase itself, economic forces in free-markets automatically offer an efficient solution. By this, we mean an outcome which alternative arrangements are unlikely to improve upon. The property owner or entrepreneur weighs up the value likely to be received against the costs likely to be incurred. To do so, the party undertaking the expenditure must be reasonably assured that it will obtain any profits likely to emerge. With secure property rights, as long as the resource is definable, excludable and tradeable and as long as there is adequate competition, the appropriate amount of effort will be allocated. Where rights do not conform to these criteria, either too little or too much energy will be expended.
ALLOCATION OF EXPLORATION AND MINING RIGHTS
All rights to minerals in Australia are vested in the crown. Mining leases are allocated on a "first come, first served" basis. At first blush, the best market-based approach to the allocation of mining rights would appear to be "long tenure", unconditional and tradeable mineral rights vested by competitive cost bidding (alone or subject to pre-announced royalties).
The deficiency of this approach is that competitive auctions usually reveals information to the benefit of the passive follower and at the expense of the active discoverer. In a sense we have a system of auctioning at present -- there is only one applicant for the great majority of exploration leases.
In the main, the community obtains most benefit when its institutional arrangements allow firms to allocate resources they see as being optimal to the discovery of unknown value, rather than arranging for the assignment of value which is relatively certain. Furthermore, the situation in mining is dominated by the goal of discovering value. This requires active steps.
Accordingly, it is to the benefit of society if institutional settings are in place which do not impede the search for value. Long tenure and unconditional rights would favour passive waiting for others to discover value. While this might be appropriate where future uses of resources are reasonably certain, the fact is that mineral deposits in Australia remaining to be discovered are totally unknown; and, to all purposes, it is as if they are infinite. As previously discussed, price and substitution responses are such that no particular resource will ever run out. Government intervention to conserve exploration effort is therefore not warranted (and even if it were, government neither has the information nor confronts the incentives appropriate for it to arrange the correct conservation strategies).
Hence, the present system of "first come, first served" is an efficient method of ensuring that the right incentives to search out value are put in place. By imposing disciplines on explorers in terms of the requirement to progressively surrender parts of their leases, or through systems of work program bidding requirements, the search for value is stimulated. The community as a whole obtains a share of the successful searches for value, both indirectly through increased activity and directly through the payment of royalties. The latter, if efficiency is not to be unduly impaired, should be at a pre-arranged level.
In respect to efficiency, the nexus between exploration and the right to mine is crucial. The value of the site is created by the skills or good fortune of the explorer. Measures which are likely to introduce risks that discovered value may not be claimed will rebound on the incentive to search. This adverse effect on search activity will be greater, given risk aversion, where it is less certain or arbitrary than where it is known in advance. Thus, if the government is to demand additional revenues amounting to 20% of the profit, and if each exploration attempt has similar costs, there will be a reduction in search expenditure of 20%. If, on the other hand, the explorer cannot easily determine what additional share of revenues must be yielded, he is much less likely to risk any of his capital.
The Industry Commission (1990) favoured cash bidding for successfully explored land and suggested that rights to mine a promising exploration find should be tradeable. Tradeability of rights is, however, the present position. A wildcatter, or even a major company, will often seek a partner to develop a promising find. In doing so, the value of the successful exploration will be sold (perhaps even auctioned), so that the discoverer will receive his reward. The Commission's suggestions that a discovery should be re-auctioned were focussed on the taxation and allocation aspects. Yet, no explorer will reveal all the data necessary for others to make fully informed judgements, and a requirement like this will generate strategic rather than wealth maximising behaviour. Attempts to police these various strategies would involve the government in considerable expenditures and a raft of black letter law, similar to that governing takeovers, with an inevitable growth of bureaucratic monitoring.
Cash bidding has a place in some circumstances. But auctions are likely to be the most efficient means of allocating tenures only where prospectivity is known to be high, as in some petroleum rich provinces and in certain coal areas. The original discoverers of coal in Sydney Basin or oil in Bass Strait could not reasonably expect to have a lien on future discoveries beyond areas to which they were granted exploration rights. Their discoveries revealed value which they could not quarantine to themselves. In such cases, allocation by cash bidding is likely to avoid wasteful rent-seeking activity and, perhaps, premature development expenditure. But these situations are rare.
Systems like Australia's crown ownership of undiscovered minerals carry considerable advantages for efficiency. Government ownership is likely to bring adverse effects where the intent of this is to limit or ration access; but such ownership in the Australian context may best be thought of as representing custody, pending assignment of relevant rights to those who can demonstrate value from having such an assignment. In this respect, the model to which it bears closest similarity is the ownership of western lands by the US Federal Government during the nineteenth century. Title to those lands was vested in the Federal Government with the intent that they be placed in private hands at an early opportunity (Anderson and Hill, 1990). The US government, rightly, sought compensation from the private landowners in part to arrange efficient allocation and in part as compensation for its custodial activities.
The difference between the model applied to the US western lands and that which we see as applicable to mining largely involves the custodian's requirement to a separate usage fee, in the form of a royalty, rather than to up-front sales revenues (which in the US were sometimes waived). A further difference is that economic rent, or income in excess of that needed to warrant production, was present in the case of land settlement; whereas this is mainly absent -- or must be created -- in the case of mineral exploration. We shall return to the point presently.
Compared with land being held in custody by the crown, permanently vesting ownership to minerals (either in the surface owner or as a separate title) offers inferior incentives to the search for value. Ownership of minerals by the surface owner, aside from generating arbitrary and inequitable windfall gains, appears to yield much reduced incentives for explorers to search out value. Although comparisons can never provide watertight evidence, the contrasting exploration expenditure outcomes in Ireland (where crown ownership prevails) and England (where the land owner has the mineral rights) offer persuasive evidence of this. Similarly, there is much less exploration activity in the eastern part of the US than in the western states where government ownership is prevalent.
Vesting ownership of minerals in the surface owner would simply introduce transaction costs whilst conferring little in terms of incentives to search out, improve, or guard the resource; the surface owner has no idea that the resource exists (and for the overwhelming bulk of land, no valued mineral resource does exist). Vesting ownership in this way would be similar to assigning ownership to the electromagnetic spectrum prior to any use being found for it. In that case, prior assignment would have offered something of value to the owner where the worth was totally unknown, and would have resulted only in impeding the discovery of that worth.
The reduced scale of operations observed where mineral rights are vested prior to value being discovered, or in the absence of any intent to conduct search activity, also often arises due to additional transaction costs likely where miners/explorers must deal with a variety of owners. Some owners may choose to "hold out" and embark upon other strategic behaviour.
Assigning ownership where no value has been demonstrated would also introduce a new set of uncertainties. The prospects of governments reneging on assignment are further likely to undermine the sums which a prospective owner of mineral rights might be prepared to outlay. These sovereign risk uncertainties would not be seen to be diminished if the rights were to be vested. The owner would never be certain whether the government might take steps to expropriate a highly valued income stream.
Moreover, it is by no means clear that the sale of the rights would yield significant revenues. Land, outside of certain highly prospective areas, is mainly valueless as a source of minerals. Intellectual property rights, that is, knowledge about deposits, are typically the scarce resource, not the physical deposits themselves. This distinction between physical and intellectual properties has a major bearing on the taxation of mining because it means that there are rarely any real economic rents accruing to the activity; there are simply high profits to those firms which, purely through the skills they have developed, economise in their search:discovery ratios. That is, they use their expertise to conserve outlays to those areas where efficient and creative research has revealed prospectivity.
MINERAL TAXATION AND SUSTAINABILITY
Much of the literature on mineral development examines policy approaches from the perspective of taxation. General principles of taxation, particularly neutrality, are grafted on to two apparently observed phenomena which mark mining as different from, say manufacturing. These are that rents, or super-normal profits, are apparently observable from many operations; and that the mineral resources, in Australia and elsewhere, from which these are derived are the property of the people as a whole.
Models of taxation to ensure an equitable and non-distortive allocation of rents to the people as a whole have been developed. The least distortive of these are based on the work of Brown (1948), which, though not directed at mineral taxation as such, has been widely applied to it. Essentially, a pure Brown tax would see the government sharing in both the costs and profits of a venture. Variations on this have been put forward by the Industries Assistance Commission (1976), Swan (1976) and, in a distorting form which seeks to ensure that the government will share only the successes, by Garnaut and Clunies-Ross (1975).
In all these cases, the preferred approach is posited on the existence of super profits. Some have noted that auctioning would offer a superior method of obtaining the rent, but auctioning is seen to be deficient in view of collusion. There is some unease with the proposal to extract rent tax expressed by, for example Smith (1979) who observes that exploration is likely to be risky and should be rewarded accordingly. Church (1985) notes that coal deposits are widespread throughout the world and its mining technologies are well known, so that the existence of high profits would be expected to be competed away. Notwithstanding this, he cites econometric evidence which appears to demonstrate that rents in fact exist; but his explanation of their existence (a limited field of potential bidders) does not seem entirely plausible.
Whilst it is unquestionably true that high profits are available from mines in specific locations, this is a far cry from the common description of rent. Those high profits are created through knowledge and skilled entrepreneurship rather than being pre-determined. Striving for this form of rent involves a continuing search for highly profitable activities, and is the essence of a dynamic economy. As Schumpeter said in describing the process of income creation:
... competition from the new commodity, the new technology, the new source of supply ... which commands a decisive cost or quality advantage ... is so much more effective than (price competition) as a bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly.
(Quoted by K.P. Barwood Implementation of a Competition Policy
NZ Association of Economists Conference, February 1986).
The entrepreneur searches for hidden values and may "create" needs in the hope of earning high rewards. Where these rewards are attenuated by taxation, the search for them will be so much diminished. In a sense the finder of a high yielding deposit has a monopoly on its exploitation and sells its outputs at the best price he can.
The notion of undeserved economic rent accruing to mining companies has dominated many economists' thinking about this industry. While individual mines and companies earn high profits, economic rent which can be taxed without affecting production decisions is rarely observable in mining activities. Most commonly, rents are simply the occasional high profits which result from corporate skills and research and development activity. They are, in short, earned rather than given; where their potential existence is observed, this is typically followed by their "dissipation" in further research and development. In mining, as with other industries, such "dissipation" leads to discoveries of value. And, although in principle it might be possible for the nation as a whole to maximise net revenue by economising on the R&D effort, in practice this seems unlikely.
The lack of aggregate rents accruing to the recovery of minerals can be corroborated by examining the profitability of mining companies. Taken as a whole, mining companies' profits are similar to those of other companies. In its submission to the Industry Commission, AMIC pulled together figures which showed that, over the period 1972-73 to 1986-87, mining returns on capital were in fact 11.7% compared with 14.7% for all industries.
If aggregate profitability in the mining industry were to be somewhat higher than in other economic activities, this would be a reflection of risk premiums rather than of the existence of (Ricardian) rents. If rents were available or became available, entrepreneurs would switch out of other industries to find them.
We should therefore recognise royalties as a form of additional taxation, legitimised both by centuries of operation and by notions of providing a charge for government custody of resources. This latter element would be quite a small proportion of the monies actually diverted to governments. There is no case for royalty collecting in excess of sums needed to finance wardens' courts, government geological mapping, etc. Beyond these levels, except for royalties imposed to allocate reserves between rival firms, they will normally be forms of taxation which discriminate between economic activities and, therefore, reduce aggregate income levels.
The exceptions to this -- areas of high prospectivity and strong commercial rivalry for exploration leases -- may be thought of as having changed the nature of their tenure. Tenure of such highly prospective leases is best regarded as having shifted from government custody to government ownership. Information on the value of the areas has become so widely known that a system of "first come, first served" would prove to be wasteful of services and reveal very little additional knowledge. When economic rents are known to be present, Government ownership, rather than custody, become the efficient form of tenure.
ENVIRONMENTAL PROTECTION AND MINERAL EXTRACTION
In recent years, mining operations have attracted considerable opposition, especially from environmentalists concerned at the destruction of extant "natural" areas and pollution externalities.
Environmentalists' concerns about mining are on a stronger theoretical footing when they address externality issues than where they seek to interpose restraints on development to pursue sustainability. Although many externalities are trivial and not worth the transaction cost or effort of arranging for compensatory payment, others may lead to distortion by inadequately valuing the spillover costs. There are two issues in this concern: the excessive resources attracted to activities which have their costs partly born by non-contracting parties; and the unknown risks of development.
With regard to the latter, all activities carry risk; but through well constructed liability laws, proper incentives are put in place, so that parties balance their gain against the costs. These costs include a premium to account for risk. The party most directly involved is better placed to take such judgements than a remote but "central" authority. The party directly involved is likely to be more familiar with the terrain and the various techniques available to reduce exposure to mishap, as well as having a direct stake in the downside and upside rewards. Such a party is able to weigh up the value obtainable for itself (and indirectly the community) against the risks involved.
Incremental judgements by independent market operators may also impose less risk than centrally determined judgements with a wide application. More importantly, where government agencies take decisions, they are likely to be excessively risk averse, since they have no direct stake in the rewards available. Hence their actions are likely to bring opportunity losses to the community from options foregone.
Internalising externalities is always an attractive approach both to address known polluting activity and to ensure that risk is taken into account. The externalities imposed by mining activity itself include destruction or impairment of wilderness or other scenic areas through:
- scarring the landscape;
- harming rivers and other pre-existing systems;
- reducing the value of land for purposes other than mining.
LAND AS A COMMONLY OWNED RESOURCE AND AS A BEQUEST VALUE
Where property is fully assigned to individual ownership, and where externalities are not significant, it will find its uses allocated to the purposes which the community values most highly. Because of the difficulties of totally eliminating externalities, some land is reserved from uses (farming, mining) which would fundamentally alter its present nature; and even from uses (tourism, bush-walking) which would alter it less significantly.
The justifications for such reservations find expression in "existence" and "bequest" values, which, it is argued, could be even less comprehensively secured by market signals than land held back solely for its leisure uses.
For these reasons there is no constituency for fully privatising all land -- to most people the risks are too great that there will be an inadequate capture of all the "non-use" values and that more readily tapped private purposes would usurp prized recreational, "bequest" and "existence" values. In part this fear is likely to be compounded by a feeling that fully privatised land would leave those with powerful lobbying muscle worse off, in that the land use would shift to purposes which they do not favour.
Accordingly there is wide support for land being reserved in national parks. However, there is no yardstick, once allocation by means of commercial market processes has been abandoned, by which we are able to measure the appropriate amount of land that should be so set aside.
All mining is effectively banned in national parks and, indeed, even aerial exploration is forbidden. Hence we are not only denying ourselves opportunities for wealth generation but also preventing ourselves from becoming familiar with the possibility of even knowing what these opportunities are. It is as if we cannot trust ourselves even to look at the cookie jar. Such restraints on scientific curiosity sit uneasily with our wish to enhance our well-being.
Beyond national parks, the ability to take up leases has also been progressively restricted in a great many areas. Thus, as a result of delays by cascades of approval procedures, Roxby Downs, located in an area of no value as wilderness and of marginal farming use, has required 54 separate approvals from regulatory authorities. This process has occupied the best part of a decade, and is in contrast to the situation prevailing during the 1960s when the massive Kambalda nickel mine required just two separate approvals.
None of this is to argue that the decision to allow exploration should automatically be followed by the right to mine. The exploration activity itself may reveal values that the community may wish to use differently and thereby forego the benefits of mining. Alternatively, the expected values the exploration reveals may be insufficient to justify disturbing a particularly rare ecological formation. However, government should be wary of attempting to involve itself in detailed cost-benefit analysis as a condition of allowing developments to proceed. It neither has the expertise nor faces the appropriate incentive structure to pursue such a policy.
Considerations about the trade-offs between unpriced and market values are -- or should be -- more straightforward for a highly concentrated activity like mining than in the case of more land extensive uses. Any good is more highly valued where it is scarce. A children's playground is less valued in an area with a large number of such facilities than in an area where they are few and far between. Because mining in remote locations takes up such a tiny proportion of the area in which the mine is located -- typically less than a square kilometre in a one thousand square kilometre exploration field -- and because it is a highly valued activity, it has in the past been considered a preferred form of land usage. The various restrictions and impediments imposed on mining indicate that this preferred usage has been modified in a way which is difficult to justify.
Greater income and material well-being certainly allows us the scope for setting aside resources to satisfy other needs, but this has occurred in Australia through government fiat rather than voluntary action of individuals. Notwithstanding that externality and "free-rider" problems present difficulties, there is a strong likelihood that political log-rolling has brought a far more prominent role for government in excluding commercial activities than would be the wishes of the people if given a true market type of choice. Ballot box choices amalgamate a great many issues which have only a remote bearing on true preferences.
These same considerations apply to the notion of reserving land as a bequest to future generations or maintaining it for its existence value. It is important to maintain a perspective on the overall land degradation brought by mining activities. At any one time, mines account for less than 0.02% of Australia's surface area (AMEC, 1990); and it is likely that less than 0.1% of Australia's area has ever been mined. Of this, some would be economically viable for restoration; other areas, especially those near population centres, would have a value as land fill sites. Still others are more valuable left as disused sites; forming, as they do, a part of the nation's heritage.
MINING AND OTHER LAND USE CONFLICTS
The Industry Commission's draft recommendations on public land use conflicts called for rigorous cost-benefit analysis, new land use categories, creation of independent advisory bodies, and a requirement that proposals be assessed from a overall public viewpoint. These recommendations conflict somewhat with those under "Environmental Impact Assessment", which call for market-based solutions (presumably narrowly confined to those parties having a legitimate standing with regard to the issue).
This latter approach has two advantages. First, it prevents decisions being taken on political grounds. Secondly, it avoids cluttering the process by the intercession of parties with only a remote interest in the outcome. Rather than preview action, the law normally operates by ensuring liability is in place in the event of harm being imposed. This leads to an efficient use of resources, allowing economical decentralised decision making by those with the best information.
Although the former approach was intended to facilitate approval processes, experience demonstrates that creating advisory bodies, and requiring proposals "likely to have a major impact" to be examined from the overall public benefit viewpoint, will lead to increased regulation. Taken further, such a proposal may amount to a form of centralised planning whereby the decision to go ahead requires the imprimatur of the government.
Mining is almost always confined to very small areas -- the Coronation Hill mine, for example, would amount to the size of Parliament House in an area the size of the ACT. This brings us to the view that the community would be ill-served by a requirement for rigorous pre-assurances that a new activity in mining will not do harm. To assemble evidence for, and conduct deliberations about such reassurances is costly both in time and money.
These activities will most certainly reduce the return available to the community. Of course, where a major development has the potential to impose considerable incidental costs on the community -- for example in the case of extensive expansion of farming on previously unused land -- more rigorous pre-assessment they may be justified. For mining, experience (and intuitive knowledge of the extent of mines) indicates that applying such an approach means the positive opportunities missed would be likely to outweigh any costs.
Rather than supporting measures which would bring about delays (like those the Industry Commission recommended under "public land use conflicts"), it is preferable to devise measures which facilitate resolution between the parties most directly affected. This would be further assisted by placing strict time limits on approval processes both for mining and, where mining might not readily be permitted, for exploration.
POLLUTION ISSUES
Notwithstanding the general acceptance in principle of Coase's proposition that environmental impositions are mutual issues not necessarily requiring compensation or mitigatory action on behalf of the "victim", the conventional approach has followed the "Polluter Pays Principle". Issues concerning pollution are more fully addressed elsewhere in this volume. In mining, because of the localised nature of operations and their highly concentrated nature, pollution is more straightforward to monitor; simpler to contain; and (where the operation is remote) easier to dilute so that it becomes relatively more harmless than is the case with less compact emission sources. Australian mining companies have accepted the "Polluter Pays Principle" and the issue largely revolves around how, and how strictly, it might be applied.
The ability to rectify mistakes is important in this respect, and resiliency is demonstrably the case in mining. Indeed, nature itself, in areas of greatest environmental sensitivity, has performed this function; for example, in Kakadu gold mines where cyanide treatment was used without any precaution against environmental damage. Arguments for Kakadu to be maintained in its present primitive splendour sit uneasily with the fact of previous pollution.
RECTIFICATION OF LAND
It has been suggested that mining has in the past left a legacy of degradation and destruction on the land, and that measures should be enforced to prevent this happening in the future. Evidence of these unfortunate occurrences is seldom presented -- or rather a familiar "ugly" parade of highly localised degradation is offered. Nevertheless, there may be merit in requiring miners to rectify disturbed land.
One approach is to demand the posting of environmental bonds; however it may be more efficient to ensure appropriate rectification through the agency of insurance companies (insurance could, of course, evolve side by side with the posting of bonds). Swedish law has accepted insurance mechanisms against inadvertent harm as an alternative to exacting environmental charges. Where mining in an area might lead to quite dramatic changes, and the area itself is considered to have valuable recreational or bequest values, measures which allow sequential development might be considered. These could include auctioning rights or trading pre-existing rights. The transaction costs of such measures may prove to be insuperable but are worth investigation as alternative approaches to the total denial of access in national parks.
Mineral extraction, by definition, involves transforming the pre-existing resource. In the main, however, mining is confined to small and isolated locations. Typically, according to evidence supplied by CRA to the Industry Commission, a successful mining operation will occupy less than one square kilometre within an original exploration lease of 1000 square kilometres. Moreover, as the naturalist Harry Butler has made clear (ABC, 1990), almost all land which has been mined can be readily restored. In the case of beaches, restoration is particularly straightforward; indeed operators of tourist buses on the northern NSW coast ask their clients to nominate which of the beaches they can see have been sand mined, knowing that the differences are imperceptible.
For other areas, restoration may be more costly and involve retaining different layers of the original soil and replacing it. Some estimates from open cut mining operations suggest that costs of thorough rehabilitation could range into the billions of dollars. Even so, such procedures are now widely practiced. Doubtless this adds costs to mine development -- costs which in restoring the land to its original condition might be several hundred fold the value of the restored land. Quite clearly, for land worth only thousands of dollars subsequent to its rehabilitation, society would obtain poor value for the money spent were we to insist upon rehabilitation.
Accordingly, decisions on rehabilitation might best be left to prior agreement between the miner and the landowner (who may be the government); with a court establishing the measures to be taken, or compensation to be paid, in the event of disagreement. The basis of such decisions would need to be specified. Decisions would, for example, have to be closely related to the value of the land in close proximity to that which has been disturbed. Such approaches are far more effective in internalising externalities than those requiring specific actions to be taken.
For these reasons, whilst it may not seem unreasonable to expect rectification of land after mining has ceased, requiring such costs to be absorbed may be irrational in both an economic and a wider social sense. There may be room for bargaining solutions to be adopted based on the value of the land being returned to its original condition and the cost of undertaking this activity.
CONCLUDING COMMENTS
Mining contributes appreciably to the generation of wealth and the material satisfaction it brings must be traded off where its impact adversely affects unpriced values like wilderness. Moreover, in such trade-offs, we should be mindful that increased wealth allows us to afford things otherwise unavailable to us. Placing obstacles in the way of the wealth generation which mining development brings is more likely to impede the pursuit of overall community well-being than to prevent destruction of natural assets which would be valued greatly now or in the future. A key to the appropriate policy approach is to recognise limitations on the availability of information. Policy must ensure the correct structuring of incentives to enable information to be economically generated and applied -- information on needs of markets and the ways to meet these needs. Equally important, policy must ensure measures do not impede this information discovery process, or the uncovering of hidden values.
The essential goal of societal organisation for mining, as for other activities, is to set a framework within which people can pursue their ever changing aims on the basis of their own knowledge.
It is apposite to quote Hayek on competition in setting out the preferred regime under which mining should operate. Hayek put his view in the following way:
Competition is ... like experimentation in science, first and foremost a discovery procedure. It is irrelevant ... (to) ... evaluate the results of competition ... from the assumption that all the relevant facts are known to some single mind. The real issue is how we can best assist the optimum utilisation of the knowledge, skills and opportunities to acquire knowledge, that are dispersed among hundreds of thousands of people, but given to nobody in their entirety. Competition must be seen as a process in which people acquire and communicate knowledge; to treat it as if all this knowledge were available to any one person at the outset is to make nonsense of it. And it is as nonsensical to judge the concrete results of competition by some preconception of the products it "ought" to bring forth as it would be to judge the results of scientific experimentation by their correspondence with what had been expected. (Hayek, 1976: 67).
It is competition that reveals the discoveries on which wealth and well-being generally are founded. Institutional arrangements for mining are best focussed on allowing this process to unfold rather than seeking to extract shares from the income it generates. It is even more unwise for government instrumentalities to attempt to determine in advance how the process of income generation should unfold. Mineral resources are effectively undepletable; and we should not, therefore, establish frameworks which are appropriate only for sharing a scarce resource which is in fixed supply. Whilst farming, the tall chimney stacks of heavy industry and the exhaust pipes of motor vehicles all make extensive use of common environmental goods, workable mineral deposits are located as pinpricks on the map. The extraction of their value imposes relatively slight damage; but where that damage might be appreciable, market-based mechanisms, involving appropriate charges, should be established to ensure adequate compensation to the community and incentives for producers.
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