Former Australian leader says natural resources shouldn’t be ‘cash cows’

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06.10.2010 17:29

1.jpgASTANA - Wednesday, October 06, 2010 - Former Australian Prime Minister John Howard said today that natural resource-rich countries should avoid the temptation to view their petroleum and minerals as “cash cows” for generating government revenue.   

He also said he opposes export taxes.

The comments came during a keynote speech the former Liberal Party leader gave on the second day of the 5th KAZENERGYEurasian Forum and at a press conference after his address.

Although he didn’t mention a specific country, his remarks came in the context of Kazakhstan officials re-imposing a petroleum export tax and announcing plans for a minerals export tax after saying the government needed more revenue from its two economic mainstays.

So it was apparent to many in the audience what country he was referring to. Howard, who has always had a reputation for speaking his mind, tempered his comments with praise for Kazakhstan’s economic performance. He gushed that the country’s “rate of growth is remarkable” and noted that “it’s an exciting future that Kazakhstan has.”

He said there is a natural kinship between Australia and Kazakhstan because the countries have several similarities – among them large land areas, small populations and economies based on natural resources. Howard noted that the Australian government’s attempt to impose a hefty tax increase on its extractive industries led to black eyes for the politicians who proposed it. Prime Minister Kevin Rudd’s proposal for a new tax this year, which would have led to mining companies giving the government 40 percent of their earnings, ran into strong public opposition.  Rudd, the Labor Party leader who unseated Howard in a 2007 election, had justified the increase by contending that the miners weren’t paying their fair share of taxes. But Australians viewed the industry as having saved the country from the debilitating economic downturn that enveloped most of the world in 2008.

The grassroots opposition forced Rudd to work out a compromise with the mining industry this summer that led to a much smaller tax increase. But the damage had been done.

Plunging public support prompted the Labor Party to oust Rudd as prime minister ahead of elections in 2011, replacing him with Julia Gillard. A key reason for the decline in his popularity was the mining-tax proposal.

Most of Kazakhstan’s public idolizes President Nursultan Nazarbayev, so the kind of political dynamics that accompanied Australian leaders’ efforts to increase the mineral tax won’t come into play here. But Howard noted at the press conference that there could be another unpalatable outcome. Governments that impose taxes that single out industries “will scare away (foreign) investors,” he said.

That has been the argument that executives of two big international oil and gas consortiums have made privately about the government imposing an oil export tax on their operations. The two, Karachaganak and Tengizchevroil, contend that their long-term contracts exempt them from the tax.

The government ordered Karachaganak to pay the tax from the time it was first imposed in 2008 until it was lifted in 2009. It re-imposed the tax in August of this year, this time ordering Tengizchevroil as well as Karachaganak to pay it. Asked at the press conference what he thought of a natural-resources export tax, Howard replied cryptically: “I don’t like the idea of an export tax at all. I think the idea of resorting to an export tax is a bad one. “He had said in his speech that countries with natural resources should have “an open foreign investment policy” – a comment that some listeners construed as applying to the changes in the rules of the game that Karachaganak and Tengizchevroil say they’ve been subjected to.

After announcing this summer that it would re-impose the oil export tax in August, the government said it would impose an export tax on the mining and minerals sector in 2011. With much of the economy recovering slowly from the economic downturn, the government has been trying to find ways to obtain additional revenue to reduce a budget deficit. Extractive-industries export taxes were one of the approaches officials came up with.

The powerful Association of Mining and Metallurgical Enterprises responded with a vigorous campaign against a mining export tax.

“The experience of many countries shows that, where there is no domestic demand, export duties have negative consequences,” Nikolai Radostovets, the association’s executive director, said a few weeks ago. Kazakhstan exports 95 percent of its minerals, although the government has been encouraging mining operations to set up ore-processing and metals-finishing facilities to create jobs and increase the industry’s value to the economy.

The organization, which said its 60-plus members would prefer a higher tax on their profits, has been  negotiating with the government on the issue.

One of its arguments is that an export tax could hurt its effort to meet Nazarbayev’s goal of doubling the value of mineral and metals exports within five years. The industry will be committing $16.5 billion to that effort, the association has said.

CENTRALASIA

Hal Foster

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