The Economics of Mineral Export Licences

ACKNOWLEDGEMENTS

Thanks are due to several government departments and the Australian Minerals Foundation for assistance in compiling facts and data from diverse sources.  Remaining errors are the responsibility of the author.

EXECUTIVE SUMMARY

• Export controls, mainly in the form of direct regulation of quantities and prices enforced through an export licensing regime, are currently applied to mineral exports which comprise about one quarter of total Australian exports of goods and services.
• The Government bases its policies of licensing mineral exports on the existence of perceived market failures.  These apparently occur because of:
1. particular market structures -- the failure of domestic firms to exploit extant monopoly power;  the exploitation of domestic producers by foreign buyers;  and the existence of vertical integration in particular markets.
2. the existence of "externality"-based market failures -- where the actions of some firms are not accounted for in their decision processes.  For example, the failure of mining companies to account for the damage to the environment caused by mining.
• The regulations add various costs to the mining sector, reducing flexibility and profitability.
• In most instances the policies do not work.  Where real problems do exist because of externality related problems, the export controls, in the form of direct regulation, cannot solve the problems.  An appropriate solution would use market-based policies targeted directly at the cause of the problem, which rarely originates in the export market.
• Controls imposed because of market-structure-related problems are unwarranted because it is unlikely that either Australian sellers have much market power over the medium to long run or that foreign buyers have much market power over a similar time horizon.
• The current system of export licensing should be abandoned.  Where legitimate concerns exist the Government must:
1. clearly identify the source and causes of any market failure;
2. identify the costs of any identified market failure;
3. enact policies that deal directly with the problem.  These policies will typically involve market-based solutions that are flexible, robust and which do not induce firms into unproductive rent-seeking activity.

1. THE MINING SECTOR

1.1 PRODUCTION, EXPORTS AND PROFITS

Australia is in the very fortunate position of having vast reserves of minerals that fuel traditional western industrial structures in addition to having enormous reserves of minerals that form the basis of fast growing "high-tech industries".  In the former group Australia has roughly 13 per cent of the world supply of demonstrated economic resources of recoverable black coal, 17 per cent of recoverable brown coal and 8 per cent of iron ore. ⁽¹⁾  Australia has roughly 25 per cent of demonstrated economic resources of bauxite, 31 per cent of the western world's supply of uranium, over 15 per cent of the world's lead and nearly 14 per cent of the total supply of zinc.  Add to this 14 per cent of world demonstrated economic resources of cadmium, 26 per cent of lithium, 30 per cent of zircon and large quantities of other minerals used in rapidly growing electronics industries.  Many more resources are currently classified sub-economic which, in a world of increasing scarcity, would become profitable at some price.  All this is supplemented by inferred (not yet demonstrated) reserves, some of which would become viable given further exploration and analysis.  This vast mineral wealth is presided over by less than 0.3 per cent of the world's population living on about 5 per cent of the world's land area.

Production

Initiatives aimed at capitalising some of the mineral wealth have made production from the mineral resource sector (which includes energy and non-energy minerals and basic down-stream processing industries) the fastest growing component of GDP (see Figure 1).  By comparison, rural activities and manufacturing output declined as a share of national output.  Rural output has declined even more as a share of total merchandise exports (see Figure 2).  On the basis of forecasts through to the year 2000, the mineral sector is expected to continue its strong growth performance. ⁽²⁾

The composition of raw mineral output has changed over recent years (see Table 1.1).  Between 1982 and 1988, mine production has grown fastest for bauxite, black coal, gold and manganese.  Strong mine output has also been recorded for production of crude oil, natural gas and LPG, and silver.  Mine output of copper, nickel, tin and uranium actually fell over the period.

Table 1.1:  Mine Production of Principal Minerals

Mineral	Unit	1982	1988	% change 1982-88	% share of world market
Bauxite	kt	23,625	36,192	53	39
Coal   - black   - brown	kt kt	107,329 37,281	176,604 43,450	65 15	3 3
Copper	t	245,322	238,317	-3	4
Gold	kg	26,961	156,950	482	8
Iron ore and concentrate	kt	87,694	96,064	10	10
Lead	t	455,338	465,545	2	19
Manganese ore and concentrate	t	1,123,019	1,985,467	77	8
Nickel	t	87,552	62,358	-29	8
Petroleum   - crude oil   - LPG   - natural gas	103m3 103m3 106m3	21,668 - 11,595	30,139 3,919 15,572	39 - 34	- - -
Rutile concentrate	t	220,697	230,637	5	12
Silver	kg	906,863	1,113,569	23	8
Tin	t	12,126	7,009	-42	5
Uranium	t	5,215	4,164	-20	11
Zinc	t	664,800	759,191	11	14
Zircon	t	462,476	480,049	4	58

Source:  Australian Mineral Industry Quarterly, various issues.

On the processing side, smelter and refinery production has grown strongly for alumina, aluminium and newly won Australian gold (see Table 1.2).  Processed mine output fell for lead, pig iron, silver and tin and overseas sourced gold.  Overall the share of processed (for example, metal ingot) and semi-processed minerals (for example, alumina and nickel matte) in total mineral exports has grown rapidly since 1970.  The expansion of the alumina and aluminium industries accounts for much of this change.

Table 1.2:  Smelter and Refinery Production of Principal Minerals

Mineral output	Unit	1982	1988	% change 1982-88
Alumina	kt	6,631	10,511	59
Aluminium	t	380,796	1,149,525	202
Copper   - blister   - refined	t t	175,536 160,195	177,669 196,040	1 22
Gold, newly won   - Australian origin   - overseas origin	kg kg	23,292 25,711	131,674 8,710	465 -66
Lead	t	218,812	162,729	-26
Lead bullion	t	181,592	191,218	5
Pig Iron	kt	5,956	5,730	-4
Raw Steel	kt	6,371	6,400	1
Silver	kg	348,019	297,362	-15
Tin	t	3,105	439	-86
Zinc	t	291,390	302,472	4

Source:  Australian Mineral Industry Quarterly, various issues.

Exports

Over 80 per cent of total Australian mine output is destined for export and the changing mine and processed ore output mix is reflected in the changing export mix (see Table 1.3).  In terms of quantity, exports of alumina, aluminium, black coal and gold grew strongly.  In value terms aluminium, copper, gold, rutile, zinc and zircon showed strong growth as both quantity and unit export prices grew, while alumina, black coal, iron ore and lead increased quantities sold abroad but suffered from declining unit export prices.  The total quantity of uranium exported declined as unit export prices received increased.  Overall the value of uranium exports fell.

Table 1.3:  Exports of Principal Mineral Products

Mineral Product	Unit	Quantity			Value $m (f.o.b.)*
		1982	1988	% change	1982	1988	% change
Alumina	kt	5,951	8,526	43	1,103	1,799	63
Aluminium	t	156,068	813,030	421	168	2,190	1,201
Black coal	kt	46,724	100,315	115	2,526	4,642	84
Copper	t	115,664	153,077	32	156	491	214
Gold	kg	13,076	142,731	992	136	2,658	1,857
Iron Ore and Pellets	kt	73,056	94,969	30	1,440	1,774	23
Lead	t	412,655	445,606	8	336	497	48
Nickel	-	-	-	-	392	327	-17
Petroleum   - crude   - LPG	Ml kt	- 1,367	6,005 1,244	- -9	- 328	744 202	- -38
Rutile	t	199,296	244,482	23	51	141	177
Tin	t	7,792	7,564	-3	93	60	-36
Uranium	t	5,459	4,327	-21	416	373	-10
Zinc	t	525,216	675,718	29	318	657	106
Zircon	t	405,215	471,614	16	43	187	335

* Note:  values are in current dollars

Source:  Australian Mineral Industry Quarterly, various issues.

Alumina, aluminium, black coal, iron ore and uranium, which are the focus of this study as they are all still subject to export controls, accounted for over half the value of total mineral exports in 1988 and nearly a quarter of the value of all merchandise exports.

Profits

Profitability has returned to the mineral sector in recent years, following a period of excess capacity (due in part to strong investment levels in the early eighties) and poor minerals prices.  Most metals prices rose strongly in 1987-88, though bulk minerals prices (for iron ore and coal) were weaker.  These price trends continued through 1988-89, with prices for steaming coal also firming.  Operating revenues rose 20 per cent during 1988-89 to $21,527 million and costs rose less than 15 per cent.  Many industries had previously restructured in the face of poor conditions and, as a result, employment in the minerals sector was still 2.6 per cent lower in 1988-89 than in 1985-86, despite strong expansion during the former year.  Most of these reductions occurred in the bulk minerals sector -- particularly coal.

Returns to shareholders' funds have gown steadily since 1982, rising rapidly in 1987-88 and 1988-89.  Overall the industry managed to reduce its debt-to-equity ratio from peak levels in 1985-86, thereby reducing interest service costs.  Total outstanding borrowings have continued to fall.  The combination of lower labour costs and reduced debt servicing has increased profitability from just 2.3 per cent of total industry revenue in 1981-52 to over 18 per cent in 1987-88.

The minerals resource sector is relatively capital intensive, accounting for over 6 per cent of total expenditure on non-dwelling construction and equipment, and employs 1 per cent of the workforce.  Table 1.4 presents the vital statistics for the minerals resource sector.

Table 1.4:  Key Statistics for the Mineral Resources Industry

Item of Interest	1985-86 *	1988-89 *	% change
Operating Revenue ($ million)	14,644	20,762	42
Total Assets at year end ($ million)	28,640	34,182	19
Borrowings at year end ($ million)	13,475	10,329	-23
Interest Expense ($ million)	1,220	952	-22
Net Profits ($ million)	557	2,885	418
Net Profit Return on shareholders' funds (%)	5.1	18.3	260
Effective after-tax return on average funds employed (%)	6.7	12.9	91
Effective after-tax return on average assets employed (%)	5.7	10.5	86
Expenditure on fixed assets ($ million)	2,016	3,079	52
Exploration expenditure ($ million)	232	425	83
Employees at year end	79,552	77,502	-3
Debt-to-equity ratio	1.3	0.6	-52
Index of mineral resources export prices	100	108	8

* Note:  values are in current dollars

Source:  Minerals Industry Survey, Australian Mining Industry Council, various issues.

1.2 INTERSECTORAL LINKAGES

The impacts of development in the mineral resource sector are far-reaching throughout the domestic economy, even though the industry itself is a relatively small employer of labour and capital.  Early consideration of these impacts was, following Gregory (1976), focussed on the negative effects of increased mineral export revenues on the real exchange rate, discussed under rubrics such as the "Gregory-thesis", "Dutch disease" and "de-industrialisation".  It was proposed that a boom in the minerals sector induced an appreciation of the real exchange rate which crowded out traditional exporting industries.  On balance a minerals sector boom may not have any short-run positive impact and, to the extent that it was short-lived, it may be detrimental in the long-run.  More recent discussions of the "general equilibrium" or economy-wide effects of such an expansion identify significant positive multiplier effects benefiting the economy generally. ⁽³⁾  The primary linkages from the minerals sector to the rest of the economy, identified in these works, are through supply-side effects, demand-side effects and the balance of payments.

Supply-side Considerations

The minerals sector draws inputs from the economy, both during the investment or development phase and during the production phase.  Figure 3 shows that roughly 45 per cent of total mineral resource revenue goes towards purchases of goods and services used to create value-added in the minerals industry.  Affected industries either directly supply inputs into the minerals development and production process, or supply inputs into other directly supplying industries.

A further 20 per cent of total mineral resource industry revenue is used to pay labour (both directly and indirectly).  These demands on domestic resources place pressure on wage costs, intermediate materials costs and capital costs facing other industries.  On the other hand, they directly add to the revenue of the supplying industries.  While some industries may contract in the face of rising costs, others expand, more than offsetting the effects of higher costs with higher demand for their services.

Demand-side Considerations

The most obvious demand-side effect is the increased income of workers caused directly by new jobs on offer and indirectly by higher real wages across the board as the demand pressures work through the labour market.  Secondly, increased profitability of mining projects will, in part, contribute to higher domestic earnings of the owners of capital.  Some of this increased income is directly spent, adding to total domestic demand.  Some is saved, increasing funds available for borrowing.

Government revenues increase from direct taxation of the minerals sector, and again indirectly from a larger overall tax base.  In 1988-89 governments directly collected $561 million in resource based taxes (mineral royalties, tenement and mining licence fees, and the coal export duty/research levy);  $1,399 million in income tax from mining companies;  a further $337 million in indirect taxes on companies;  and $1,319 million in charges for government supplied services.  In total, Federal and State governments collected more than $3.6 billion in revenue from the mining industry, not including $989 million in employee group taxes and $18 million in lenders' and shareholders' withholding taxes. ⁽⁴⁾

Balance of Payments and other Relative Price Considerations

The development and export of mineral resources is generally presumed to induce an appreciation of the real exchange rate.  During the investment phase demands on local funds increase the return to domestic savings, inducing a capital inflow and subsequent nominal exchange rate appreciation.  The larger the capital inflow (as the minerals development is more directly financed by overseas lenders) the smaller the domestic interest rate effect but the larger the exchange rate appreciation.  During the production stage, the increased prior investment generates increased mine output and, other things constant, increased export earnings.  The increased supply of foreign exchange maintains the strength of the domestic currency.  Offsetting this, in part, is the increased capital outflow generated by repayments on past borrowings and profits remittance abroad.  As noted above, the consequent real exchange rate appreciation may squeeze out established export and import-competing industries.  A subtle consideration is raised by Porter (1984) who notes that the mere fact that mineral deposits are developed and the ore exported does not necessarily lead to a currency appreciation, per se, if the increased wealth of the country (the value of the ore deposit) is already capitalised into share prices following the initial discoveries.  In this instance, minerals developments merely substitute an asset in the ground for another asset, foreign exchange, with no net change in wealth.

The general equilibrium models constructed to quantify these effects are usually multisectoral versions of fixed price/abundant factor models used in standard macroeconomic analysis.  One such model is that constructed by the Bureau of Industry Economics (1981) evaluating the effects on factor markets of minerals developments through the 1980s and 1990s.  The BIE calculated an employment multiplier of 4.2, an output multiplier of 1.3 and an income multiplier of 1.2.  Thus, under the assumption that relative prices do not change, a $100 million boost to minerals development and production will increase national output by $130 million and national income by $120 million.  Every 1,000 jobs created in the minerals sector generates 4,200 jobs nation wide.

Of course the feedback effects through prices can be quite large and the subsequent "crowding out" may considerably reduce the national benefits from minerals development.  The general equilibrium model used by Cook and Lees (1984), which is an extended and simplified version of the ORANI model, attempts to take account of some of these feedback effects.  Embedding the ORANI model in a simple national accounting framework, allowance is made for "inter-sectoral sales linkages, changes in relative prices, the scarcity of some factors of production, price-induced substitution by producers and consumers, and a link between national income and expenditure via balance of payments considerations".

Cook and Lees have thus made every effort to capture the important sectoral and macroeconomic linkages that affect the discussion.  Nonetheless, any model is inevitably stylised and care should be taken when interpreting the results.  Table 1.5 summarises key results of the Cook and Lees analysis.  The table shows percentage changes in key real aggregate variables following (a) a $100 million increase in minerals investment, half of which is funded by a capital inflow ($50 million);  and (b) a $100 million increase in minerals export earnings, half of which is remitted abroad in an increased capital outflow.

Table 1.5:  Percentage change in Key Real Aggregate Variables
following $100 million increase in minerals investment or exports *

	Minerals investment with $50 million capital inflow	Minerals exports with $50 million capital outflow
Real exchange rate index	-0.05	-0.07
Gross national expenditure	0.06	0.07
Total employment	0.01	0.04
Average annual real wage	0.02	0.06

* See preceding text

Source:  Cook and Lees (1984), pages 265-266

Further results in Cook and Lees demonstrate that the larger the capital inflows associated with minerals investment, the larger the short-run gains in terms of increased expenditure by Australians;  and the larger the capital outflows associated with the exports of minerals, the smaller the gains.  Of course, larger capital inflows during investment lead to larger capital outflows when that investment becomes productive.

As an example of the use of the above results, consider the general equilibrium effects of prohibiting further uranium mining in Kakadu National Park.  All operations for the recovery of minerals in the Park, including exploration, were prohibited by Commonwealth legislation in 1987.  At present, there is only one uranium mine, Ranger One, in operation but ore deposits at Jabiluka and Koongarra are ready for immediate retrieval.  Other known deposits of uranium show economic promise.  G.H. Sherrington (1989) reports that the Koongarra mine, ready since 1972, can produce 2000 tonnes of U3O8 a year and the Jabiluka mine can begin producing 3000 tonnes a year (subsequently rising to 9000 tonnes).  Based on 1987 results for the Ranger One mine, Koongarra and Jabiluka could produce export earnings of around $400 million a year.  Assuming a 50 per cent capital outflow, this would increase real gross national expenditure by 0.28 per cent, or almost $800 million in 1987 dollars;  employment by 0.16 per cent, or nearly 11,400 jobs;  and annual real wages by 0.24 per cent, or almost $60 a year in 1987.

The shortcomings of this type of analysis are apparent.  For example, it may not be possible to sell the additional U3O8 production at 1987 Ranger One prices.  More importantly, it is difficult to quantify the costs associated with exploration and mining in the Park.  On the other hand, the above figures probably understate the extent of total revenue from the uranium mines, as other minerals, particularly gold, would be produced.

This type of general equilibrium analysis, although highly stylised, does highlight the important sectoral linkages between individual sectors and the rest of the economy that need to be considered when imposing controls on any one sector.  It further provides "ball-park" figures which can be used as a basis for rational debate.

1.3 OWNERSHIP AND CONTROL

Much of the land in each State or Territory of Australia, and all the minerals found therein, is owned by the Crown (the State or Territorial Government).  This land is known as "Crown land".  The Crown also owns most of the minerals in land that is held privately.

Since each State Government is the major owner of minerals, each jurisdiction has established a separate administrative structure, headed by its own Minister of State.  Rights granted under the general mining legislation fall into three categories:  miner's rights, exploration rights, and mining rights or leases.  Miner's rights generally refer to an entitlement to prospect, stake claims and mine on Crown land (unoccupied or occupied, with minor variations in each case).  Exploration and mining rights or leases also include provision for such activities on private lands.

The Federal Government, which owns all land in the Territories, established ownership rights over all offshore areas with the Seas and Submerged Lands Act of 1973, thus asserting control over major petroleum and natural gas discoveries in offshore areas.

In addition the Federal Government has asserted control of matters relating to uranium under the Atomic Energy Act of 1953, which is based on the Federal Government's constitutional power over defence matters.  This power has not yet been tested as most uranium discoveries have been made on Territorial land. ⁽⁵⁾

Although most aspects of mining control are under State government jurisdiction, the Federal Government retains enormous influence over all aspects of mining through its use of power to control overseas trade, external affairs, banking, some environmental matters, Australian Heritage legislation and Aboriginal land rights.  In addition it exercises control over various aspects of trade that are the subject of international agreements or treaties.

All told, the mining industry is subject to a vast panoply of laws, regulations, government charges and control, administered both by Federal and State governments.  An Industries Assistance Commission Report (1988) identified no less than twenty-six different categories of State and Federal government intervention in mining activity.  The effects of such interventions on the operating costs of mining industries are considerable.  One industry representative notes that in the mid-1960s, where it was necessary only to liaise with a small number of government departments, discovery-to-production times were small enough to take advantage of temporarily favourable market conditions.  Now, it took up to ten years of negotiating with "30 or more departments and licensing authorities" before similar results could be achieved. ⁽⁶⁾  Not only have fixed costs associated with mining risen significantly, due to the increased administrative burden, the industry has lost a large degree of flexibility which further hampers overall profitability.  The Industry Commission (1990) has made a number of recommendations as to possible improvements in the exploration and mine development approval process aimed at reducing costs and increasing flexibility in the mining industry.

1.4 A FEDERAL GOVERNMENT RESOURCES POLICY

In a recent statement the Minister for Primary Industries and Energy outlined the Government's position with respect to resources (Kerin (1989)).  Mr Kerin states that the Federal Government has a firm commitment to the principle that individual resource exporters are in the best position to make decisions regarding the commercial development and marketing of Australia's resources.  However, such sentiments are tempered by the admonition that market practices must be in the national interest.  The Government sees itself as meeting its national interest responsibilities by:

1. protecting and promoting national interests through export control powers, considered primarily a power in reserve;  and
2. promoting national economic welfare through support to the export marketing endeavours of industry.

The first category of policy instrument, export controls, is the subject of this monograph and is dealt with extensively below.  In the second category, supporting the marketing endeavours of industry, falls the general macroeconomic approach of the Government.  The extent to which the dollar has been floated, financial markets deregulated and controls over foreign investment relaxed have all helped to enhance the competitiveness of domestic producers.  However, at times, other policy goals may be in direct conflict with the goal of promoting exports.  For example, a tight monetary policy, with a consequently overvalued exchange rate, hurts the short-run position of mineral resource exporters.

A number of other policies and initiatives in the second category are considered in some detail by the Industry Commission (1990).  Among them is the industrial relations policy of the Government which has succeeded, in the recent past, in holding down the level of industrial disputes in the country.  Unit labour costs under the various versions of the Accord have fallen considerably.

More micro-oriented policies aimed at further increasing productivity in the minerals, and other, exporting sectors are reforms in the transport and shipping arenas, tariff and taxation reform and policies directed at increasing the extent of value-added processing industries in mining.

At the international level, the Government works towards reducing market access restraints imposed by foreign governments.  This occurs both at the official level, through various GATT initiatives, for example, and at more informal levels.  At the national level, various marketing boards and advisory councils have been established.

Finally, the Government views itself as being in a unique position with respect to its ability to collect, collate and disseminate market knowledge or intelligence.  It collects a wide array of publicly released data, has access to individual and confidential firm data and sits in on various consultative forums with other countries.

On some occasions the national interest and the interests of the mineral resources sector are seen to clash.  The two most common causes are concern for the environment and Aboriginal land rights.  Issues relating to Aboriginal land rights, as they concern the Federal Government, apply only to the Commonwealth territories, such as the Northern Territory.  Legislation provides for the basic right of Aboriginal people to retain their racial identity, and thus they have been granted freehold title to certain land and are able to make claims in respect of other Crown land or leased land.  Permission to explore and mine will only be given subject to satisfactory negotiations between the industry and the relevant landowners.

The States have primary responsibility for environmental matters.  But where a project is likely to have a significant effect on the environment, the Federal Government can withhold, and in the past has withheld, export approval or foreign investment approval subject to an Environmental Impact Statement as required under the various environmental protection acts.

Overall, the Government characterises its resource policy as a fundamentally free market approach, tempered by responses to perceived failures in the unfettered unregulated economy.  These failures are apparently pervasive, requiring active management.  In Section 3 below we characterise the Government's perceptions of how the minerals markets fail.  Section 4 deals with the effectiveness of the policy tools adopted by the Government to combat these apparent failures.  The most direct of the policy tools are the controls on exports, to which we now turn.

2. EXPORT CONTROLS

The Customs Acts of 1901 empower the Governor-General to prohibit the exportation of goods, including mineral industry output, from Australia by:

1. prohibiting the exportation of specified goods absolutely;
2. prohibiting the exportation of specified goods to specified places;  or
3. prohibiting the exportation of specified goods unless prescribed conditions or restrictions are complied with.

In the case of minerals, this power to impose export controls was used sparingly until the 1970s.  The major application prior to then was an embargo placed on exports of iron ore in 1938.  All exploration for new iron ore deposits ceased until the embargo was lifted in 1965.  Export controls subsequently were used to set minimum prices for iron ore contract negotiations with Japan during the 1960s.  With the election of the Labor Government in 1972, the various ad hoc controls were replaced with general controls on all mineral exports, written into the Customs (Prohibited Exports) Regulations 1953-1973.  By 1980 the Regulations prohibited the exports of raw or semi-processed materials, hydrocarbons including petroleum, and certain metals unless written permission was granted by the Minister for Trade and Resources, or a person authorised by him. ⁽⁷⁾  The Regulations made special provision for uranium and nuclear materials.

However, by 1980 some of the controls were already being relaxed.  Exporters could obtain "blanket approval" for exports of some commodities, that is, they did not require approval for each particular contract, in the cases of bismuth, lead, manganese, mineral sands (where environmental concerns were satisfied), nickel, tungsten and zinc.  Some minerals were exempt from any form, of control:  gold, silver, minor metal (for example, molybdenum, cadmium, arsenic), and all industrial and construction minerals.

Since 1980, the Regulations have been considerably amended and generally weakened.  In June 1986 controls on tin were removed following the termination of quotas imposed by the International Tin Agreement.  Subsequently, controls on tungsten, produced jointly with tin, were removed.  In October 1987 controls were removed on primary forms of copper, lead, manganese, nickel and zinc.

Controls on exports of oil were relaxed in September 1987, and subsequently removed altogether in January 1988 with the discontinuation of the Import Parity Pricing Scheme.  Trade in crude oil and refined petroleum products is free except for trade with South Africa and provisions for control in the event of a national emergency.  Exports of liquefied petroleum gas (LPG) and liquefied natural gas (LNG) require prior approval, conditional on there being a domestic surplus.  In addition, LNG exporters are required to establish that the transactions are at arm's length world market prices.  Australia has abundant reserves of LNG.  Domestic supplies of LPG are dwindling.

At the end of 1989 the prohibition of exportation without permission only applies to:

alumina, bauxite, coal, copper scrap and alloy, ilmenite concentrates, iron ores (ores, concentrates and agglomerates), leucoxene concentrates, monzanite concentrates, rutile, common salt, xenotime concentrates, zircon and liquefied petroleum and natural gas.

Uranium and related nuclear fuels are still subject to strict control.

Some restrictions apply to exports of many commodities to particular countries, primarily South Africa and Namibia, and, in some instances, France.

The imposition of the controls as they affect coal, iron ore, bauxite and alumina, and uranium is discussed in detail below.

2.1 EXPORT CONTROLS ON COAL

Apart from controls on uranium, export controls have had the largest impact on the coal industry.  Coal is the largest single Australian mineral export, produced under conditions conducive to the formation of competing interests groups.

Changes introduced to the administration of export controls in October 1978, by the then Deputy Prime Minister and Minister for Trade and Resources, the Rt Hon J.D. Anthony, required coal producers to negotiate with buyers within a set of "parameters" determined by the Minister.  These included prices, tonnage and duration of contracts.  Approval for negotiation had to be obtained before negotiations began.  Variations to the parameters arising during negotiations had to be approved as they were met.

The Government's reasons for imposing such a strict regime, as they were for the previous Labor Government which imposed the controls, were that domestic coal producers were a fragmented disorganised bunch facing a concerted, unified and well co-ordinated group of buyers -- mainly from Japan.  Competition between domestic producers drove agreed prices down below those which were obtainable under a more monopolistic approach.  Thus, revenue from coal mining was not being maximised and many of the gains from trade were being transferred to the buyers.

In September 1986, the Labor Government relaxed the controls so that coal companies are now able to conduct negotiations on their own accord.  Sellers do not have to obtain prior approval for contract negotiations, but all settled contracts subsequently have to obtain Government approval.  The Minister for Primary Industries and Energy retains the power to reject contracts entered into which are not in the national interest.  Having obtained approved contracts, and as long as the Department of Primary Industry and Energy has the relevant documentation in hand, individual shipments no longer require export permits or licences.  Export permits are issued on an annual basis, for shipments falling within the purview of a single contract;  or, under some circumstances, for the balance of the tonnage to be shipped under the contract agreement.

In November 1986 approval was withheld on two contracts, which were subsequently renegotiated.  Throughout 1987, more contracts did not obtain approval.  The Government was clearly exercising its power to administer contracts during this period of recession in the coal industry.

Some of the harshest critics of the coal industry have been the coal unions.  They have consistently asserted that the domestic coal producers unproductively compete amongst themselves to the detriment of the national interest.  A union representative from the Miners' Federation has commented that during 1986-87 the coal producers accepted lower prices for increased tonnage in contracts which led to the closure of many small mines (see Maitland (1988)).  The unions have demanded the re-imposition of strict export controls and the establishment of a national coal marketing board along the lines of some agricultural industry marketing schemes.  The Government has resisted the pressure to establish such a national coal marketing authority but, in part succumbing to union pressure, acted to strengthen its control over the coal industry.  In May 1988 the Minister for Primary Industries and Energy, Mr Kerin, announced the establishment of the Australian Coal Marketing and Technology Council.  An advisory body, the Council reports directly to the Minister on measures designed to enhance Australia's export trade in coal.

2.2 COAL EXPORT DUTY

In addition to direct controls on the export of coal, the Federal Government imposes coal export duties.  These were first imposed in 1975, payable on all export coal, the value of the duty depending on the quality of the coal.  The reason behind the duty was that windfall profits accruing to the coal industry as result of the oil crisis would thus be distributed among the community at large.  The Government directed the policy at high profit mines, emphasising that the duties should not be passed on through higher export prices.

The duty and its coverage have been changed a number of times since its inception.  Now, an export duty of $3.50 per tonne applies to high quality coking coal with a carbon content equal to or greater than 85 per cent which is produced from open cut mines above a depth of 60 metres opened prior to 1 July 1980.  Since May 1984, those producers who blend substantial quantities of underground mined coal in their export operations are exempt from the duty.

With all the qualifications, the duty is now only applicable to coal exported from some open cut mines in the Bowen Basin of central Queensland.  As open cut mines are dug to deeper depths the export duty revenues fall.

2.3 EXPORT CONTROLS ON IRON ORE

The iron ore industry was first subject to export controls when, in 1938, the Government announced an embargo on exports because it was determined that, given the then available resources, there were insufficient supplies to meet forecast domestic demand.  All exploration subsequently ceased.  The embargo remained in effect until it was relaxed in 1960 and then finally removed in 1965.  Intensive exploration followed, boosting estimated reserves from 370 million tonnes in 1960 to almost 20,000 million tonnes in 1969.  Today there are proven and inferred reserves totalling almost 37,000 million tonnes. ⁽⁸⁾  Since 1965 there has been a dramatic growth in exports, stimulated in large part by the very rapid expansion of the Japanese steel industry.  However, Japan's significance as Australia's largest customer for iron ore is diminishing with total iron exports to Japan declining both in absolute terms and as a fraction of total iron ore exports over the 1980s.

The iron ore industry, along with the coal and bauxite industries, was subjected to rather more stringent export control in 1978 because of the perception held by the then Minister for Trade and Resources that the iron producers had not collaborated sufficiently in order to obtain the best possible contracts.  From October 1978 all contracts had to be negotiated within a set of parameters determined by the Minister.

In 1981 agreement was reached between the Government and industry such that the controls were relaxed.  Firms no longer had to negotiate within previously determined parameters.  As with the current system for coal, the Government monitors the market with the view of withholding approval of signed contracts if they are seen not to be in the national interest.  Approval of contracts for the sale of iron ore is the responsibility of the Minister for Resources.  However, the Department of Primary Industries and Energy remains the administrative focus of the policy.

It would seem that domestic iron ore producers have been acting in the national interest as, in contradistinction to the coal industry, no iron ore contracts have been rejected for a number of years.

2.4 EXPORT CONTROLS ON BAUXITE AND ALUMINA

Controls on the export of bauxite and alumina have been imposed at the same time and on the same terms as controls on exports of coal.  Up to September 1986 potential exporters had to obtain prior approval of their proposed negotiating parameters.  Since that time exporters have been free to conduct negotiations "in accordance with their own commercial judgements", while still having to seek approval for export following the completion of negotiations.  Details of export transactions and related market information must be forwarded to the Department of Primary Industries and Energy and approval of contracts is given by the Minister for Resources.

Aluminium is not subject to export control, probably because when the controls were first exercised aluminium exports from Australia were small.  This is not the case now, however.  In 1982, exports of alumina totalled roughly $1.1 billion whereas aluminium exports totalled only $0.2 billion, or less than one fifth of the former.  By 1988, alumina exports had risen to $1.8 billion (a 64 per cent increase) but exports of aluminium surged to $2.2 billion (a 1,000 per cent increase).  This development, when in its early stages, did not escape the notice of the Senate Standing Committee on National Resources which, in 1981, recommended that coverage of export controls be extended to aluminium metal.  The Government has not at this time done so and, given its prevailing mood of deregulation, appears unlikely to do so in the future.

The motivation for controlling exports of bauxite and alumina was somewhat different from the cases of coal and iron ore.  In the latter cases the reasons related to perceived imperfections in the market arising from market power generated by collusive actions amongst buyers or the ineffective use of domestic market power.  In the case of bauxite and alumina the market structure was such that a very small number of vertically integrated companies controlled the industry from bauxite mine production through to aluminium refining.  With relatively few "arm's length" transactions the opportunities for tax avoidance by transfer pricing and other schemes may be great.

In Australia two companies have been involved in claims of transfer pricing.  The first case involved Comalco, through its wholly owned subsidiary the Commonwealth Aluminium Corporation (CAC), which was charged with entering into marketing arrangements whereby it sold bauxite to two Japanese companies through a Hong Kong subsidiary jointly owned by Comalco and the Japanese purchasers.  The price at which bauxite was sold to the Hong Kong company by Comalco was less than the price at which the same bauxite was sold to the Japanese companies.  As it turned out, this marketing arrangement was seen as a device for gaining entry into the Japanese market, not a tax avoidance scheme.  It resulted in only marginally reduced income taxes paid in Australia because the profits from the pricing scheme were distributed between Comalco and the purchasing companies.

The second example involved the Swiss company, Alusuisse, and exports of alumina from Gove in the Northern Territory.  Alusuisse is one of the world's six major integrated aluminium producers ⁽⁹⁾ and holds 70 per cent of the Gove project through a wholly-owned subsidiary, Austraswiss.  The remaining 30 per cent share is held by Gove Aluminium Limited, in which CSR holds the major share.  It had been claimed, by the Icelandic Government among others, ⁽¹⁰⁾ that the price of alumina out of Gove "increased at sea" before arrival at Alusuisse's refinery in Iceland and that freight rates had been manipulated so that taxable income in both Iceland and Australia had been minimised.  In December 1980 the Icelandic Government entered into negotiations with Alusuisse over an alleged $US47.5 million shortfall in taxable income in Iceland because of the pricing practices.  A settlement was reached in 1984 wherein Alusuisse paid higher prices for electricity into the smelter and also paid a cash settlement to the Government.

In Australia, the Senate Standing Committee on National Resources recommended, in 1981, that all contracts predating export controls be renegotiated.  Alusuisse resisted such attempts with respect to alumina sales, although progress was made on some exports of bauxite.  A review announced by the Government in 1986 provided for a number of options with respect to the contract sales.  Although confidential, the report appears to have prompted action from Alusuisse.  The Government announced in February 1988 that it had renegotiated the pricing arrangement whereby Austraswiss would receive increased prices for alumina exports from Gove for the remaining tenure of the contract, due to expire in 1992.

In both the Comalco and the Alusuisse cases the contracts which became the subject of dispute were entered into prior to the imposition of export controls in 1973.  The Government, at that time, decided against requiring the renegotiation of extant contracts.

2.5 EXPORT CONTROLS ON URANIUM

The history and motivation for uranium export controls are, again, somewhat different from the controls on coal and iron ore.  The result is a level of government intervention far in excess of that in any other mineral industry.  A clear statement of Government policy with respect to uranium mining can be found in Livingstone (1982), a paper delivered in his capacity as the Chairman of the Australian Export Office, wherein he notes that companies interested in developing Australian uranium resources must satisfy the following three requirements:

1. compliance with foreign investment guidelines, which in the case of uranium requires 75 per cent domestic equity and control for the development of pre-1977 discoveries and 100 per cent Australian equity for new discoveries, unless there are special circumstances;
2. compliance with both Federal and State Government environmental procedures;  and
3. where appropriate, conclusion of satisfactory arrangements with the Aboriginal people.

Various forms of these official restrictions apply to all other forms of mining (foreign investment guidelines are generally weaker elsewhere), but uranium mining is subject to further controls as a result of international commitments entered into by the Australian Government.  Companies wishing to negotiate export contracts can do so only with buyers in countries that have entered into bilateral nuclear safeguards agreements with Australia. ⁽¹¹⁾  Having negotiated a contract, final approval of the conditions of the sale is required from the Minister for Primary Industries and Energy.

Unlike the negotiating requirements for coal, iron ore and bauxite/alumina, the uranium industry has been restricted by an explicit "floor-price" policy.  That is, a fixed price for uranium was established and announced by the Government in the late 1970s which dictated the minimum acceptable price for uranium sales.  This mechanism was much more formal than simply having negotiating parameters approved prior to contract discussions, as was the case with coal and iron ore contracts.  At the time the floor-price policy was initially imposed the uranium market was very strong, particularly in the United States where there were attempts at holding down prices with antitrust actions against major suppliers.  Since a defence against antitrust behaviour in U.S. courts has been "foreign sovereign compulsion", and a Federally mandated fixed price satisfies that criterion, the floor-price policy has been described as a way of protecting domestic producers against antitrust actions in customer countries.  Unfortunately, the floor price for uranium has remained fixed above market prices almost since its inception.  Market conditions changed dramatically in the late 1970s and through the 1980s with steadily falling uranium prices.

On September 4 1989, the Minister for Primary Industries and Energy, Mr Kerin, announced what amounts to an abandonment of the floor-price mechanism.  Departmental approval for new uranium contracts is now more in line with the practices in the coal and bauxite/alumina industries where contract approval considers the market conditions in which the contracts were negotiated.  The floor-price requirements in all other existing contracts, however, remained unchanged.

Uranium is also different in that shipments under approved contracts still require individual export permits or licences, granted at the Ministerial level.  One reason for this is that the mode and form of transport are important with respect to Australia's obligations under its various bilateral nuclear safeguards treaties, given the complexities of international trade in nuclear material.  An important element of the safeguards is the "equivalence principle" which attempts to ensure that at all times there is a known quantity of nuclear material identified as being subject to Australian safeguards treaties, even when mixed and interspersed with material from other sources.  This process places an onerous administrative burden on exporting companies.  It has been suggested that a simplification of this procedure, removing it from direct Ministerial control and placing it in the regular working of the Department of Primary Industries and Energy, is likely.

Confusing the issue of export controls on uranium mining for commercial and non-proliferation reasons, is the so-called "three mines policy" of the current Labor Government.  Existing ALP policy is that uranium production is limited to three named mines -- Ranger and Narbalek in the Northern Territory and Olympic Dam at Roxby Downs in South Australia.  Currently, Narbalek has all but exhausted its stock of ore and is largely restricted to processing lower grade and stockpiled ore.  There is a long list of potentially viable uranium mines, including Jabiluka and Koongarra in the Northern Territory;  Yeelirrie, Kyntyre and Lake Way in Western Australia;  Honeymoon and Beverley in South Australia;  and Ben Lomond and others in Queensland.  Uranium discoveries at these various sites date back to the early 1970s.  Domestic production from these mines is deterred because of the certain failure to obtain export permits, irrespective of the producers' ability to find contracts at prevailing floor prices with suitable customers.  The Government has justified the "three mines policy" at various times during Parliamentary debate, ⁽¹²⁾ arguing that unfettered competition between domestic producers would drive prices down, apparently reducing total revenue from uranium sales and thereby harming the national interest.  With powers over the Territorial lands, aspects of environmental policies and Aboriginal land rights, the Government has always found reasons for refusing export permits.

International political issues, other than those associated with nuclear non-proliferation, have also had an impact on the uranium industry.  The banning of uranium exports to France is a particular instance.  This ban has recently been lifted on existing contracts, although a ban still exists on new sales of uranium to France.

2.6 URANIUM EXPORT DUTY

Exports of uranium concentrate from the Alligator Rivers Region of the Northern Territory are also subject to an export duty.  This duty was imposed at the rate of $0.11 per kg in 1980.  It was lifted to $0.80 per kg in 1987, gradually rising to $1.30 in 1990.

The revenue raised by this duty is minimal, totalling just $351,468 in 1985-86 and $3,102,976 in 1986-87.  The funds are earmarked for partially offsetting the costs of monitoring the environment in the area mined.  Such a charge is not levied on uranium exports from Roxby Downs.

3. MARKET FAILURE AND EXPORT CONTROLS

Although not normally acknowledged as such, export controls, in the form of restrictions on permission to export, have been, and continue to be, applied where the Government has perceived instances of market failure that apparently result in welfare losses to the community at large leading to a "diminution of the national interest".  A number of factors contributing to market failure have been identified by the Government.  These are:

1. the failure of domestic firms to achieve optimal (profit-maximising) prices because of their apparent inability to act as a cartel in markets where Australia has significant market power, that is, the failure of domestic interests to act as monopolists where it is possible;
2. the acceptance of lower prices by domestic producers in markets where Australia faces buyers with significant market power, that is, selling in monopsonised markets;
3. the operation of markets where vertically integrated multi-national firms can indulge in transfer pricing schemes, subverting the competitive process;
4. the failure of domestic producers to internalise social costs associated with environmental degradation resulting from mining operations;
5. the failure to recognise the rights of traditional owners of the land to be mined, where they lack either the knowledge or resources to enforce such property rights on their own behalf;
6. the failure of individual firms to internalise the national costs, strategic or otherwise, of failing to ensure adequate domestic supplies of minerals;  and
7. the failure of individual firms, or national industries as a whole, to internalise the costs associated with world-wide proliferation of nuclear materials.

The first three instances concern the failure of the competitive process because of particular market structures.  The latter four instances are examples of market failure resulting from well recognised and well understood externalities.  Some of these more important cases of market failure and their effects on national welfare are analysed below.  Discussion of the existence of such market failures in the case of Australia and the effectiveness of current "solutions" as they apply to the mining industries subject to export controls is deferred until Section 4.

3.1 DOMESTIC EXPORT CARTELS

It has been claimed in the cases of coal and iron ore that competition between domestic producers drives down the price received for mineral output in a way that benefits only the foreign demanders.  J.B. Maitland, speaking for the Miners' Federation in March 1988 stated:

1986-87 saw the negotiation of very low export prices for Australian coal.  The question raised in many cases is whether the Australian negotiators were defeated by some international market price they had to meet.  The answer is that the Australians were able to better the prices offered by the international competition, but continued to cut prices against each other.  The removal of export controls enabled the large mines to thus exchange price for tonnage.

The Miners' Union has been a vocal advocate for the establishment of a national coal authority, a government-run industry cartel, which would be directed to impose what amounts to an optimal export tariff.  The argument runs as follows.

When an industry faces demand conditions that are relatively insensitive to price changes -- an increase in price does not generate a proportionately large fall in quantity demanded so that total expenditure on the good rises -- then the industry as a whole can act like a monopolist.  The industry is said to wield market power.  Industry self-interest is pursued by reducing the quantity of output supplied, increasing the price and thereby increasing industry profits.  A cartel is formed when different firms or producers collude in cutting back output so that prices rise and each firm's profits rise.  OPEC is an example of a cartel formed by the explicit collusion of member governments in the international oil industry.

In the case where the demanders in the market are all foreigners and the suppliers are all domestic firms, the increase in industry revenue from the formation of a cartel translates directly into an increase in national income because the value added in the industry rises with no addition to domestic costs elsewhere.

Cartels are well known to be unstable, however, because each member firm has a strong incentive to cheat on the other members, increasing its own profits at the expense of the cartel at large.  This temptation arises precisely because the actions of the cartel, by reducing supply, have increased the market price above what would have prevailed with free competition.  If all member suppliers succumb to the temptation to cheat, then the market price is driven down below the original competitive price.  Cartel members must maintain constant vigilance to ensure that other members are not cheating on them.  Thus cartels are most likely to be effective, that is, exhibit some stability, when there are just a few members so that the costs of monitoring are low.  If this is not the case, then it is likely that individual suppliers, or otherwise interested parties who, by themselves, cannot affect the cartel outcome, will call for a national body, such as a marketing board, to monitor the cartel to ensure compliance.

Alternatively, where the government recognises the possibility for cartel-like behaviour and industry does not, it can attempt to ensure the outcome that maximises national income by regulating the quantity available for export or possibly by imposing an export tax.  The export tax achieves the same end result of increasing the price to the consumer, in this instance foreigners, and thus increases industry revenue when the domestic industry wields sufficient market power.

With an export tax, domestic consumers gain through lower prices on domestic markets when some of the production once destined for world market is diverted back into the domestic market because of the higher prices abroad.  The government gains because it collects tax revenues but domestic producers lose profits -- sales are down overall.  If the world price for the exported goods rises, which will happen if the domestic country has some market power, then foreign buyers are also worse off.  On balance, as long as the export price on world markets rises sufficiently, the domestic country as a whole can be better off because the gains to consumers and the government outweigh the losses to producers.  The more inelastic is foreign demand, that is, the more market power has the domestic industry, the more likely is the domestic country to be a net gainer.  On the other hand, if foreign demand is elastic, that is, sensitive to price changes so that the domestic industry has little market power, the domestic country is a net loser -- domestic producer losses exceed domestic consumer and government gains.

A similar outcome can be achieved by imposing direct quantity controls or quotas on exports, perhaps by restricting export licences.  In this case the government can restrict total exports to a level which causes the price on foreign markets to rise to the amount that would have been charged if an export tax had been directly imposed.  The difference here, of course, is that the domestic exporters gain in increased profits what was previously government revenue.  Thus, even though domestic producers lose profits on the domestic market, if foreign demand is inelastic enough, they can recoup enough on world markets to make them better off overall.  If foreign demand is elastic, however, the domestic producers remain net losers and the country as a whole is worse off.  Of course, the government could always appropriate the extra revenue accruing to the exporting companies by auctioning off the licences to export, as this amount is the value of the monopoly profits to domestic firms from trading with the rest of the world under the quota scheme.

Another policy designed to achieve the same outcome is a floor-price policy where the minimum export price in any approved contract is restricted to be greater than or equal to the price achieved on the world markets by either the export tax or the equivalent export quota.

All the above government policies attempt to achieve the profit or national income maximising outcome that appears to be unattainable by the individual enterprises concerned because of internal competition.  The market power exploitable by the industry as a whole is not being internalised by the constituent firms.  In practice, successive Australian governments have attempted to overcome this "failure" by some combination of export quotas and minimum price rules.

3.2 FOREIGN BUYER CARTELS

The mining industry has not only stood accused of failing to maximise national income in their contract negotiations by failing to exploit extant market power, but has apparently allowed itself to be subject to the coordinated buying practices of foreigners, whereby they exploit their market power as consumers.  This became a concern during the 1972-74 commodities boom when prices for Australian coal and iron ore were unfavourably compared with prices received by exporters from the United States. ⁽¹³⁾  The practice apparently continues today because, throughout the 1980s, exports of Australian steaming and coking coal to Japan consistently achieve lower per unit exports prices than do Japanese coal imports from the United States. ⁽¹⁴⁾  The claim is that buyers of Australian resources, from Japan in particular, present a unified front in contract negotiations and, because they represent a large quantity of total purchases, drive prices down thereby garnering all the gains from trade.  The practice of Japanese steel mills, whereby they negotiate as a group in each separate supply market, coupled with the evidence of price differentials, is offered as clear proof of the exercise of foreign consumer market power.  The Australian sellers, a fragmented disorganised lot as evidenced by their inability to form supplier cartels, do little to counter this particular form of market failure.  The Minister For Primary Industries and Energy, Mr Kerin, explicitly stated these views on March 14 1989.  Referring to export controls on coal, iron ore, bauxite and alumina, he said that:

Controls on these commodities have been retained partly because of their importance to the economy and to our trade.  But they also remain because the marketing of these minerals is subject to observed market imperfections.

Coordinated buying practices, which can afford undue bargaining power, and, in some cases, the existence of vertically integrated multi-national industries are both major problems.

In a competitive market, buyers compete against each other in bidding for the limited quantity of the good available for sale.  When demand increases all buyers pay the higher price on all units sold.  Thus, an increase in demand requires purchasers not only to pay more to extract the extra units from suppliers, but also requires that this extra marginal cost is applied to all previous or infra-marginal sales.  If the individual buyers got together they would recognise the effects of their actions on each other and internalise them.  Just as a supplier with market power reduces supply and drives up the prices, a buyer, or coordinated group of buyers, reduces demand and drives down the price.  Domestic suppliers therefore sell a smaller quantity at a lower price.

Policies that overcome this form of market failure are similar to those discussed in the case of optimal export taxes.  In this instance the Government could subsidise domestic production, or place a minimum on the quantity exported or impose a minimum price.  The analyses follow as above.

3.3 VERTICAL INTEGRATION

Vertical integration, as it exists in the bauxite/alumina/aluminium industry, provides another means whereby producers can circumvent the market process, obscuring and distorting information in such a way that national tax obligations are minimised.

Transfer pricing by multinational firms is the most obvious way vertically integrated companies can minimise overall tax obligations.  One method is to legally incorporate the raw material supplier and the final processor separately in different countries with different company tax systems.  The price of the raw material to the supplier is then adjusted to lower the average rate of tax on the joint companies.  If the country with the raw materials has the highest company tax rate, the vertically integrated firm sells the inputs to itself at a relatively low price, transferring profits out of the highly taxed company into the lower taxed final processing company.

More insidious, by vertically integrating, multinational companies remove transactions from the market place thereby removing them from the scrutiny of other market participants or observers.  The option of arbitrarily specifying prices to lower taxes at both ends of the transaction is then possible.  The case involving Alusuisse and Austraswiss, with the transaction concerning Australian bauxite as an input into alumina production in Iceland, is one such example.  By paying low prices to the bauxite supplier, Austraswiss, profits and therefore tax obligations were lowered in Australia.  Then, as the price for the raw material input "increased at sea" the costs of the alumina producer in Iceland, Alusuisse, rose lowering reported profits and taxable income there.

Transfer pricing opportunities exist whenever companies are faced with differing tax systems over different phases of production.  Opportunities for fraud exist whenever the discipline of the market is circumvented.  The obvious solution to the former problem is to rationalise, across national boundaries, the differential tax systems that multinational companies are confronted with.  To date, this solution has not been attainable because of the differing market philosophies of the governments involved or simply because of administrative difficulties.  Thus the only recourse might be scrutiny of export earnings and reported profits.  Similarly, scrutiny seems the only solution when transactions are removed from the market entirely.  Whether such scrutiny is best applied before contracts are approved or after individual transactions are finalised is discussed below.

3.4 EXTERNALITIES

The failure of domestic producers to appropriately consider the costs of environmental damage caused by mining, the contribution to the proliferation of nuclear materials world-wide, and the failure to consider the national strategic costs of diminished or uncertain domestic supply of raw materials, are all examples of market failure in a traditional "externality" framework -- producers and consumers are not appropriately calculating or incorporating the true social costs of their actions.  The market thus provides too much or too little mining and/or export of some raw materials.  In these circumstances, some form of government regulation might improve on the market outcome.

The issue of what are appropriate policies depends on the exact nature of the problem.  As recognised in a recent policy report prepared by the Treasury Department, ⁽¹⁵⁾ solutions ought to address the cause of the problem as directly as possible.  For example, in the case of environmental damage from mining, the social costs are reasonably considered to be localised, that is, specific to the area mined, and related directly to the level of mining but only indirectly to the level of exports.  With respect to uranium mining, the costs are more appropriately global, especially since Australia does not itself manufacture nuclear weapons.  However, the costs are directly related to the availability of nuclear fuels world-wide and only indirectly related to the level of Australian exports.  It is uniformly the case that policies in Australia have been directed at the indirect export market and not at the source of the problem.

Consider the case of environmental damage from mining.  The problem arises because the mining company does not acknowledge the (negative) value to the community of the by-product, environmental damage, created in the mining process.  Fundamentally, property rights over this unwanted output have not been defined and assigned.  A variety of measures designed to correct this market failure are discussed in a number of places, including Treasury (1990) and the Industry Commission (1990).  The former report emphasises that any feasible and workable measure will directly address the source of the problem, and will probably take the form of "market based measures such as charges or emissions rights".  Thus, a production related tax might appropriately address this particular problem.

The socially responsible outcome cannot be achieved by a tax, or any other form of regulation, on exports.  The export tax causes some of the mine output to be redirected to the domestic market, lowering prices there and inducing domestic consumers to increase their consumption level.  Thus, while sales to foreigners might be reduced to an appropriate level, sales to domestic consumers increase to undesirable levels.  A production tax, on the other hand, presents the same price to domestic and foreign consumers so that the desirable level of sales is achieved in both markets.

Other policies directed at the level of exports, and not the level of production, such as a quota on exports or a floor-price policy, result in the same inefficiencies.  The difference merely revolves around the distribution of income, as is also true in the case of policies designed to address monopolies and cartels.

These results follow in like fashion in the case where Australia has some market power in the mineral markets under consideration.  In this instance, the price of the exports on world markets rises and the price reduction in the domestic country as a result of the export tax is lower.  Consequently, it may require a larger per unit export tax to achieve the same reduction in domestic production.  However, since the export tax extracts monopoly profits from the rest of the world (if the pricing policies of the domestic producers are not already doing this) then it may be possible that the extra government revenue from the export tax is sufficient to cover the environmental costs of production that are being ignored by private companies.  In this situation it might appear that the domestic country gets the rest of the world to pay for the self-inflicted environmental damage.  This is not the case however.  The increase in revenue from the export tax results because of sub-optimal behaviour in the first place, not cartelising where possible as explained in Section 3.1 above.  The export tax can correct for this but we still are left with the efficiency loss, as described immediately above, because the underlying source of the externality is not addressed.

The externality associated with Australia's contribution to world proliferation of nuclear material is somewhat more complicated as the unmet social costs pertain both domestically and abroad.  The dangers of nuclear contamination/destruction are global because mining of uranium anywhere is presumed to contribute to the higher probability of holocaust, thus the social costs should be considered in both domestic and foreign markets.  To the extent that these costs are not considered anywhere, worldwide production of uranium is too high and the cost of uranium too low.

If one exporting country admits to its social responsibilities, however, when the rest of the world does not, and unilaterally imposes a production tax or an export tax, then it alone may suffer with no appreciable improvement in world welfare.  It simply vacates a segment of the market which is filled by some other producer with no appreciable change in world production or consumption of uranium.  In the case where the domestic country has some market power then world prices rise, with a consequent reduction in world consumption and an increase in world production.  However, if the commodity involved is consumed domestically, then the domestic price also falls as output previously sold on world markets is dumped at home.  Unless the export tax is coupled with other regulatory measures at home, domestic consumption increases.  The rise in domestic consumption acts to offset the decline in foreign consumption.  The rise in rest-of-the-world production offsets the decline in domestic production.  Thus the social gains might be minimal because the total quantity of uranium consumed worldwide varies little.  It simply comes from different, higher cost, sources.

In any of the commonly addressed examples of externalities, an export tax by itself, or some combination of controls over export quantity and price, will not result in a socially optimal outcome.  The source of the problem lies in the faulty evaluation of either the benefits or the costs of consuming and producing the resource.  A much better approach is to address the market failure directly.

4. EVALUATING CURRENT POLICIES

Current policies should be evaluated according to the following criteria:

1. if markets fail in the ways identified by the government, do current interventions eliminate those failures?;  and
2. more fundamentally, do the types of market failure for which we have interventions exist?

We consider both these questions below.

4.1 OPTIMAL POLICIES WHERE MARKET FAILURE EXISTS

Market failures identified by the Australian Government, as they relate to the mineral resource industries, fall into two broad classes.  The first is market structure related:  the failure of domestic industries to exploit extant market power;  the exploitation of domestic industries by foreign buyers with market power;  and the exploitation of non-market transactions for purposes of defrauding the government of taxation revenue.

The second class of market failure relates to outcomes where some social cost or benefit is not being internalised by producers or consumers of Australian minerals.  These failures lead to sub-optimal production, consumption and/or export levels.  They include the unmet costs of damage to the environment from mining;  the increased dangers associated with mining nuclear fuels;  the depletion of strategic reserves or loss of national sovereignty;  and the overall excess rates of exhaustion of domestic resources.

These two classes of market failure differ in one important respect -- quantity controls and direct price controls on exports can potentially eliminate the first set of problems but they cannot do so in the second set of cases.  Thus one might be able to make a supporting case for current Government policies in some circumstances.  However, even in the case of market structure breakdowns, quantity controls and direct price controls on exports will generally be inferior policies to export tax/subsidy policies.

Market-structure-induced Failures

Section 3.1 above shows that, when domestic firms are not acting cooperatively to impose optimal "export taxes" the government can achieve the same result with any of an export tax, an export quota, or a floor price.  The major difference in the policies, on the assumption that the world is static, is one of income distribution -- an export tax generates revenues for the government, whereas a quota or floor-price policy benefits producers.  Whether this is good or bad depends largely on one's view of an equitable distribution of income.  If the money goes to the government then presumably the general public benefits directly.  If the money goes to the firms, the public might benefit only indirectly, if at all, possibly as a result of greater profits disbursements or overall increased levels of activity.

However, the world is not static and consideration of dynamic responses reduces the attractiveness of direct price and quantity controls when tax/subsidy or other market-based policies are available.  In a changing economic environment, the latter policies confer much more flexibility and discretion on consumers and producers than do direct controls.  Private agents are usually in a much better position to act quickly in the face of changing market conditions.  If market-based interventions are well chosen, producers and consumers, acting in their own interests, can quickly and efficiently bring about the optimal outcome that would otherwise entail considerable effort on the part of the government and administration.

In the case where the domestic industry fails to act optimally as a cartel, the government could impose an export tax which increases the price to foreigners and achieves the same result as if the industry had cartelised.  An equivalent outcome, with a different distribution of income, could have been attained by an export licensing system which restricts the total quantity of exports to the same amount as would have obtained under an appropriate tax.  Or a floor-price scheme, set at the level which would have applied with the appropriate export tax, would do a similar job.

If world demand unexpectedly declined, then the tax policy, given that it was appropriately designed in the first instance, would remain the optimal policy.  The tax inclusive price would adjust to clear the market at the profit maximising level which, with reduced foreign demand, would require a lower price overall for domestic producers to maintain market share.  A floor-price policy would not achieve the same result because the domestic price, by decree, cannot be lowered.  Similarly, the quota policy would no longer be appropriate because, given that export licences had already been issued under different market circumstances, too many exports would now be permitted.  To rectify the situation, the government would need to identify the new state of world demand and institute a new quota scheme.  Since producers were already licensed to export a larger quantity than warranted under the new scheme, it would be necessary to revoke some export licences.  Just how this might be equitably achieved is a difficult question.  As quotas confer monopoly profits on those holding the export licences, it would be very difficult, politically, to reduce the current level of quotas by revoking existing licences.

If, instead, the level of foreign demand rose, exports and the price received for them would rise, as would the amount of tax revenue collected.  Under the quota policy, on the other hand, exports would be restricted to a sub-optimal level and the quota policy would become progressively more restrictive.  As this occurred, industry profits would be less than they otherwise could be and we would observe considerable effort and expenditure coming from the industry as it lobbied the government to issue more export licences.  Considerable resources would be diverted into unproductive rent-seeking activity.  The opportunity for, and probability of, corrupt practice concomitantly rise.

Direct price and quantity controls require considerable fine-tuning to ensure the best outcome whenever cost and demand conditions are changing.  The optimal tax, on the other hand, need only be specified once, in the form of a tax schedule, and the market can be left to determine prices and quantities.  In Australia's case, since existing policies often contain both a quota on exports and a floor price (either explicit or implicit, and enforced via the contract approval process), it is unlikely that the optimal revenue-maximising solution obtains at any point in time given that foreign demand is constantly shifting both up and down.

A case in point is the Australian uranium mining industry.  A floor price of $US31 per pound was established in the late 1970s when the uranium market was strong.  Shortly thereafter the market weakened considerably and world prices have steadily fallen -- dropping to an average of $US16 per pound, which by 1987 was slightly over half the Australian price.  As a result, Australia with over 30 per cent of the western world's reserves of uranium has just 10 per cent of the world uranium market.  Under the pressure of contract renegotiations involving the Ranger mine, the Government approved a reduction in the floor price to $US26 per pound on September 4, 1989.  Almost immediately thereafter, new contracts were announced by the proprietors of the Roxby Downs mine at Olympic Dam.  It would appear therefore that the floor price was, in fact, restricting the quantity of exports.  If the floor price began at an optimal level it could not remain so when market conditions changed and the floor price did not.

Another issue concerns the information requirements necessary to enact an optimal policy in the first instance.  For a given level of world demand the same informational requirements are placed on the officiating Government department irrespective of which policy tool is chosen.  The policy-maker, in all cases, must correctly identify the current state of world demand and act on this information.  Given that an optimal policy is enacted to begin with, the optimal export tax requires no further intervention -- the market enforces the policy.  The quota or floor-price policy, in contrast, requires the Government to continuously monitor market conditions, fine-tuning the policy as conditions change.  With direct controls, the informational demands are never ending.  It is doubtful that the Government, in practice, has a continuing comparative advantage in managing information over the ability of private market participants to do so for themselves.

The same arguments apply to instances where domestic producers are exploited by strong unified foreign consumers.  An export subsidy policy which would induce the optimal outcome could be instituted.  Similarly, a quota or minimum price policy could achieve the same result, in a static equilibrium.  However the flexibility and minimal informational requirements of the subsidy policy indicate that it has considerable advantages over the policies of direct controls.

The problems that might be encountered with markets that are vertically integrated concern the redistribution of profits from high-tax countries to low-tax countries by transfer pricing methods and the concealment of profits at both ends of a transaction conducted outside the scrutiny of the market.  The difficulty facing a government lies in judging when transfer pricing for the purposes of tax avoidance has occurred.  Many instances of transfer pricing, which generically concerns the sale of inventories between affiliates, occur for legitimate reasons at legitimate prices.  The only clear indication is when the prices at which goods are transacted are above or below what is, or would have been, the competitive market price.  Of course, when there is no official or formal market, the market price cannot be observed.

The Australian Government's policy response to potential discriminatory transfer pricing has been to subject export contracts to prior approval so that it is clear that such transactions are occurring at "arm's length" or reasonable prices.  Once again, direct controls are placed on prices and quantities in contracts which do not appear to meet competitive market criteria.  With foreknowledge of the state of the market, this policy should be sufficient to promote the competitive outcome.  The administrative difficulty, as with other policies designed to combat market-structure-induced failure, is that the government might not be in a position to judge, contemporaneously, whether or not contracts submitted for approval are in fact meeting the market requirements, particularly when the state of the market is constantly changing and where contracts are often specified for long periods.  Such information might be more readily available with a lag, thus the decision might be best taken after the fact.

Since the activities of companies operating in Australia are, in any case, subject to ex post scrutiny by the Taxation Department, the decision as to whether completed and current contracts are reasonable is certain to be easier when more information is available.  Along these lines, the bauxite/aluminium companies have complained of the excessive administrative burden of having to satisfy two sets of bureaucratic criteria -- one when contracts are initially approved and again when taxes are collected and paid.  The efficient solution, both because it minimises administrative costs and because it is undertaken with more information, would be to subject contracts to ex post approval, with suitable penalties imposed for intervening transgressions.

Policies in the Presence of Externalities

The second broad class of market failure involves problems arising from the actions of some agent when not all the associated costs with that action are accounted for.  As we have shown above, the best policy goes directly to the cause of the problem.  The optimal solution induces the transgressor to "internalise" such costs and the best way of doing this is usually a market-based solution.  Such approaches typically allow the parties involved to decide for themselves on appropriate remedial measures once the problem is identified.  This confers a greater degree of flexibility than is usually permitted with direct regulation and is more likely to yield an efficient outcome.

A very difficult problem confronting the Government is deciding on the best option.  This is almost certain to be an emotional and divisive issue if the parties involved -- the general public, ostensibly represented by conservation groups, and the mining companies -- cannot agree upon the extent and value of the damage done to the environment.  The current state of the debate between these opposing groups is such that no agreement on the true costs and benefits of mining appears to be forthcoming.  Statements abound to the effect that some environmental regions are "priceless".  Such assertions are fatuous at best in view of our own actions in other areas of life:  we reveal through our behaviour that we do not place an infinite value on anything.  On the other side of the coin, however, it must be admitted that, once mined, some regions will never be returned to their original condition.  At the very least, these observations must place finite (still to be determined) upper and lower bounds on the costs of environmental damage and the value of mining.

It is the role of the political process to settle this debate over true costs and benefits, although one can furnish arguments suggesting why the "political market" itself might fail in this endeavour.  Foremost among these are the incentives for the principals involved to misrepresent the strength of their preferences.  More generally, special interest groups, identified because of the issues they hold dearly (this group probably includes both the conservation groups and the mining companies), overstate the true costs and benefits when lobbying the Government and present views more extreme at both ends than one finds in the populace at large.

The benefits from mining some areas appear to have been under-stated because little attention has been paid to the intersectoral linkages addressed in Section 1.2 above.  For example, the decision not mine uranium and other minerals in the Kakadu region, outside the Ranger One mine, is one of great significance as the costs include not just the forgone earnings of the mining companies and their employees, but include decreased GNP, forgone employment and a reduction in real wages generally.

Evidently the Australian Government has perceived that the costs of mining are indeed very considerable when compared to the benefits -- as many recent decisions have prohibited mining altogether.  In effect the Government has decided to impose quantity controls equivalent to a prohibitive tax on some mining endeavours, enforced by withholding export approval.  Therefore, not only are current policies not applications of market-based solutions directed at the source of the externality, but they are arbitrarily chosen direct price and quantity controls imposed on an indirectly related market -- the export market.  Such interventions cannot achieve optimal allocations of resources in a static model, least of all a dynamically shifting economic environment.

The same reasoning applies to externalities associated with bans on uranium mining and shipments because of non-proliferation goals.  If the only effect of such actions is to create market opportunity for foreign competition, with no real effect on the quantity of nuclear material used world-wide, then the action has incurred significant real costs for no gain.  These costs are easily hidden as they represent forgone benefits which would have been distributed over the general population.  Because these costs are diffuse and hard to quantify they are unlikely to promote the formation of consumer lobby groups advocating their elimination.

In short, where market failures do exist in mineral markets, and there are bound to be instances, current government policies have little chance of rectifying the situation.  Indeed there has been no evidence to suggest that the equilibria that actually obtain in any way improve on the unregulated outcomes.

4.2 DO THE PERCEIVED FAILURES EXIST?

It is reasonable to accept that market failures occur because of the existence of externalities, the failure to correctly assign property rights or otherwise contribute to unmet social costs.  It is much more difficult, however, to support the case that market-structure-induced failures are also pervasive, as the once pervasive application of export controls would have indicated.  As current policies stand, coal, iron ore and uranium are still subject to forms of export licensing on the presumption that those mineral industries either have significant market power, or are subject to the actions of buyers with significant market power.

Coal

Consider first the coal industry.  It had numerous contracts rejected during the period 1986-87.  The coal mining unions have consistently criticised the industry for inefficient internal price competition and continue to call for the establishment of a national coal marketing board -- a thinly disguised government-funded and government-run industry cartel.  The question that must be answered is, does the coal industry in fact have the capacity to act optimally as a cartel?

As was discussed in Section 3.1, in order for the industry to successfully impose an export tax, either voluntarily or with Government intervention, the demand it faces must be suitably price insensitive.  That is, foreign demanders must have few opportunities to substitute out of Australian coal over the medium to long-run.  Substitutable possibilities arise with alternate sources of supply, either in terms of different suppliers of the same product or the use of a different product.

On the surface it would appear unlikely that Australia, which produces less than 5 per cent of the world's supply of coal, has significant monopoly power in the coal market.  It is a much larger participant in the world export market, however, with a 20-25 per cent share of the world export market for steaming coal and roughly 31 per cent of the world coking coal export market.

Steaming coal is used in the generation of electric power and in the cement industry as a substitute for oil.  Demand for steaming coal grew rapidly in the late 1970s following the series of oil price rises over that decade as many countries, Japan in particular, substituted out of oil-fired power plants into coal-fired plants.  It appears that most of this substitution is now complete and predictions are that there will not be a reversal of this trend. ⁽¹⁶⁾  Australia gained significantly from the rationalisation in the production of energy because much of the increased demand for steaming coal fell on Australian exports.  Australia's market share of world exports rose from less than 10 per cent in the late 1970s/early 1980s to current levels.  South Africa was another major beneficiary of the substitution out of oil.  Demand from current users of steaming coal is assured into the future and expected to grow at slightly less than the average rate of growth of world GDP.  However, there appears to be a good deal of substitutability in the provision of new power generating plants between coal, gas and nuclear fuels as a source of power.

Coking coal is used mainly for producing steel.  Thus the demand for coal is derived from the demand for steel and fluctuations in industry-wide demand are caused by the cyclic fluctuations in world steel production.  The production technologies are relatively rigid and there are not many short-run opportunities for industry-wide substitution out of coal.  In the long run the situation is different.  Hilly (1989) considers the future export prospects for Australian coking coal in light of technological developments in the steel industry, where there has been a substantial movement towards the use of cheaper, lower rank coal in the steel making process.  In effect, the relative price of high quality coal in terms of low quality coal has risen and, other things remaining constant, we can expect to see contracting demand for the former.  Since Australia is relatively well endowed with high quality coal, the technological developments will have a detrimental effect on Australian coal exports in the long run.

Furthermore, for a given level of demand for both steaming and coking coal, there are many potential suppliers, with new low cost suppliers entering the market.  South Africa looms particularly large as a major competitor with Australia in both European and Pacific markets.  Between them, Australia and South Africa supply about 60 per cent of seaborne steam coal exports, in a market that has grown to about 140 million tonnes.  Figures presented in Barnett (1989) suggest that while Australia has an advantage in lower operating costs for coal production, the total costs FOB ex-port are about the same.  In 1988 US dollars, Australia could supply steaming coal at $26.70-$33.40 per tonne, whereas South African coal costs $26.20-$32.40 per tonne.  The advantage held by Australian coal as it leaves the mine is lost when transport costs and port charges are accounted for.  Moreover, economic and trade sanctions placed on South Africa have induced it to act in a more predatory fashion than it might otherwise have done.  Figures 4 and 5 show that for the years 1984-86, ⁽¹⁷⁾ the average coal export unit value, FOB, for South African steaming and coking coal to all destinations is lower than that for Australia.

A particularly noticeable feature of Figures 4 and 5 is that the price differential between Australian and South African coal has narrowed considerably.  This has occurred because Australian prices have been bid down and South African prices have been bid up.  The volume of steaming coal trade is projected to increase to around 220 million tonnes by 1995.  South Africa, like Australia, is well placed to supply all this anticipated increase in world demand without significantly depleting its reserves until into the 21st century.  However, Barnett (1989) notes that by 1995 China, Colombia, Indonesia and Venezuela, all new entrants into the steaming coal trade, could account for 30 per cent of the market.  Canada and the United States are also large suppliers, currently supplying the balance of the market for seaborne steaming coal.  The USSR is now supplying increased tonnages to Japan.  Clearly opportunities for monopolistic behaviour are restricted, particularly as countries such as Colombia and China are aggressively pursuing export expansion policies which might lead to export subsidies for coal products.

Further evidence of the decline in whatever market power Australia might once have held is found in the changing nature of contracts currently held.  Crowley and Jones (1989) report that "while virtually non-existent in 1972, one-year contracts accounted for 65 per cent of Australian coking coal exports with Japanese buyers in the Japanese fiscal year 1987".  As Crowley and Jones note, the shift towards short-term contracts reflects the changing relative bargaining strengths of buyers in a depressed market.  However, it also works to the advantage of sellers in a market that strengthens.  At the very least, it is a signal of the increasing robustness of the market generally and indicative of the overall level of competitiveness.

Why, then, do suggestions about the monopoly power of Australian exporters persist, particularly in the form of calls for a national marketing board?  There are at least two possible explanations.  The first concerns the nature of the export trade market, where negotiations are usually conducted directly between producers and end-users within the confines of long-term contracts.  With the absence of middlemen or specialist traders to abitrage price differences it is concluded that large suppliers have market power which can be exploited.  This reasoning confuses size with market power.  As we have seen, the number of potential suppliers of coal, particularly in the Pacific trade, is large and increasing.  Additionally, the cost of consuming one's own resources rises as the world export price increases.  As Australia only produces a small amount in total world terms, driving up the export price will induce other large self-sufficient producers into the export market.

The second explanation concerns the motives of the coal unions as they pursue their goals on behalf of their members.  Barnett (1989) notes that based on 1986 prices, 25 to 50 per cent of Australian steaming coal supply did not cover operating costs.  As a result, although 1987 was a year of record production, the coal industry underwent a period of rationalisation, closing down many mines and cutting costs.  Most of these closures were at relatively small, labour intensive mines, located primarily in NSW.  Labour costs are generally high in Australian coal mines, and particularly so in NSW mines where the coal mining unions have taken a tougher stance with respect to work practices.  In a competitive market, enterprises that consistently fail to cover costs exit the market.  The selection process is impersonal and outside the influence of individual agents.  However, with a coal marketing board, appointed by the Government, production quotas could be allocated on grounds other than efficiency.  In short, such an organisation is empowered to redistribute income from low-cost, high volume mines to high-cost mines, thereby ensuring their continued existence.

If the coal industry does not have monopoly power, then perhaps it is subject to the monopsonistic practices of foreign buyers who exercise their monopoly power.  The practice of Japanese steel mills which negotiate as a group in direct bargaining between coking coal producers and users is cited as evidence of this.  Coupled with the evidence that prices for US coal -- both steaming and coking -- are typically 10 to 20 per cent higher than prices received for Australian coal, the existence of consumer power seems prima facie plausible.  However, a number of pieces of evidence argue strongly against such a conclusion.  First, there are many more buyers of Australian coal in Japan, other than the steel mills, none of whom has resorted to coordinated buying practices.  There are at least fifty cement companies and at least six large power companies in the steaming coal market alone.  These buyers provide the potential for competition should any one group begin to act monopsonistically.  Reinforcing this competitive constraint on Japanese buyers is the existence of buyers outside the Japanese market.  In 1980-81 over 50 per cent of Australian steaming coal exports went to Japan and nearly 75 per cent of coking coal exports.  By 1987-88 these numbers had fallen to 46 per cent and 37 per cent respectively.

Second, as shown in Figures 4 and 5, Australia has received considerably higher average prices for its coal exported to Japan than has South Africa, over whom Australia has a considerable transport cost advantage.  Third, Australia receives higher average prices for coal exports to Japan than for coal exports to Europe, which entail considerably higher transport costs.  The implication of the price evidence is that Australia and Japan are sharing the transport cost savings on prices that are determined in an apparently competitive environment. ⁽¹⁸⁾  Although the dealings between the two countries are on a strictly bilateral basis, potential competition on both the supply and demand sides mitigates the opportunity for bilateral exploitation.  The existence of long-term bilateral contracts, far from providing an opportunity for exploitation, ensures stability in the relationship, reducing the costs of initial opening bargaining sessions.

One reason why Japan is willing to pay higher prices for imported coal from the United States, for which marginal production costs there are higher, is that it represents an attempt to diversify its portfolio of suppliers.  Japan insures against interruptions in supply from any one source.  Australia with its relatively poor industrial relations record possibly represents a risky, if low cost, choice of supplier.  The higher prices paid elsewhere are thus in the form of an insurance premium.

Iron Ore

Export controls were initially imposed and enforced in the light of negotiations between Australian iron ore producers and Japanese consumers in the early 1970s.  Since then, the export controls have largely lost their relevance for iron ore negotiations.  No iron ore contracts have been refused approval for some considerable time.

Evidently the market for iron ore exports is more clearly competitive with Australia occupying a position of reduced prominence relative to its position in the coal market.  In 1987, Australia produced about 10 per cent of world iron ore production while accounting for about 20 per cent of total iron ore exports.  Overall, 22 producers in 11 countries account for about 60 per cent of western world iron ore production.  The remaining 40 per cent is accounted for by many smaller producers. ⁽¹⁹⁾  In the export market, 10 major producers account for about 70 per cent of the international trade.  Australia is second in terms of total volume behind Brazil.  There would seem little apparent scope for monopolistic practices by Australian sellers.

On the other side of the market, Australian producers now sell iron ore to a diverse group of buying countries.  In 1980, 72 per cent of total Australian exports went to Japan, 15.4 per cent went to other Asian countries and 12.6 per cent to Europe.  In 1987, these figures were 53.4 per cent, 25.5 per cent and 21.1 per cent respectively.  Both the newly developing countries of Asia and Western Europe have significantly increased their share of Australian exports.  Thus it is unlikely that the domestic industry is the victim of monopsonistic buying practices.

In addition, the domestic producers are a much more homogeneous group than are the domestic coal producers.  They are all large, low-cost, relatively efficient enterprises that suffer equi-proportionately in the event of an industry downturn.  The coal industry, on the other hand, has a much broader distribution of cost conditions which would mean that the smaller enterprises would suffer more than proportionately when conditions change for the worse.  Hence there is less demand in the iron ore industry for a redistributive body such as a national marketing board.

Uranium

Justification for export controls on uranium, apart from those alleged to arise from nuclear proliferation externalities, is often based on the claim that Australia's market power is such that opening up more mines, or allowing existing mines to produce and export more, would drive down the price to unreasonable and unsustainable levels.  In short, the current restrictions on uranium mining -- the explicit floor-price and quantity restrictions -- are presumed to induce the optimal cartel outcome.

The evidence would seem to suggest that the demand faced by Australian producers is far from being price insensitive.  Since 1982 Australian mines have provided roughly 10 per cent of the western world's supply of uranium concentrate.  Canada supplies roughly 30 per cent and the United States and South Africa each supply about 12 per cent of total production.  Other African countries pick up much of the balance.  Just as important, however, are existing stockpiles of uranium.  Based on figures cited by the Minister For Primary Industries and Energy, Mr Kerin, in Parliament on 19 May 1988, the western world is presently carrying 1-2 years more inventory than it finds optimal.  By drawing down current stock and producing to current capacity, western world demand can be met through to 1995. ⁽²⁰⁾  At the same time, development of new nuclear facilities, particularly in the United States, has slowed considerably.  The possible easing of sanctions against South Africa will ease access for that country into new markets.  All these factors suggest that the demand facing Australian producers must be price sensitive so that it is extremely difficult for any one country to hold prices against world trends.  Establishing a floor-price policy under such conditions must lead to a reduction in total revenue.  Recent experience confirms that a marginal decline in the Australian floor price elicited, almost immediately, new contracts.

In summary, it appears unlikely that Australian mineral producers either benefit from or suffer because of market-structure-based failures.  While Australia is currently a large supplier of coal, iron ore and uranium, there are many existing or potential suppliers of all these minerals.  Market interventions based on assumption of market power are thus only likely to create new inefficiencies.

4.3 ADMINISTRATIVE AND OTHER COSTS

The exercise of controls over exports of minerals contributes to the costs of the minerals industries in a number of ways:

1. direct administrative costs are incurred as companies comply with the regulations.
2. uncertainty costs associated with the further dilution of identifiable property rights over mineral resources rise.
3. costs of bargaining rise as the position of the producer and seller is eroded by the need for recourse to the government either before or during the course of negotiations.
4. resources are diverted by the Government into administering the controls and by firms into rent seeking and other lobbying activity which tries to alter the current allocation and burden of controls.

Administrative Costs

The minerals industries are subject to a dizzying set of regulations and controls other than export controls.  The administration of compliance with these regulations and interventions is complicated by the sharing of ownership and control over minerals between the Federal and State governments.  A case study of the black coal mining industry by the IAC (1988) indicated that in NSW alone there were 15 State and local agencies involved in 36 areas of responsibility affecting the mining of coal.

Additional, generally speaking complex, controls over exports can only exacerbate the problem.  Firms must develop knowledge and expertise in the areas covered.  Since the export, and other, regulations are constantly changed, resources must be devoted to simply remaining abreast of the current state of affairs.

As Collier (1985) notes, the administrative burden has not only increased the overhead costs of the mining companies but it has also contributed to a general decline in flexibility.  Companies are no longer in a position to quickly react to market opportunities, because they must fulfil so many requirements first.

Definable Property Rights

As noted in Section 1.3 above, the property rights over minerals in the ground are vested with the Crown.  The agents of the Crown, the Federal and State governments, then allocate the rights to private companies, either by conditionally selling them or, more often, conditionally leasing them.

This partial transfer of property rights impedes the competitive process because of the ambiguous nature of the ability of the current holder to transfer the ownership of the minerals to another party.  The unconditional ability to transfer property rights is what establishes the value of a good or commodity in a free market.  The implication of the current system is that the market, under current property rights arrangements, may not be correctly valuing the mineral resources.  This could lead to inefficiencies in a number of ways.  First, it could induce over-exploitation of current deposits because current holders want to avoid potential losses in the future.  Second, because of the reduced value of minerals in the ground, exploration for new deposits might be below rates that are deemed optimal in light of needs in the future.

The current system of property rights transfer, in effect, introduces new externality based problems into the market place, ensuring that efficient outcomes are unlikely to be achieved.

Bargaining Inefficiencies

Rouse (1989) discusses a number of problems with the guidelines to minerals companies as they applied when bargaining was only approved within certain "parameters".  These are:

1. sellers could not negotiate freely in a competitive environment when market conditions unexpectedly changed because they had to approach the government before talking to buyers.  The exercise of the requirements revealed to the buyer the prior position of the seller.
2. strict confidentiality could not be assured, nor was it kept in all cases.
3. customers were wary that contracts, once settled, could by government decree be cancelled.  In essence, buyers recognised and capitalised into their positions the fact that the sellers did not have unrestricted property rights over the commodities they were selling.

These concerns have in part diminished as the export controls have been relaxed.  However, with the rejection of contracts in recent years in the coal and uranium industries, these issues must always be a concern.  Moreover, the potential always exists that export controls will be strengthened and enforced in the future.  The bargaining position of domestic sellers must be weakened as a result.

Directly Unproductive Profit-Seeking Activities

Whenever governments intervene in competitive markets, on any scale, they introduce incentives for individual agents, firms and consumers or their representatives, to undertake directly unproductive profit-seeking (DUP) activities, which include tariff-seeking lobbying, tariff evasion, and premium-seeking for given export licences.  These are activities which use resources in an attempt to redistribute income, but which yield no productive output in their own right.  They represent a direct drain on society's consumable resources.  DUP activities cover a wider range of wasteful endeavours than does the earlier notion of rent seeking.

DUP activities occur at two levels.  First, there are those designed to alter the level of current intervention in the market:  perhaps to introduce new interventions in order to redirect profits to the seeker, or to forestall an industry decline and forced market exit that might otherwise have occurred, or to remove existing interventions and so reduce the overall level of intervention.  Second, there are those introduced as firms compete for scarce profit opportunities as a result of existing interventions with no change in the overall level.

In the former category we could put the actions of the mining unions who have lobbied for a national marketing board in the coal industry.  As discussed in Section 4.2 above, such a board could ensure that low-volume, high-cost mines are allocated a share of domestic production in excess of what they would have received in a competitive environment.  The actions of some environmental groups could also fall into this category.  Using a broad interpretation of "profit", it is clear that the various environmental groups lobby very hard to attain their goals (increase their profit) through whatever means possible, including the use of export licences to restrict the viability of domestic mine production.  Also in this category are the lobbying practices of the mining companies in agitating for the removal of current interventions so as to increase their profits.  The difference here is that if the existing interventions are inappropriately applied in the first place, then successful lobbying for their removal will increase social welfare.  Nonetheless, resources are diverted into activity designed to alter the current distribution of income.

Because they consume resources, DUP activities effectively lead to a smaller amount of output to be distributed.  For any given level of government intervention, firms will direct their efforts to ensure that they end up with as large a slice of the smaller pie as possible.  Influence needs to be exerted so that the limited quantity of export licences ends up in the "appropriate" hands.  As was noted in Section 4.1 above, this problem becomes acute when market conditions continually change and the regime of quantitative restrictions becomes progressively more or less restrictive.

The difference between quantitative restrictions or direct regulation on the one hand, and market-based solutions on the other, was also discussed in Section 4.1.  Krueger (1974) demonstrates that the welfare losses associated with competitive rent seeking or DUP activity are always larger with quantitative restrictions than with market- or price-based interventions.  Quite simply, for any tariff or tax an equivalent quota or quantitative restriction can always be found.  These policies, by themselves, thus induce the same costs.  However, the quota induces competition for the allocation of the licences and so incurs further costs.  Because the tax is applied across-the-board, and therefore anonymously, these additional costs are not incurred with market-based measures.

5. SUMMARY AND RECOMMENDATIONS

Export controls have been widely applied by the Federal Government over an extended period of time.  As they currently stand, controls apply to about one quarter of total exports of goods and services.

According to the Government, the controls are imposed in the national interest, which suffers when failures in the competitive market process emerge.  The causes of market failure, as assessed by the Government, appear to fall into one of two categories:

1. market failure induced by particular market structures:  the failure of domestic firms to exploit monopoly power and impose an optimal export tax on minerals;  the exploitation of domestic firms by buyers with monopsony power;  and, the existence of vertically integrated industries.
2. market failure caused by the existence of externalities -- actions whose benefits and costs are not accounted for:  the failure to correctly assign property rights over all aspects of mineral production (causing, for example, excess environmental damage);  the failure to internalise the true costs of nuclear proliferation associated with mining uranium;  failure to account for benefits of strategic independence and self-sufficiency;  and the like.

To combat these failures the Government has imposed a regime of direct price and quantity controls which is enforced via the contract approval process.  The controls can be explicit, as in the floor-price policy on uranium exports, but, more often, are implicit and unstated.

As with all regulations, the policies add to the operating costs of the industry.  They increase uncertainty about ownership, contribute to the costs of negotiation and they further reduce the flexibility of the industry, reducing its short-term competitiveness.  The policies almost certainly introduce new externalities into the market through their effects on property rights, and divert resources into unproductive rent-seeking activity.  These costs are incurred but there are no offsetting gains as it is by no means apparent that the export controls are achieving their goals.

Evaluation of existing policies indicates first that, where such market failures as identified by the government do exist, the imposition of direct price and quantity controls in the export market will rarely solve the problem.  A market-based solution imposed at the source of the market failure or externality will always do better.  The market-based policy is more flexible in response to market changes and imposes less of an administrative burden on both the industry and the enforcing agency.  It also avoids many of the directly unproductive profit-seeking activities associated with direct controls.

Second, the controls are unwarranted in cases where they are imposed to combat market-structure-induced failure.  Little evidence has been provided by the Government in support of its policies based on either the existence of market power for sellers or buyers of Australian resources.  Evidence presented in this paper suggests that the markets for the major minerals -- coal, iron ore and uranium -- are unlikely to yield exploitable opportunities to either sellers or buyers.  The markets appear to be very competitive over the medium- to long-run.

Thus, the export control policies currently in place are in many instances an unnecessary and costly burden on trade.  Where some corrective action is required, and there are bound to be such instances, the export control policies are not capable of doing the job.

A systematic re-evaluation of the motives for imposing export controls is required.  The Government must:

1. identify possible sources of market failure and establish their existence in each case;
2. identify the extent of the market failure -- the costs associated with inaction;
3. enact policies that directly address the cause of such identified market failure where it occurs.

Optimal policy should make a correct assessment of the costs and benefits of any action, including a consideration of the wider issues ignored in much current discussion.  Each policy must be shown to yield benefits over the costs that would accompany compliance.  If these procedures are followed, it seems likely that regulations and direct controls in the export market will rarely be chosen over more direct solutions.

BIBLIOGRAPHY

Abelson, P., (1983).  Coal in Australia:  Prospects to 1990, The Economist Intelligence Unit, London.

Anderson, K., (1980).  "The Political Market for Government Assistance to Australian Manufacturing Industries", Economic Record, 56, June, pages 132-144.

Australian Bureau of Agricultural and Resource Economics, (1988).  Commodity Statistical Bulletin, AGPS, Canberra.

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ENDNOTES

1.  See Australian Mineral Industry Quarterly 41(2), 1989 and Rutland (1990).

2.  See Australian Resources Outlook 1987-2000, Bureau of Resource Economics, 1987.

3.  Three good examples are Bureau of Industry Economics (1981), Cook and Lees (1984) and Higgs (1986).

4.  Minerals Industry Survey, 1988.

5.  See Dare Reed (1980).

6.  See Collier (1985).

7.  See Dare Reed (1980).

8.  See Rouse (1989).

9.  The others are:  Alcoa, Alcan, Reynolds, Kaiser and Pechiney.  These "majors" controlled 80% of the bauxite-to-aluminium market in 1970.  Their position has been severely eroded since (see Holloway (1988)).

10.  See Crough (1985).

11.  As of January 1989 there were 13 such agreements with the United States, the United Kingdom, France, Canada, Japan, the Republic of Korea, the Philippines, Finland, Sweden, Switzerland, Egypt, Euratom and the IAEA.

12.  For example, 23 February 1988, 19 May 1988.

13.  See Smith (1982).

14.  See Commodity Statistical Bulletin, ABARE, December 1988.

15.  "Economics and Regulatory Measures for Ecologically Sustainable Development Strategies", an extract from The Economic Roundup, June 1990.

16.  See Australian Resources Outlook, Bureau of Industry Economics (1987).

17.  The only years for which we have South African data.

18.  See the related discussion in Smith (1982).

19.  These figures are provided in Rouse (1989).

20.  It is somewhat ironic that the stockpiles of uranium are used as justification for trying to act monopolistically, as Mr Kerin appears to argue.  The very existence of the stockpiles suggests ready opportunities for market substitution by potential buyers which, as argued above, eliminates the ability to profit from restricting output.  Attempts to do so merely reduce domestic export income.

21.  This term was coined in Bhagwati (1982).