By Megan Bowman, UNSW

SYDNEY: 1 June 2013 - Urgent questions are now being asked about how best to ensure a long-term viable Australian economy as the resources investment boom in Australia begins to slow. One approach is detailed in the Advantage Australia: Resource Governance and Innovation for the Asian Century report (Advantage Australia report) published last week for CSIRO on 20 May 2013. It proposes a National Minerals Strategy to facilitate long-term mineral and mineral-wealth management within the country and to secure competitive advantage across the region. Concomitantly, the Petroleum (Onshore) Amendment Bill 2013 (NSW) (the Bill), tabled in the NSW Legislative Assembly on 22 May 2013, passed without amendment this week on 28 May 2013. It now sits with the Legislative Council for further debate and final determination, and is very likely to become law given that the Opposition has proposed only two minor amendments. The Bill increases the compliance burden on energy and resources sector participants in NSW - particularly in the onshore petroleum industry – by strengthening liability and enforcement provisions and constraining land access and resource extraction. These restraints will, according to the Minister for Resources and Energy, Chris Hartcher, ensure that NSW imposes ‘the most rigorous requirements in Australia for the petroleum industry’.

Both initiatives, in their own way, seek to facilitate optimal regulation of the minerals sector for the long-term but with very different operating assumptions and potential outcomes. These developments are explored in this article with particular focus on the explicit promotion of enforcement and environmental sustainability as a means of facilitating economic longevity. It will also highlight the dissonance between mineral resource legal and regulatory initiatives in Australian domestic jurisdictions, and analyse the potential effects on foreign – particularly Chinese – direct investment into Australia.

The Advantage Australia report documents the uncertainty of future commodity demand. It notes that ‘the quality of our remaining mineral resource stock is in decline [and] costs of production and transport are rising’ in a context of ‘increased competition from overseas for market share’ (pp3, 29). In short, the report describes the minerals sector and therefore Australia as ‘vulnerable’ and asserts a national urgency in preventing the Dutch Disease from progressing to a Resource Curse. To do this, it proposes a long-term strategy comprising nine key ‘foundations’, which can be summarised as: (1) positioning for long-term development ; (2) supporting environmentally and socially responsible supply chains; (3) creating a National Mineral Account that compiles site and regional data on economic, social and environmental impacts; (4) technology and innovation that improves environmental and social performance; (5) ensuring high value labour skills; (6) focusing on strengths and extending skills; (7) emphasising social licence in technology design to ensure that new technologies better meet community expectations; (8) harmonising systems for licensing projects and regulations across domestic jurisdictions; and (9) tracking progress towards 2040 via public reporting and hypothecation of mineral revenues through a sovereign wealth fund (SWF).

Similarly, the NSW Bill seeks to balance stakeholders’ competing interests, namely community and landholder desire for increased involvement in decision-making about exploration activities, and resource companies’ desire for increased transparency in government decision-making to enable ongoing resources activity and investment. In the second reading speech, Minister Hartcher stated explicitly that the Bill seeks to ‘build community confidence and provide certainty for industry’. As drafted, the Bill introduces mandatory provisions for land access for petroleum exploration (Schedule 1[6]); greater access to environmental information about petroleum activities (Schedule 1[14]); criminal liability and accessory provisions for a director or manager of a corporation in non-compliance with a petroleum title condition or a direction issued by the Department of Trade and Investment, Regional Infrastructure and Services (DTIRIS) (Schedule 1[16]); and an offence for non-payment of royalties (Schedule 1 [10]), being a maximum base monetary penalty of AU$1.1 million plus interest on the unpaid royalties. 

Crucially, however, the Bill belies an assumption by the NSW government that self-regulation alone cannot provide reassurance that the resources sector will be managed for the long term. The Bill extends and strengthens direction and enforcement powers (Schedules 1[11], [16]) consistent with those already in Part 12 of the Mining Act 1992 (NSW), which indicates an increasingly interventionist regulatory approach by the NSW Government to mining and petroleum activities. Indeed, the Minister expressed the government’s intent ‘to build a cleaner and more robust compliance and enforcement practice’ (second reading speech). Testament to this, a training program has been implemented for the department's officers to ensure that they ‘are properly equipped to apply the expanded enforcement powers in this bill’ (second reading speech). It is apparent that enforcement is the government’s preferred mode for obtaining accountability - as opposed to other regulatory options such as increased disclosure and transparency. The Minister evidenced the enforcement/accountability symbiotic when he stated that ‘we are making sure that the petroleum industry will be held accountable if it does not meet its obligations, particularly its environmental obligations’ (second reading speech).

Reserves of gas from coal seams in NSW have been estimated as sufficient to provide over one million homes with energy for over a century. Naturally, the state government is keen to capitalise on that energy cache in a post-boom economy. Yet, through tougher direction and enforcement provisions that can be actualised by trained officials, the government is simultaneously mandating that exploration and production be ‘carried out in a way that ensures the health and safety of the community and protection of all aspects of the environment’ (second reading speech).

Indeed, the Bill proposes a new Division to the Act which enables the Director-General to publish environmental information about the impact of petroleum prospecting and mining activities (Schedule 1 [14]). Although ‘environmental information’ does not include the value of petroleum recovered, the prospecting company can object to publication on the basis that it is likely to cause a ‘substantial commercial disadvantage’. Nonetheless, the Director-General retains final discretion to publish even commercially sensitive information if it is in the public interest to do so, which buttresses the strong social-environmental stance underlying this proposed legislation.

It is clear that both the Advantage Australia report and the NSW Bill explicitly promote the strengthening of social licence and environmental sustainability as a means of facilitating economic longevity. Social license refers to the ongoing support received by a mining operation from the local community and other stakeholders. According to Domènec Melé of the Instituto de Estudios Superiores de la Empresa: ‘society gives licence to business to operate and, consequently, business must serve society not only by creating wealth, but also by contributing to social needs and satisfying social expectations’. 

The Advantage Australia report notes increasing community concern and environmental pressure around mineral resources activities and that ‘social licence to operate is becoming more difficult to establish and maintain’ (p3). Specifically, it contends that companies can achieve a competitive advantage for Australia by leading the development of self-regulative standards for ‘responsible’ minerals (p59). The Report draws on the local example of the Steel Stewardship Forum (SSF), which was launched as an industry initiative in Australia in 2007 with a view to developing a best practice model for the APEC region. A key aim of the SSF is facilitation of standard-setting that minimises deleterious local social and environmental impacts across the steel product life cycle while maximising the value of steel to society. The Report seeks to actualise a similar model for the minerals resources sector by proposing the creation of a National Mineral Account for improved transparency regarding the nature and distribution of benefits and detriments (foundation 3), the adoption of new business models and services to support environmentally and socially responsible supply chains (foundation 2), technology and innovation that strengthens social licence and improves environmental and social performance (foundations 5, 7), and regulatory harmonisation across domestic jurisdictions (foundation 8).

Importantly, the federal government financed the recent Extractive Industries Transparency Initiative (EITI), an enormous endeavour in which 96 countries support greater transparency and accountability from the resources industries through increased disclosure. The EITI is expressly referenced in the Advantage Australia report under ‘facilitating investment and best practice governance’ (foundation 8). Specifically, the report recommends that EITI be fully implemented by Australia in the context of regulatory harmonisation and sustainable management of resources (p5). 

Overall, a comparison of these national and NSW initiatives reveals valuable insights about Australian mineral resources governance. There is consonance between the two initiatives regarding their facilitation of a long-term approach to economic viability that strengthens social licence and environmental sustainability by corralling investment activity. Yet the regulatory approaches that they adopt to achieve that goal are radically different. The Advantage Australia report promotes ‘responsible’ industry self-regulation as a modality of accountability within the mining and minerals industries. In contrast, the NSW government favours high interventionism undergirded by real threats of enforcement and personal liability to ensure industry ‘responsibility’. 

In addition to these complexities in federal-state regulatory developments, there is some state-state dissonance between approaches of resource rich jurisdictions within Australia. In particular, the Western Australian (WA) regime stands in stark contrast to the NSW initiative. Like the NSW and national initiatives, the WA regime seeks to secure long-term mineral resources and economic viability. However, unlike its state counterpart, WA regulation encourages extraction and investment in order to assure continued wealth accumulation for its constituents.

A foundation stone of the WA regime is the AU$6.5 billion Royalties for Regions program, which is a conduit for reinvestment of 25% of mining and onshore petroleum royalties into regional WA each year (since 2008). Thus, the WA government seeks long-term solutions very differently to the NSW and national initiatives. It is not facilitating economic viability via social licence and constrained resource exploration; rather it is strengthening social licence via economic viability, particularly through wealth accumulation from liberal mineral resource and mining governance.

Specifically, the WA Exploration Incentive Scheme (EIS) is an AU$80 million initiative funded by Royalties for Regions over five years that aims to encourage mineral resource and mining exploration in WA ‘for the long-term sustainability of the State’s resources sector.’ The EIS seeks to stimulate increased private sector resource exploration and extraction, predominantly in greenfields. Tools to do this include: government co-funding for exploration drilling; prompt approval of mining titles for exploration, prospecting and extraction in accordance with the Mining Act 1978 (WA) by the Department of Mines and Petroleum (DMP); and promoting oil and gas prospecting in sedimentary basins via the Geological Survey of Western Australia (GSWA).

The WA government is clear that its approach is ‘essential for guaranteeing the sustainability of the resources sector and the State’s future prosperity’. To this end WA welcomes foreign investment in mining and minerals resources, particularly from China. According to qualitative evidence from O’Brien, Gilligan and Greenacre, WA officials differentiate between ‘stock market miners’ and ‘real miners’ (p13) when facilitating inward investment. Given the decrease in commodities’ value, many stock market miners are not activating their exploration rights to actualise extraction and hence royalty accumulation. However, Chinese investors are activating their rights and therefore making real mining investments that manifest real dollars to help perpetuate the state’s long-term agenda. Indeed, the WA Trade and Investment Promotion Office in Shanghai sends a very clear message that the Australian state is open for Chinese investment. 

Clearly, Australian political and legislative responses to extractive industries lack consistency, largely for political reasons. It is not surprising that the Advantage Australia report recommends regulatory harmonisation across domestic jurisdictions. Yet, if we adopt a harmonised regime, which approach – WA or NSW - is more likely to gain traction? Importantly, does the national political will exist in a federal system to limit state action which, of necessity, plays to different constituencies?

In contemplating these questions, some guidance can be found in the federal government’s Australia in the Asian Century White Paper, released in October 2012. The White Paper stipulates national objectives, including National Objective 18a: ‘The Australian economy will be more open and integrated with Asia, through efforts to improve our domestic arrangements. The flow of goods, services, capital, ideas and people will be easier’ (p195, emphasis added). It then specifies that improving ‘domestic arrangements’ includes improving regulatory frameworks in support of greater financial integration (p195), maintaining consistent and transparent foreign investment decision-making (p195), and ‘welcoming foreign investment’ as a way of supporting Australian businesses (p187).

Arguably, this evidences an implied intent by the federal government to harmonise and limit state action in a way that favors the WA approach. But will it happen in actuality? Importantly, the White Paper and these national objectives have been issued under a Labor Government at a time when that government was more secure in its seat of power. If the Federal Coalition-Liberal party takes government in September this year then the game may change. And it is very difficult to predict what form that game will take given that WA and NSW are both currently governed by state Liberal governments and yet they have each adopted very different positions.

The preceding discussion reveals important insights about Australian mineral resources governance at present. There are clear tensions between state-state, state-federal and intra-party regulatory approaches and politics regarding mineral resources and inward investment. As such, a crucial issue for Australia’s long-term outlook is the potential effect on foreign, particularly Chinese, direct investment.

Importantly, 78% of completed Chinese investments in Australia from January 2005 to December 2012 were for the purpose of securing supply to an underlying commodity. More specifically, Chinese direct investment into NSW from September 2006 to December 2012 totalled US$10.8 billion, over half of which was invested in the mining sector compared with a notably smaller investment of $1.6 billion into the oil & gas sector. Indeed, accumulated Chinese investment into NSW’s oil & gas sector during that six-year period comprised only 15% of total accumulated state investment making it the third largest investment sector (behind renewable energy at 19%). However, when comparing oil & gas sectors between states, NSW’s oil & gas sector was the second largest recipient of Chinese investment after Queensland’s (at 32%) and ahead of WA (at 10%). The largest recipient of Chinese investment at state level was the mining sector, which absorbed 89% of all WA investments and 55% for NSW.

Overall, total Chinese investment into Australia in 2012 consisted of 48% into mining and 42% into gas, which may indicate a diversification toward energy and away from resources. Interestingly, Sinopec, a Chinese corporation predominantly owned by central government, operates solely in the energy (gas & oil) sector and constitutes Australia’s third largest Chinese investor based on accumulated investment figures from February 2005 to December 2012. 

Analysis of this data raises the question of whether disparate regulatory initiatives in Australia will have an eventual chilling effect on state capital flows from China. Hurst, Cai and Findlay of the East Asian Bureau of Economic Research note an ‘awkward interaction’ between public reaction and policy response and consequent adaptation by Chinese investors. They evidence that in some cases, as a response to media sensationalism and peripatetic policy, Chinese investors have embraced the concept of social licence and made increased attempts to gain local legitimacy on the ground in Australia. Certainly, this is apparent in other jurisdictions, exemplified by the efforts of Softbank/Sprint in the United States. However, other Chinese investment entities are simply walking away, a case in point being Huawei’s decision to exit the United States market, as documented in detail by CLMR Director Justin O’Brien. Indeed, as FIRB policy guidelines shift, some Chinese investors are diverting large-scale resource investments away from Australia to other resource-rich areas, for example, Mongolia and African countries such as Guinea. Clearly, escalating Chinese exits will have important implications for Australia’s long-term outlook.

In order to achieve the noble goal of economic longevity via environmental sustainability and social licence, industry participants and regulators (and even the public) will need to rethink the meaning of ‘value’ and  how best to add it to Australian minerals and mining governance. Importantly, in 2011 the Commonwealth Government produced the Australia in the Asian Century Issues Paper which framed the issues for discussion in the subsequent White Paper. In the Issues Paper it was stated that ‘a change in mindset as well as building new skills and capabilities’ is required if Australia is to successfully expand its areas of comparative advantage in the region and beyond (p12). The White Paper adopts and extends this by providing that: ‘Asia-relevant capabilities include adaptability, flexibility, resilience, creative and design thinking and the confidence and readiness to interact with and operate in Asia’ (p162). Specifically, the White Paper concludes that: ‘[d]eveloping Australia’s capabilities will require us, as Australians, to consider and in some instances to change the way that we do things, such as… the way we do business and the way we operate our institutions’ (p162).

Changing institutional mindset and ‘the way we do things’ is no easy challenge; yet it will be critical to thriving in the Asian Century. With the emergence of a post-boom Australia, the question is whether major players in the regulatory field – peak industry associations, individual companies, non-government organisations, civil society, and policymakers - can accept and win this challenge. It is a question that depends on the framing and, of course, the political value (in terms of votes) in privileging the environment over development.

With Australia’s commodity demand likely to decline despite its dependence on resource revenues, regulators now need to engage actively in a delicate and multifaceted balancing act to assure optimal mining and mineral resources governance. The balance involves encouraging the foreign investment so necessary for domestic infrastructure while ensuring that such investment is properly managed for the long-term national interest. It also involves knowing when to promote responsible industry self-regulation and when to legislatively coerce industry responsibility. Timely regulatory efforts can bring the twin rewards of sustainability and longevity. Australia does not want to look back at the end of the Asian Century and realise too late that it peaked too soon.