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ANZSEE 2012 Boyd Blackwell & Brian Dollery: Income Factor Shares

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Presented at ANZSEE 2012 Conference 'Green Growth or De-growth?', 12-15 November, Bond University, Gold Coast.

Presented at ANZSEE 2012 Conference 'Green Growth or De-growth?', 12-15 November, Bond University, Gold Coast.


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  • 1. Factor Shares from Mining: Remote NT Case Studies Dr Boyd D Blackwell*, Prof. Brian Dollery***Post-doctorial Research Fellow, UNE Business School and CRC REP **UNE Business School and Director, Centre for Local Government boydb@une.edu.au Presentation made to the 2012 ANZSEE Conference, Green growth or de-growth? 12 – 15 November, 2012, Bond University, Gold Coast
  • 2. Outline • Introduction • Mining’s factors of production • Case studies • Methods of calculations (RIEM, PTRIEM) • Results • Assessment • DiscussionRanger Uranium Mine, NT (AFP Herald Sun, 2007) Jeffery Matthews from Lajamanu at Tanami Gold Mine, Yapa Employment Plan (Alice Springs News Online, 2012). 2
  • 3. Introduction • Research Question: a) What is the disbursement of mining revenue to the factors of production and b) how does this affect the well-being of remote Australian communities? • Smith (1904 [1776], I.6.17): “Wages, profit, and rent, are the three original sources of all revenue”. Labour, stock (‘capital’), land – factors of production • Goal: disbursement of mining revenue to the factors of production • Approach: factor share / factor proportion • Political economy questions (Atkinson, 2009): 1. Incomes at national and local levels 2. Inequality in personal distribution of income 3. Social justice, fairness of sources of income 3
  • 4. Mining’s factors of production Miskelly’s (2004) 5 ‘m’ factors of production: debt interest, dividends, •Mineralization, manpower, materials, management and money retained earningsFactor Definition Owner Return/price Further disbursement / typeLand Earth’s surface Business Rent Profit: Other parties e.g. Rent Lease payments, rent, government land taxes Mineral resources Crown: State Resource rent Royalties, license fees Land, water, ATSI Compensation for Royalties and other minerals use paymentsLabour Human work individuals Wage/salary + super, shares etc.Capital Equipment & Business Rent Profit: structures Other parties e.g. private Rent Lease payment sector E.g. financial debt interest, dividends, contribution retained earnings 4
  • 5. Case studies: NT Context • NT is special • Examples • Institutionally • Institutionally • Economically • Territory • Historically • Commonwealth’s role (Guj 2012) • Socially • Uranium • Culturally • ATSI land • Politically • Industrial relations • Ecologically, environmentally • Economically (NT Gov’t 2012b, pp. 1-2) • Small open economy, GSP $16B* • Highly sensitive to shocks* • High output/income per capita* • Natural resources • Mining • Cultural and natural heritage 5
  • 6. NT Economy and Mining’s Role Table 1: Industry sector value added Industry Value, GDP% Position Mining $2.8B, 17% Largest Construction $1.8B, 11% 2nd Public admin & safety $1.5B, 9% 3rd Source: Northern Territory Government 2012b, p. 3. Table 2: Industry employment Industry Employment Position Mining 4,561, 4% 9th Construction* 13,427, 11% 3rd Public admin & safety* 17,987, 15% 1st Source: Northern Territory Government 2012b, p. 5. 6
  • 7. Case studies: Locations Newmont Tanami Mine N 1km Sources: Manipulation of NT Government 2012, p. 118; Wikimapia 2012 7
  • 8. Newmont’s Tanami Gold Mine, 2011 Includes: • Granites treatment plant, 550k NW Alice • Dead Bullocks soak mining operations - 40km W Granites Table 3: Key characteristics Mine Output Reserves New Capital Increase in (ounces) (ounces) project exp. output Tanami 221k 2.5m* Shaft $450m 60-90k/yr expansion 2015 - 2012 Source: Newmont 2012a, pp. 29; 2012b. Shaft - additional mine expansion 8
  • 9. Case studies: Locations ERA Ranger Mine Sources: Manipulation of NT Government 2012, p. 118; ACIL Tasman 2011, p. 5 9
  • 10. ERA’s Ranger Uranium Mine • world’s largest producers, mined 100,000t over 30 yrs (ERA 2012a;b) • 70% Rio Tinto; 30% publically listed ASX (ERA 2012c) • 2011 had extreme wet, 2,427mm (ERA 2012b) • Closed plant for 6 months, drew on stockpiles (ERA, 2012d; Fitzgerald, 2012) • $154m loss 2011 (ERA 2012b) • Production returned by 2nd Qtr 2012 (ERA 2012d) Table 3: Key characteristics, 2011Mine Output Sales Reserves (stk, New project Capital exp. Reserves (U3O8) (U3O8) proved, prob.)Ranger 2,641t 5,167t 13,484t* Deeps decline $120m 34,000t* Source: ERA 2012, various 10
  • 11. USA Industry Compensation share of value addCalculation of factor shares Agriculture 21% Mining 36% Manufacturing 73% A. National accounts Services 75% B. Company reports Source: Gollin 2002, p. 464 • National accounts most common (Gollin 2002) • Focus on labour share (Kaldor (1956), Solow (1958), Kuznets (1959), Prescott (1986), Poterba (1998), and Gomme and Rupert (2004)) • Overcomes ‘commercial in confidence’ • Generalized • Company accounts • More than just labour share • Provides nuisance and peculiarity (see Blackwell, 2012) • Percentages • Our approach: company accounts + national accounts for context • Employee compensation factor shares -v- labour shares • Entrepreneurs and self employed (Gollin 2002) • Developing countries: lower labour shares assumed (Gollin 2002) • Informal economy 11
  • 12. Methods • Company reports while preferred have problems: 1. Newmont annual reports – consolidated global operations 2. Reports under USA law 3. No distinction made for employee benefits • Some subsidiary reporting: sales, cost of sales and amortisation; Newmont AP, Tanami (Newmont 2012a) 12
  • 13. Methods continued…• ERA: 1. Reports under AUS law 2. Categorizes employee benefits 3. Represents Ranger (no other operations) 4. BUT: 2011/12 very wet – used 2010 instead• Approach to Newmont: 1. 36% cut of labour from total cost of ‘material’ related expenses • Based on 37% found for ERA; and 36% from USA Nat Acts 2. Requested an internal Tanami report (K Ellington 2012 pers. comm. Aug, Sep.) • % provided against total expenses not revenues • No % of expenses for taxes or royalties 13
  • 14. Royalty Indirect Estimation Method (RIEM) • Individual company/mineral royalties not reported by NT Gov’t • Protect confidentiality, commercial interests (s. 50, Mineral Royalty Act 1982 (NT)) • RIEM (Blackwell 2012b) • NT profit based royalty system (roughly 20% of profit) (Guj 2012) • NT Govt reports total royalties paid (RTM) by all minerals and total amount of minerals produced (OTM) • Can therefore estimate royalty’s as % of output (rather than profit) • Newmont Tanami (G) – only major gold producer in NT (ACIL Tasman 2009) RG = RTM ÷ OTM × OG (1) • Where: R = royalty, O = output, TM = total minerals, and G = Newmont Tanami Gold • In this Presentation: given as % of income rather than absolute amount 14
  • 15. Profit, Corporate Tax, CLC Royalties Indirect EstimationMethod (PTRIEM) • All expenses provided except CLC royalties (provided as definition): • CLC (Central Land Council) royalties (RL) = 2.5% of revenue (Y) • Assumed: • Corporate tax (T) = 30% of profit (π) (assumed from ATO) • NT royalty (RG) = as defined previously (used to calculate T) • Royalties assumed as an expense of business • Tanami net sales ARE reported in consolidated accounts (Newmont 2012a) • Revenue assumed (Y) = net sales • All expenses in factor categories (E) recalculated as % of revenue (see 4) π = Y - E - RG - RL (2) T = 0.3π (3) Factor Shares: Ei /Y, RG /Y, RL /Y, T/Y (4) 15
  • 16. Results FACTOR SHARES, NEWMONT 2011Factor Sub factor Share of sub- Share of total factor factorsaLand Mining tax (net of fed benefit) and other 7% 1% Income tax (net) 93% A 7% Total 100% 7%Labour Total 100% 36%bCapital Advanced projects R&D 4% 2% Reclamation and remediation 1% 1% Exploration 4% 2% Cost applicable to sales B 42% 21% Amortisation 21% 11% General and administrative, write-down and 28% 14% other Total 100% B 50%Money Interest on debt (net of capitalised interest) 40% 3% Net income attributable to Newmont stock C 60% 4% holders -Dividends paid to controlling interests 81% 5% -Dividends paid to non-controlling interests 19% 1% Total 100% 6% Grand total 100% Source: Manipulation of data from Newmont (2012a). a. Rounding errors exist. b. Refer to discussion in methods. 16
  • 17. Results cont… SHARES, ENERGY RESOURCES AUSTRALIA 2010 FACTORFactor Sub factor Share of sub- Share of total factor factorsaLand Royalties (% of net sales) c -to Cth for Aboriginal Orgs (4.25%) A52% >NC 3% -to Cth for NT Government (1.25%) 16% 1% Income tax 32% <NC 2% Total 100% 93% A 6% ~NC 7%Labour Employee benefits and contractor expense B 97% 36% -Directors (non and exec.) and Chief 2% 1% Managers Defined contribution super 3% 1% Other employee payments 0% 0% Total 100% B 37%Capital Materials and consumables 41% 19% Purchased materials (e.g. U3O8) 37% 17% Inventory changes -12% -5% Commission and shipping 4% 2% Depreciation and amortisation 23% 10% Rental expense on leases 1% 1% Statutory, corporate and other 5% 2% Total 100% C 46% ~NC 50%Money Financing costs (~interest on debt) 25% 3% Profits (After Tax) 75% 8% -Dividends paid b 100% D 11% >NC 5% Total 100% 11% Grand Total 100% Source: Manipulation of data from ERA (2012b). a. Rounding errors exist. b. A dividend greater than profit was paid during that year. 17
  • 18. FACTOR SHARES, NEWMONT TANAMI OPERATION 2011Factor Sub factor Share of sub-factor Share of total factorsLand CLC Royalties 30% 3% NT Royalty (considered as a tax) 26% 2% Community Relations 5% 0% Income tax A 39% >ERA 32% 3% total 100% A 8% 25% > ERALabour Wages & Salaries 96% 26% Super Contribution 4% 1% Total 100% B 27% <ERA/NCCapital Materials & Consumables B 35% 21% 37%,36% Inventory Change -3% -2% Depreciation & Amortisation 16% 10% Rental expense on leases 1% 0% Development Capital (Mine Development) 20% 12% Sustaining Capital 25% 16% Exploration 5% 3% Total 100% B 61% >ERA/NCMoney Bank Guarantee Fees 2% 0% 46%,50% Profit 98% 3% Total 100% B 3% <ERA/NC Grand total 100% 11%,6% Source: Manipulation of data from Newmont Tanami (K Eglington, 2012, Pers. Comm., 24 August and 5 Static September). 18
  • 19. Assessment • How do labour shares compare with National averages and other industries? Use National Accounts Use Company Accounts/reports Australia ERA TanamiEmp.Comp. -> Lbr 54%->70% 37% 26%sharesYear 1986->1992 2010 2011Source Gollin 2002, p. 465, 470 ERA 2012b Pers. Com USA Industry Compensation share of value add Agriculture 21% Mining 36% Manufacturing 73% Services 75% Source: Gollin 2002, p. 464 19
  • 20. EMPLOYEE COMPENSATION SHARES, AUSTRALIAN INDUSTRIES 2008Industry Labour Gollin’s self-employed share a adjustment bAgriculture, hunting, forestry; fishing (A+B) 26% 35%Agriculture, hunting and related service activities (01) 26% 35%Mining and quarrying (C) 20% 27%Manufacturing (D) 58% 77%Electricity, gas and water supply (E) 36% = 38% 48%Construction (F) AUS 54%~ 56% 75%Wholesale retail trade, repair of motor vehicles, 67% 90%motorcycles, etc.; hotels and restaurants (G+H)Transport, storage and communications (I) 43% 57%Financial intermediation; real estate, renting and business 46% 62%activities (J+K)Public administration and defence; compulsory social 81% 108%security (L)Education; health and social work; other community, 83% 111%social and personal services (M+N+O)Total Economy 54% 72% Source and notes: a. The labour shares were calculated using basic prices data from the United Nations (UN, 2011, pp. 29-35) = employee compensation / (employee compensation + operating surplus + consumption of fixed capital). b. The adjustment used the mean adjustment fraction for Australia of 17/50 from Gollin (2002, p. 470). 20
  • 21. Discussion: Factor shares and the flow of incomefrom mining in remote locations? • Labour shares, mining < other industries • BUT in remote Australian case studies • labour shares > than mining industry averages • Capital shares • greatest proportion of disbursement • Reasons: Capital intensive nature of mining, changing role of labour unions • Reflects:  labour shares generally despite > labour shares in developing countries with lower MPL • Resulting from: factor price equalization from globalization,  mobility of capital, > FDI, exchange rate flexibility, financial crises • despite previous attempts to restrict L & K mobility,  gov’t spending, • all shift returns from labour  capital 21
  • 22. Discussion: Factor shares and the flow ofincome from mining in remote locations?Continued… • Land returns • while small as % of total income • large in absolute terms • allows remote communities to undertake activities • ALSO mining companies are critical in providing important additional funding and support which if well planned can provide enduring value 22