National Economic Review
National Institute of Economic and Industry Research
No. 68 October 2013
The National Economic Review is published four times each year under the auspices of the Institute’s Academic Board. The Review contains articles on economic and social issues relevant to Australia. While the Institute endeavours to provide reliable forecasts and believes material published in the Review is accurate it will not be liable for any claim by any party acting on such information.
Editor: Kylie Moreland
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The mineral resource boom and the economy of South West Queensland
Dr Ian Manning, Deputy Executive Director, NIEIR
As outlined in the State of the Regions report for 2012–2013, the current national resource boom is patchily distributed, with some regions reporting frenetic activity and others depressed as a side-effect of the boom. South West Queensland lies on the margins of the boom: it is not involved in the booming iron ore and coal export industries but parts of it produce petroleum, natural gas and coal seam methane. To ensure that benefits continue, it is necessary to plan for what will happen after the boom has run its course. There are two main concerns. First, infrastructure should not be allowed to deteriorate as a result of boom usage or the diversion of resources to the boom. Second, the boom should not be allowed to detract from the productive capacity of the pastoral, tourism and other non-mineral resource industries in which the region has expertise. The present paper investigates several policy measures to optimise the benefits from the mining boom. Such measures include: ensuring that the mineral resources industry makes appropriate contributions to local infrastructure through a rural equivalent of the urban developer charge system; ensuring that the industry makes appropriate direct contributions to local government; increasing state royalties to fund a regional development trust, as pioneered in Western Australia; financial regulation to require appropriate financial intermediaries to insure housing values in the towns of the region; and investment to improve the quality of transportable homes. A further measure, a review of income tax zone rebates, is canvassed in a complementary paper.
This paper was prepared for the Shires of Bulloo, Murweh, Paroo and Quilpie, the Maranoa Regional Council and Regional Development Australia, Darling Downs South West region. It is printed with permission.
National resources and the economy
Geoffrey Blainey’s popular history of Australian mining is entitled The Rush That Never Ended. Despite this title, it is actually the history of a sequence of rushes, some small and local in their effects but a few of them major to the extent that they changed the course of national economic history. These major rushes (mining booms) were separated by decades when other industries took the lead in Australian economic development. Over much of the nineteenth century, before Australia became an integrated economy, the pastoral industry was in the lead in all six colonies, while farming provided a solid basis for development in most colonies in the late nineteenth and into the twentieth century. The prosperity of the post-war period in the mid-twentieth century was based on manufacturing. However, the late twentieth century saw a revival in the exploitation of mineral resources (mining is now something of a misnomer: underground mining has declined in favour of quarrying and oil and gas wells). The Poseidon boom was preceded by the first Pilbara boom, after which there was a lull followed by the present resources boom.
The national resources boom
The current Australian resources boom is a response to an unexpected increase in the international prices of three minerals. First, The US dollar price of iron ore rose more or less continuously from 2004 to peak in 2011 at nearly thirteen times its level in 2003, although it has since fallen to eight times its 2003 level. Second, the US dollar price of thermal coal rose from 2004, spiked in 2008 then fell, before recovering to four times its level in 2003. Finally, the US dollar price of liquefied natural gas (LNG) rose from 2004, spiked in 2008, fell, and then recovered to four times its level in 2003, although falls are expected given declining gas prices in the United States.
Although part of each of these increases reflects the fall in the value of the US dollar, the increases have been substantial whatever the currency used to measure them. Australia has resources of all three minerals and, once it was realised that prices were going up despite the Great Financial Crisis, investment boomed in increasing Australian production capacity. The reason for the high prices lies primarily in demand from China arising from rapid economic growth.
In describing the effects of a resources boom, it is important to keep an eye on the future. The very word ‘boom’ implies subsequent bust. There are some who believe that the current level of activity in the mineral resource industries is not a boom but can go on forever. However, the historical record is that peaks in mineral prices have been followed by periods of lower prices as international supply has caught up with demand. There is every reason to expect that this will occur in the present case, if only because the Chinese are investing heavily in expanding supply, partly in Australia but also in other mineral-rich countries. When prices fall the industry responds by reducing investment in capacity expansion and the boom ends. Regions which prospered during the boom are thrown back on other sources of employment.
The rush of the current resources boom is well measured by gross operating profits in the ‘mining’ industry, which, as defined by the Australian Bureau of Statistics, includes all mineral resource exploitation. In 2011 profits in the industry were running at the rate of approximately $A94 billion a year: nearly four times their level a decade previously. In 2011 profits in the mineral resource sector accounted for 32 per cent of all business operating profits (excluding the agricultural sector and most of the finance sector), a significant increase from their share of 19 per cent in 2001. This increase in profit share was largely at the expense of manufacturing, which had approximately the same share of non-agricultural, non-financial profits as mineral exploitation in 2001 but declined to 11 per cent in 2011 (ABS, 2012). There was a causal relationship at work here:
- The Reserve Bank of Australia responded to the resources boom by raising interest rates. The currency market responded to this and to the increase in foreign investment in Australia by raising the Australian exchange rate, which reduced the Australian dollar prices of imported manufactured goods. The Australian manufacturing industry found itself unable to compete.
- The rise in resource exploitation profits generated a boom in resource-related investment and, hence, in the demand for construction labour. Although there has been no general wage breakout during the boom, there has been competition for skilled labour, to the detriment of manufacturing.
Although the primary victim of the resource boom has been manufacturing, the high exchange rate has penalised export industries across the board, including resource exploitation itself. However, the penalty is of little concern to the mineral resource industry because it has been counterbalanced by booming prices. In addition, the industry is largely overseas-owned and thinks in terms of the US dollar, the euro, the yen or the yuan. The penalty has been severe for tourism and export education but because of the hazy definition of these industries in official statistics is not well documented.
The farming and pastoral industries are also trade-exposed, but have been relatively well placed to survive the high exchange rate, for three main reasons. First, the agricultural and pastoral industries have a long history of exposure to fluctuating world prices, including (since 1983) fluctuations due to the floating exchange rate. Through long and sometimes bitter experience they are better prepared to deal with fluctuating prices than manufacturing and service industries. Second, the agricultural and pastoral industries likewise have a long history of exposure to good and bad seasons, which has again forced resilience upon them. It has helped that in much of Australia seasonal conditions have been reasonably good in recent years so that increases in quantity sold have helped to counteract price reductions due to the spike in the exchange rate. Finally, international prices for a number of key pastoral and agricultural commodities have been reasonably favourable over the past few years. Thus, in 2011 the US dollar prices of beef and fine wool were sufficiently high to offset the exchange rate so that Australian dollar prices were comfortably above the low levels suffered in the 1990s and up to 2005. These factors have so far sheltered many agricultural and pastoral businesses from the adverse effects of the resources boom expressed in the high exchange rate and competition for labour.
A further potential adverse effect of resource exploitation, its environmental impact, can be important for the agricultural and pastoral industries, as well as for tourism, although it is not important for manufacturing or export education. For example, several decades ago the mining of beach sand in Queensland was curtailed because of its serious environmental effects, including the impact on tourism. More generally, resource exploitation can directly disrupt rural production. Mineral exploration can involve entry to farm properties, which affects the use of the properties, while mining and quarrying can debilitate farmland, pre-empt water supplies and pollute creeks and ground water. The various state mining acts provide for compensation but farm organisations argue that the compensation is insufficient. More fundamentally, they claim that it is not right that mining should have the automatic precedence over agriculture as a land use granted to it by the current state mining acts.
The rapid changes in relative industry competitiveness that have resulted from the resources boom have had pronounced regional effects. Activity has boomed in the mineral resource regions and slumped in regions based on manufacturing and tourism. The effects in the agricultural and pastoral regions are more complex, partly because the high exchange rate has been partially offset by increased international prices and partly because several agricultural and pastoral regions also host mineral resources.
The prospect of an end to the boom is of great importance in assessing its effects. If the increase in the profitability of mineral resource exploitation is permanent, it is rational to divert resources from less-profitable industries to the new high-profit industry. However, if the high profits are temporary, the diversion of resources may come to be regretted once the boom ends and the country has to depend on its established industries. Thus, a boom that weakens other industries, for example by raising wage costs so that routine maintenance is postponed, may turn out to be costly in the long term, because it will be difficult for the established regional industries to take up the slack when the boom ends. In contrast, it is possible for boom investment to strengthen the other industries, for instance, by improving general transport infrastructure. If this happens its long-term effect is likely to be positive.
South West Queensland: Geography and population
As an example of the effects of the resources boom in a largely pastoral region, part of which has been directly affected by the boom, we take South West Queensland, here defined as five local government areas (LGAs): Bulloo, Maranoa, Murweh, Paroo and Quilpie. This region lies north of the New South Wales border and forms a strip approximately 350 km wide, stretching roughly 800 km east from the South Australian border. Four of these LGAs are legally shires, while Maranoa is legally a regional council, but, with apologies to Maranoa, in this article we will use the term ‘shire’ to refer to each of them. Each shire is geographically large, typically 200 km east to west and 200 km north to south. At the 2011 Census the resident population of the region was 20,931. More than half these people (13,100) live in Maranoa. The largest town in Maranoa, and, indeed, in the region, is Roma, with a population of approximately 6,000. The next most populous shire is Murweh, which accounts for nearly one-quarter of the population of the region and has the second-largest town, Charleville, with a population of around 3,200. Paroo follows, with a shire population of 1,900, including the region’s third largest town, Cunnamulla (population 1,200). Quilpie Shire has a population of a little fewer than 1,000 and Bulloo Shire a resident population of 400. The region has one other town of around 1,000 population: Mitchell, in Maranoa shire. The largest town in Quilpie Shire is Quilpie, with the population around 560, while the largest (some would say only) town in Bulloo Shire is Thargomindah, with a population of 200.
Over the past two decades the population of the region has increased gently, although it is best described as stable.
The economy of South West Queensland
The market value of output produced in the region, excluding corporate profits, is estimated at $A918 million, of which roughly 60 per cent originates in Maranoa, 19 per cent in Murweh, 8 per cent each in Quilpie and Paroo, and 4 per cent in Bulloo. The value of output per person employed is highest in Paroo and Quilpie (approximately $A108,000 per worker). This is something of a statistical artefact, because output in these shires is dominated by the pastoral industry, much of which is run by family businesses whose profits are included in the value of production. The value of output per person is somewhat lower in Bulloo and Maranoa: between $A80,000 and $A90,000 per person employed. The gas industry is important in these shires, but its corporate profits are not included in the value of production because they are difficult to allocate geographically and do not generate incomes available for local distribution. Finally, Murweh has the lowest value of output per person employed, a little under $A70,000, due to its hosting low value-added industries, such as the abattoirs and various service industries.
Across the region as a whole, approximately 7 per cent of the value of production is not available for distribution within the region because it is claimed by workers who live elsewhere. The remaining income generated within the region is split more or less equally between wages/salaries and business income. In 2010– 2011 residents of the region paid approximately $A160 million in income tax but received approximately $A180 million in social security payments. The balance differed between the shires. Income tax payments by Murweh residents comfortably exceeded their social security receipts but it was the other way round in Paroo, with the position in the remaining shires being more or less balanced. Residents of the region also paid indirect taxes but benefited from the provision of government services that generated employment in public administration and police, education and health services. This employment accounted for nearly one-quarter of total jobs, and its location was determined largely by government policy on service provision and, in turn, by the location of people who required services. The underlying reason why people live in the region is the incomes generated by its economic base.
The economic base of South West Queensland
Residents of the region earn incomes from the export of the products and services of three main industries to people outside the region. These economic base industries account for approximately one-third of total employment in the region, with other support and service industries accounting for the remaining two-thirds. In what follows, the long-term economic mainstay of the region, the pastoral industry, is first considered. Tourism and support services are then discussed before turning to mineral resource exploitation.
The pastoral industry
The resident employed workforce comprises a little over 10,000 workers, of whom one-quarter are employed in agriculture and forestry: primarily in pastoral production, although dry-land crops are grown in favoured parts of Maranoa. There is also a small irrigation area based on the Warrego River at Cunnamulla. In addition, the wild honey of the bush is harvested by beekeepers and the forestry industry feeds several small sawmills. The principal export products are beef cattle, wool and sheep for meat. Producing all three requires careful management to ensure that the fluctuating carrying capacity of the country is utilised without overgrazing. Management techniques include rotation between paddocks, browsing, agistment and judicious timing of animal turn-off.
Several challenges face the pastoral industry. One such challenge is maintaining detailed local knowledge to underpin property management. This knowledge is not easily acquired because it takes decades to experience the full range of seasonal conditions. Another is developing pastoral products that meet specific market requirements and, hence, command premium prices. Controlling costs, particularly labour costs but also transport costs, is another issue. It is here that there is potential for conflict with the mining industry. Another issue is the control of pests, especially wild dogs and cats.
Two other meat animals, goats and kangaroos, offer potential for expanded production, but both are difficult to manage because neither species respects fences. So far, goats have been herded and then processed as for other meat animals while kangaroos have been culled in the field: a process that has led to problems of quality management. The future of these products depends on improvements in animal management.
For the region as a whole, employment in the pastoral industry declined by 20 per cent from 1991 to 2011. The decline was most severe in Quilpie and Bulloo and had two major causes. The first was the prolonged slump in wool prices during the 1990s and early 2000s, which generated a move out of wool. There was a magnified effect on regional employment, because wool production is more labour-intensive than beef cattle or meat sheep production, and even itinerant workers (such as shearers) tend to live locally. The second major cause was an unusually long drought, particularly in the western part of the region. Both the drought and the wool slump have ended, and over the past few years employment in the pastoral industry has been recovering. It should also be remembered that other elements in regional employment are directly linked to the industry. Roma has the largest cattle sale yard in Australia and Charleville has one of the few remaining inland abattoirs.
Pastoral production is an extensive land use that is not seriously disturbed by mineral exploration nor seriously compromised by oil or gas wells or pipelines. The main potential for environmental conflict concerns ground water, with potential for competition for ground water flows and potential for the mineral resource industry to pollute ground water flows as well as creeks and waterholes.
Compared to the agricultural and mineral resource sectors, tourism is a relatively minor export industry for the region. Accommodation and food services account for less than 6 per cent of the resident workforce and many of these workers are employed to provide services for local people or for the mineral resource exploitation industry. However, the region has capitalised on its position astride the grey nomad route through inland Australia, an imaginative example being its investment in the Cosmos Centre at Charleville. The region does not attract many international visitors except for the backpackers who provide much of the hotel workforce in Roma. The mining boom has resulted in a shortage of tourist accommodation in Maranoa but not in the other shires.
Apart from the export-oriented elements in its economic base, the region provides employment in necessary commercial support services in transport, construction and trade. These services account for approximately 40 per cent of total employment in the region.
Mineral resource industries
The region’s second most important export industry, measured by employment, is the exploitation of mineral resources, which employs a little over 5 per cent of the resident workforce. Because of the importance of fly-in fly-out in this industry, its contribution to total jobs located in the region is somewhat greater, at 8 per cent, and because it pays relatively high wages its contribution to wage incomes would be somewhat greater again, but still way short of the pastoral industry.
This industry comprises three distinct segments. First, in Quilpie and Bulloo Shires, opals are mined by fossickers and other small businessmen. These enterprises have none of the characteristics of the big mining companies and can be treated as an adjunct to the tourism industry.
Second, the western parts of Quilpie and Bulloo Shires lie within the Cooper Eromanga basin and have proved prospective for hydrocarbons. Local crude oil production supports the Eromanga oil refinery: a small but significant enterprise that supplies diesel, kerosene and specialist mining fuels to a large area of outback Australia. The Jackson oilfields in Bulloo shire have been producing since 1981, with crude oil piped out via Adelaide and Brisbane. More recently, the area has been developed for natural gas. Santos operates a processing facility at Ballera, from where gas can be piped west to the Moomba hub, north to Mount Isa or east to the hub at Wallumbilla. Exploration is under way to potentially extend gas production to Paroo and Murweh Shires, but these at present have no mineral production.
Finally, energy resources available in Maranoa include coal, oil, natural gas and coal seam gas. Coal was mined at Injune until the dieselisation of the Queensland Railways in the early 1960s. The oil and natural gas fields have a century-old history, much of it a history of disappointment. The natural gas hub at Wallumbilla, east of Roma, was not sited to serve local production but lies at the point where the natural gas pipeline from Ballera bifurcates to serve Brisbane and Gladstone. However, over the past decade, coal seam gas production has increased considerably in Maranoa and across the borders in Western Downs and Banana. These increases have generated investment in gas processing plants and an increase in the importance of Wallumbilla. Coal production has yet to resume in the shire but seems likely to do so as soon as the present limits on transport capacity to the coast can be overcome.
Resources boom in South West Queensland
The national resources boom has been based on iron ore, coal and gas. South West Queensland cannot produce iron ore and does not currently produce coal but has been well placed to participate in the gas boom. The pace of development in the gas industry in South West Queensland picked up in the early 2000s, well before the national resources boom was triggered in 2004 by the rise in world prices of iron ore and energy minerals. At the time there was no question of export markets and, indeed, there was a strong possibility that Queensland would be supplied with natural gas from Papua New Guinea. Three factors served to increase interest in local gas production. First, in 2000, the Queensland Government announced a cleaner air policy, which, with a long lead time, guaranteed a market for gas in electricity generation in Queensland. Second, at approximately the same time, investors were showing considerable interest in alumina production at Gladstone, again with potential to increase the demand for gas. Finally, developments in the technology of coal seam gas production lowered costs.
In response to these signals, investment in coal seam gas began in earnest in Maranoa and adjacent LGAs. The contribution of the national resources boom has been to confirm demand, including introducing the prospect of export demand by construction of LNG export terminals at Gladstone. Investment has continued, now mainly focused on export demand. Employment in the mining sector in Maranoa continues to increase but not at the rapid rate experienced in the first 5 years of the present century.
The timing of gas industry expansion was similar in Bulloo and Paroo, although to a considerable extent it reflected the completion of a pipeline investments committed in the late 1980s. The Ballera gas hub was constructed and connected by pipeline to the Moomba hub in 1994, which enabled wells in South West Queensland to supply the Adelaide market. The pipeline to Wallumbilla was added in 1997, providing access to markets in Brisbane and Gladstone, and the pipeline to Mount Isa was completed in 1998. These connections inaugurated a program of gas field development that peaked in the early 2000s but continues to this day, with the locus of activity moving northward into Quilpie Shire. As in Maranoa, the contribution of the natural resources boom has been indirect, by maintaining confidence that gas from the Cooper Eromanga basins will continue to find profitable markets.
Sequence of mineral resource development
The impact of mineral resource development on incomes and on other industries has to be understood in relation to the typical life of a gasfield. This has four phases: exploration, construction, production and remediation.
The exploration phase is carried out by a small mobile workforce spread over a large area. This workforce is highly skilled and depends on scientific support. It is inevitably based in major centres and its members frequently camp out when in the field. The chief limit to the duration of the exploration phase is the time limits that state governments impose on exploration licences to prevent ‘warehousing’. The exploration phase ends when sufficient reserves have been proved to justify the construction of processing and transport facilities.
During the construction phase the processing plant and transport pipelines are built and a relatively large workforce is brought in. Most of this labour requires general construction industry skills. Because serious capital expenditure is involved, it is in the investor’s interest that the construction phase should be as brief as possible, a few years at the most. The high wages paid in mineral resource sector construction are partly explained by the hurry.
For most minerals the production phase requires less labour than the construction phase. However, this is not necessarily true for onshore oil fields and gas fields where, as the field ages, exploration continues to pinpoint additional reserves and wells are drilled to exploit marginal reserves.
In the remediation phase the skills required revert to general construction industry skills. Revegetation can be quite labour-intensive, but the gas industry does not require the extensive surface earthworks typical of coal mining. The mining industry has a history of failure to provide for remediation but mine and petroleum tenements now require remediation and the major mining companies make reasonable provision, the costs being small relative to the damage to their reputations if remediation is not properly implemented.
The course of the resources boom in South West Queensland can be charted by its labour market effects.
The resources boom and the labour market
Between 2001 and 2011 employment in the mineral resource exploitation sector in Maranoa increased by 380 workers and in Bulloo/Quilpie by 220 workers. These increases followed a period of construction. Although its skill requirements are not outstanding compared with manufacturing or rural industries or, indeed, with local government services, the mineral resource sector is now renowned for the payment of high wages, at least during booms. It was not always thus: workers in the Maranoa colliery of the 1950s were paid much the same wages as other rural workers.
There are several reasons for the high wage rates currently paid. For example, the gas industry, like other major resource industries, is capital-intensive. Disruptions from labour shortages that involve leaving equipment idle are accordingly very costly and employers are willing to pay to avoid plant stoppages. The quid pro quo is that workers must submit to the discipline of working the required shifts. Another reason is that plant operators in the industry are frequently in charge of valuable equipment and mistakes in equipment operation can cost millions of dollars. High wages are, in part, compensation for being careful, the quid pro quo being that carelessness results in dismissal. High wages can also be seen as compensation for the personal disruptions that occur when people go to work in distant places in jobs that carry no guarantee of permanence.
Although not all firms in the industry follow this policy, the industry has a reputation for high labour turnover and low expenditure on training. The industry relies on two main sources of labour: local labour is recruited, either from those previously unemployed or underemployed or by recruiting from those previously employed by other local industries; and labour is recruited from outside the region.
The advantage in recruiting local people is that they are already accommodated, acclimatised and incorporated into the local community. However, not all local people take up the opportunity to work in mining. For instance, many are not willing to submit to the industry’s work discipline. In addition, production sites are frequently located away from established homes and many are not willing to put up with the resulting travel requirements. Another issue is local workers not meeting the industry’s skill requirements. Thus, it is normal for mineral resource jobs to be on offer but not taken up by the local unemployed. In many remote areas governments and some mining companies provide training programs that attempt to upgrade the work and social skills of local unemployed people, particularly Aboriginal people, and these, coupled sometimes with job redesign, have been credited with increasing local participation in the industry.
Therefore, a mining boom is no guarantee for an end to local unemployment, although by all measures unemployment rates in South West Queensland have been below the national average and significantly below the average in other rural areas that lack resource sector employment. (The exception is Paroo, which of all the five shires has been least affected by the resources boom.)
Despite the reluctance of many local workers to accept mining sector employment, the sector has succeeded in attracting locally resident workers away from employers who are not able to match resource industry pay rates. The pressure was reported as least in Paroo, which is the furthest of the five shires from developments in the gas industry: 500 km away is too far for comfortable drive-in drive-out, let alone commuting, and the supply of housing in Cunnamulla is sufficient to keep housing costs low for purchasers if not for tenants. Home owners are understandably reluctant to trade their present comforts for high housing costs in the boom areas.
At the other extreme, high rents in Roma are reported to have forced local residents into the industry just to get enough cash to pay the rent. The following were reported:
- pastoral workers and even owners were transferring to the resource industry, often part-year in the off-season for pastoral activity. The downside of this was that non-urgent maintenance tasks on the properties were being deferred, with eventual run-down in production capacity;
- contractors, transport businesses and councils other than Paroo were finding it hard to keep drivers and plant operators; and
- the Charleville abattoirs now rely on 457 visa workers.
Two dangers arise if labour cannot be found at costs similar to those prevailing in the regions without mineral resource developments: government (particularly local government) assets will be run down, particularly roads; and industries will be run down or even closed. As regards roads and other local government services, the resource exploitation companies can be required to pay rates that not only cover a fair share of road costs but allow councils to pay competitive wages, even though councils are reluctant to lock in high wage rates which will continue to apply after the need for them is over. However, this opportunity is not available in shires without mineral production. As regards the pastoral industry, the effect of the resources boom seems to have been marginal. Immediately essential production tasks are being carried out but there is a concern that a maintenance backlog is building up.
In industries characterised by large employers who offer permanent career employment, the established method of staffing unpopular posts is to make service in them a condition of career advancement. Recent management fashions have deemphasised permanent employment but outback experience can still be a valuable item on a professional CV. Career promotion continues to be an important element in staffing schools, hospitals, banks, police stations and the like: broadly, in providing professional personnel. The resource exploitation industry does not, in general, directly compete for the services of remote-area professional personnel but can make it difficult to recruit such people by raising housing costs. Housing would seem to be the key to maintaining the attractiveness of non-resource jobs in the region, whether or not the jobs require skills attractive to the resource exploitation sector. This will be discussed below.
Tax incentives and Higher Education Contribution Scheme repayment incentives may also be valuable, and are discussed in a separate article.
Labour recruited outside the region
When labour cannot be found locally, the mineral resource industry recruits elsewhere, not only within Australia but overseas. The industry uses permanent visas for skilled professionals and 457 visas for other workers. When employing labour from outside the region the resource industry has used two markedly different recruitment strategies:
- In Bulloo and Quilpie almost 90 per cent of the industry workforce has been recruited from outside the region and continues to reside elsewhere (generally Adelaide, from where they fly in and fly out). Significant numbers of support personnel in accommodation and transport also fly in and fly out.
- In Maranoa the number of resident mineral resource industry employees very nearly balances against the number of employment positions. However, this is believed to understate the importance of drive-in drive-out for the local economy, some of the drive-in drive-out activity being internal to the shire and some of it involving cross-border traffic to and from neighbouring shires.
The obvious reason for this difference is that Maranoa is less remote than Bulloo and Quilpie. The gas fields and processing facilities of the Cooper Eromanga basin are too far from either Thargomindah or Quilpie to support daily commuting from these established towns, although drive-in drive-out is a possibility. If these fields were to be served by resident labour, it would be necessary to build new townships: probably several of them, in view of the dispersion of the fields. There are numerous arguments in favour of fly-in fly-out:
- Nobody wants to develop settlements that become ghost towns within a decade or two. Fly-in fly-out is appropriate when a workforce has to bivouac in a remote area for the limited duration of a project, especially a construction project. Accommodation needs can be met by temporary dongas without the need to provide more than basic facilities.
- Recent experience at Ravensthorpe (Western Australia) highlights the perils of investing in mine-site townships.
- In some remote areas, although not as far as is known in the Bulloo and Quilpie shires, the Aboriginal Traditional Owners prefer that outside workforces are employed on a fly-in fly-out basis.
- There are employers in the mineral resource industries who believe that fly-in fly-out workforces are easier to manage. They are less likely to unionise strongly and there is a potentially wide field of recruitment when workers are sacked for failures of discipline.
Fly-in fly-out accords well with the industry’s tolerance for high labour turnover.
- The Cooper/Eromanga gasfields are so spread out that townships to serve them would be very small and have limited facilities.
The arguments against fly-in fly-out are as follows:
- The fly-in fly-out lifestyle corrodes social and family life, although probably no more so than established ‘tour of duty’ occupations such as defence and seafaring.
- Fly-in fly-out incurs high transport costs.
- The pastoral and tourist industries in the same area rely on resident employment, so why not the resource exploitation industry?
- Additional townships would help support the pastoral and tourist industries.
- The Cooper/Eromanga oil and gas fields have turned yielded employment for two decades past and probably for two or three to come. Had townships been established when the fields were young they would have lasted long enough to be fully depreciated by the time their economic rationale disappears and they are abandoned and demolished.
Whatever the reasons for the long-term reliance on fly-in fly-out in the Cooper/Eromanga, the result has been that recruitment to the gas industry in Quilpie and Bulloo has placed very little pressure on local accommodation and has generated very little consumer expenditure in those shires: the fly-in fly-out workers do all their living and spending in their places of residence.
By contrast, many of the Maranoa gasfields are within daily commuting distance of Roma and other established towns and all are within drive-in drive-out distance. There has been strong pressure on all classes of accommodation in Maranoa, which, in turn, has fed back into the difficulty of recruiting employees for other industries. This applies not only to the pastoral and tourism industries (elements of the economic base) but to the service industries, which have opportunities to expand to service consumption expenditure given the increasing number of resident resource sector employees. We will return to the accommodation shortage when discussing housing.
The hospitality industry and agricultural enterprises with seasonal labour demands have made considerable use of backpackers while construction and manufacturing have made use of 457 visa workers. The question is why industries resort to immigrant labour when there are still large numbers of underemployed and unemployed Australians in other parts of the country and even within the region. One major reason is skill mismatches, many of which are as much social and behavioural as technical. More and better training and re-training are often recommended as answers. Another reason is the pressure on accommodation in the region coupled with the reluctance of Australian workers to leave their established houses in other regions and the metropolitan areas and the social networks that they have developed in those areas.
If immigrants are to be used to meet the local labour shortages created by the resource boom, there is something to be said for making work in the resource-booming areas a condition of their visas.
Gas and petroleum are most cheaply transported in bulk by pipeline. Once a pipeline is in place it makes no demands on the general transport system. However, the process of exploration, well drilling, processing plant construction and pipeline construction all require use of the general transport system, particularly roads, including many shire roads. The industry also uses road transport for product flows that are too small to justify pipeline construction.
Coal is a different matter. Export coal requires heavy haul transport as does domestic metallurgical coal and coal for electricity generation, except where the power station is located beside the mine. Although export coal is not, as yet, mined in the region, mines located in Western Downs and Toowoomba LGAs have contracted a high proportion of the limited rail capacity between Toowoomba and Brisbane and are also prominent generators of road traffic. The agricultural and pastoral industries complain that this is depriving them of high-capacity access to the abattoirs and Port of Brisbane: an especially serious matter for shippers who, for various reasons, do not have the alternative of export shipping through Newcastle via Moree. It is expected in the region that the construction of a rail connection to Gladstone and/or the bypassing of the Toowoomba Range by tunnel will allow a revival of low-cost bulk rail services. However, this is by no means certain, if only because the two main rail service companies active in Queensland have both decided to concentrate on bulk mineral and container traffic: there is no equivalent of the smaller operators who carry agricultural products from Moree to Newcastle. Under current prices and technologies it is arguable that the pastoral and farming industries can prosper without rail transport, but there is a strong argument for maintaining rail capacity against that day when the reduction of greenhouse gas emissions becomes a world and national priority.
Returning to roads, the Commonwealth remains the main source of roads funding for the South West, just as it is the main collector of road-related taxes. Its distributions are watched intently by local government and are more or less adequate: average road condition in the region is now substantially better than it was a couple of decades ago. The five shires also appear to have been reasonably satisfied with the distributions for flood damage repair made during 2011. However, resource-boom effects on local costs are not taken into account in the Commonwealth’s distributions. Again, some local roads bear mineral resource-related traffic, which is not taken into account in the Commonwealth’s distributions. However, the three shires directly affected (Bulloo, Quilpie and Maranoa) have moved to increase rates on the oil and gas industry to cover these costs. Shires have also negotiated with the gas companies to directly finance the construction of public roads required by the industry.
These arrangements do not cover road use during the exploration phase of mining development nor do they cover roads used in adjacent shires that have no mining tax base. However, apart from these deficiencies, the arrangements appear to be working.
Payments by resource extraction companies to governments
In addition to general taxes, such as corporation tax and payroll tax, there are two main classes of payment that governments may require from companies that extract non-renewable resources. The first is compensation for costs imposed on the community, notably road costs but also other items such as the cost of site rectification and pollutant management when these are left to governments rather than done by the business itself. The second is compensation for the loss of non-renewable resources. In the Australian states, these resources are owned by the states and compensation is known as royalties. The resource exploitation industries like to refer to royalties as taxes, but this is not correct.
Royalties are the price that the resource industries pay to gain ownership of the minerals they extract.
Because subsoil minerals in the region are the property of the state, neither local government nor the Commonwealth have the right to levy royalties. Therefore, local government has concentrated on cost recovery.
Payments to local government
The principal source of local government revenue, other than grants, is the rate on land. As landowners and lessees the mineral resource industries are liable to pay rates.
Queensland legislation requires rating to be on unimproved values, which have considerable merit as means of spreading the rate burden across ratepayers. However, a strict unimproved value rate generates notoriously small revenue from town allotments in rural shires. The legislation allows differential rating and it has become customary to impose a higher rate in the dollar for urban allotments than for rural allotments, the differential being determined by an estimate of the value of services provided to town ratepayers as compared to rural ratepayers. Rating on strict unimproved values also yields very low revenue from mineral resource exploitation properties: the unimproved values of these properties are low because the state-owned mineral resources lying under the property are not taken into account in valuing them. Local government has accordingly extended the established practice of differential rates for urban properties to impose differential rates on the mineral resource industry.
We may take the example of Bulloo Council, which has defined four areas occupied by mineral extractive businesses, each of which, ‘by virtue of its operation impacts significantly on the economic, environmental and social welfare aspects of the local community’.
Two of these areas are large consumers of council services, particularly roads. Land in these four areas attracts a considerably higher rate in the dollar unimproved capital value than rural land. These rates were determined by negotiation between council and the industry, and reflect estimates of: road maintenance costs occasioned by resource industry traffic; depreciation of relevant roads, which is fully funded; waste management; a contribution towards other shire services; compensation for the increase in wage costs due to the local presence of the mineral extraction industry; and a contribution towards the sustainability reserve which is being accumulated with an eye to maintaining services (particularly roads) when direct contributions from the resource industry cease due to the exhaustion of non-renewable resources.
By means of differential rating, Bulloo Shire Council raises nearly three-quarters of its total rate revenue from the oil and gas industry, but because grants and recoverable works are major sources of council funds this represents only 16 per cent of operating revenue. (Recoverable works are mainly road works at the behest of the state and Commonwealth governments but can include works negotiated with the resource companies to further their operations.) At less than $A3 million, the rate payment is also a minor expense in the books of the oil and gas companies.
Quilpie follows similar differential rating policies, and in 2011–2012 expects to raise nearly half its rate revenue from the oil and gas industry. After imposing differential rates on the industry it has abandoned a former road maintenance contribution levied on oil haulage. In rating the oil and gas industry Quilpie keeps an eye on the value of mineral production in the shire as reported by the Department of Mines and Energy.
Maranoa has likewise defined six resource-related areas on which it imposes differential rates: four areas of extractive industry plus petroleum leases and land ‘that is identified as having a gas refinery established on it’.
Although all shires host pipelines these are not rated. This policy concords with the general rate exemption for transport facilities. Mineral exploration licences are similarly rate exempt, presumably because they do not grant ownership or leasehold of land for which an unimproved value can be assessed. However, given their legal status as tenements they are potentially rateable, particularly if a fair value could be determined vis-à-vis other land titles.
The differential rating approach appears, so far, to have yielded revenue reasonably proportional to the increase in operational costs occasioned by resource extraction.
Two approaches have been noted: the ‘Bulloo’ approach, based on a broad assessment of the costs occasioned by resource extraction, including contributions to a sustainability fund; and the ‘Quilpie’ approach, based on the value of production. These two approaches frequently occur in public finance, the former reflecting the benefit principle and the latter the ability-to-pay principle. In the local government context the cost-based approach is on firm ground, but the negotiated nature of the settlements could prove a weakness in the case of councils that underestimate costs or that encounter resource extraction companies that are determined to strike a hard bargain, irrespective of the costs they impose. There may also be potential for dispute as the profitability of mineral extraction declines. If arguments develop, the parties are likely to appeal to costs, and councils should be prepared to provide a careful and accurate account of the costs occasioned for them by resource exploitation. The ability-to-pay approach is riskier for the council: it avoids the difficulty of trying to recover costs from unprofitable mineral extraction ventures and is likely to raise greater revenue from bonanzas. It is open to the objection that it is effectively a royalty and, hence, open only to the state (see below), but there are precedents in indigenous mining agreements and in the conditions under which mining leases are bought and sold. Given that state royalty rates on gas are 10 per cent of wellhead value, a local government addition of approximately 2 per cent would not be an excessive burden on the producers.
The two principles are not mutually exclusive, and it could be appropriate to combine them, with a basic rate related to direct costs occasioned by resource exploitation and a value-related addition, which would come into play only when the basic rate yielded less than (say) 2 per cent of wellhead value. The additional revenue could then be credited to a sustainability reserve.
A second area where there may be scope for formalisation of current practice is the once-only capital contributions made by resource extraction companies as part of bringing resources into production. An analogy may be made with the contributions made by developers of urban housing estates. Contributions by resource companies may appropriately include capital roadworks, water supply, sewerage, water pollution control and drainage works required for the project to proceed.
An important aspect of urban developer contributions is compliance with town planning. This cannot so easily be imposed on mineral resource developments, because the resource determines the location of the development. However, there is scope for negotiation over the location of supporting developments: roads, pipelines, processing facilities, campsites and townships. It makes sense to locate these so that, as far as possible, they will be generally useful both during and after resource extraction. For example, some of the remote area roads in Bulloo Shire have been routed to be useful to grey nomads as well as to the gas industry. Maranoa is seeking to ensure that facilities are subsequently useful for rural residential areas.
A more contentious matter is the question of industry contributions to housing and urban development. It is accepted practice that where the mineral resource industry (or the pastoral industry for that matter) employs people in remote areas it should provide accommodation. Such accommodation is either exempt from fringe benefits tax (FBT) or is assessed for FBT at
50 per cent of ‘market rates’. In towns where there are dwellings for private rental, FBT becomes unavoidable. There is a case for review of the incidence of FBT to ensure that it does not constitute a subtle incentive favouring fly-in fly-out.
A question of incentives also arises where councils require that resource companies should pay developer charges towards the provision of housing in existing towns which are to be extended to accommodate resource industry workers. The companies may then calculate that it is cheaper for them to use drive-in drive-out or fly-in fly-out. Despite the possible adverse incentives, there is a case that developments other than short-term construction should include a contribution to local government urban infrastructure. There may also be scope for measures to assist in the provision of actual housing, for example a requirement that resource exploitation companies, as part of the price of their permission to exploit, should provide bank guarantees for mortgages raised on new owner-occupied or rental housing owned by third parties in urban areas expected to house personnel employed at the resource development, with the number of dwellings covered depending on the size of the resource development.
Payments to the state government: Royalties
The administration of mineral wealth would be a relatively simple matter if all resources were known, complete with the cost of extraction. The fundamental problem of resource management would then be seen as one of resource allocation between the current and future generations. Having made a decision about this, the state could call tenders for the extraction of particular resources. It would receive, as sales revenue, the difference between the tender price and the resource sale price. However, neither the true extent of resources nor the cost of their extraction are known. Weighing up the risks and incentives, the state may be expected to maximise the return from its resources if it exacts a price that rises as the final sale price of the mineral goes up but falls as extraction costs increase. A price so determined becomes a form of profit sharing and can easily be mistaken for a tax: an emotive misidentification which the mining industry played for all it was worth in opposing recent Commonwealth mining tax proposals. In fairness to the industry, the Commonwealth proposal was, indeed, a tax, because the Commonwealth has no right to levy royalties (if a state had required a similar payment, it would have been a royalty). The Commonwealth saw an opportunity to raise revenue because the states had failed to raise their royalties in line with the resources boom. The upshot is that the right of the states to levy royalties has been vindicated and they have the opportunity to raise their mineral prices to claim a larger share of the current boom.
The history of royalty payments in Australia begins with the nineteenth century gold rushes, during which the colonial governments were reluctant to levy royalties because the diggers were numerous, vociferous and had many ways to evade payment. To this day, fossicking minerals are largely exempt from royalties, in Queensland and elsewhere. However, most of the mineral extraction industry is now large-scale and capital-intensive and there are no technical problems in the calculation of royalties provided the formula is clear. In Queensland royalties are mostly charged ad valorem, varying by mineral, as follows: gemstones are free of royalty up to $A100,000 sale value, after which the state claims 2.5 per cent of their sale price; petroleum (including natural gas and coal seam gas) is sold for 10 per cent of its wellhead value; and coal is sold for 7 per cent of its value up to $A100 a tonne and 10 per cent thereafter, with the calculation performed separately for domestic and export sales.
Because this revenue is derived from the sale of non-renewable assets, there are strong arguments for hypothecation of the revenue to investment in replacement assets. Western Australia has set a precedent with its Royalties for Regions fund, which feeds the Western Australian Regional Development Trust. Queensland faces many of the same problems of development of remote regions as Western Australia, so the Western precedent is especially relevant and should be investigated.
One of the hopes of the Western Australian government is that it will be able to develop industries to process its resources before they are exported. People in South West Queensland also wonder whether manufacturing industries can be built on the basis of its gas and coal supplies. The present oil refinery at Eromanga provides a small-scale precedent, but it is sheltered by transport costs from world competition in a way that a larger-scale industry would not be. Even so, the region should be alert to opportunities, which could arise in conjunction with that other energy resource which the region has in abundance: sunlight.
At the 2006 Census, approximately one-third of the occupied dwellings in the region were rented with the remaining two-thirds occupied by owners or purchasers. The individual shires varied from the overall pattern as follows:
- In Bulloo, the proportion renting was relatively high, due largely to state-owned houses, many of which were presumably occupied by personnel providing state services. In addition, the council was an important landlord. Few houses were being purchased but a substantial proportion was wholly-owned. Very few new dwellings were being built.
- The pattern in Paroo and Quilpie was broadly similar, although with a little less emphasis on state ownership and a few more home buyers. New dwellings were under construction despite the gradual fall in population in Paroo.
- In Maranoa and Murweh, approximately one-quarter of dwellings were being purchased, balanced by a smaller proportion of outright ownership. New dwellings were under construction but not at a particularly rapid rate and in Maranoa a shortage of accommodation was developing.
All shires reported that they were trying to promote low accommodation costs as a way of retaining workers for industries that could not afford to pay resource industry wage rates. A primary element in the strategy was low land costs, well below metropolitan levels. However, both lot servicing costs and dwelling construction costs were higher than in the metropolitan areas for three reasons: the transport costs for materials; the need to accommodate out-of-town skilled labour; and the lack of economies of scale in construction.
In Thargomindah the impact on costs was estimated at between 25 and 30 per cent over costs in Toowoomba, raising the cost of a $A300,000 dwelling to $A380,000. The impact in Charleville would be less because of the availability of local tradespeople, but in Roma would reflect direct competition from resource-related construction for the services of local tradespeople.
In Australia the preferred low-cost tenure is home ownership. The low costs derive in part from tax favours, particularly the lack of taxation of capital gains made on owner-occupied dwellings. However, the benefits of owner-occupancy can be offset by the costs of buying and selling houses. For people who are obliged to change residence in the course of their careers, home ownership is not necessarily the lowest-cost housing option, particularly when they live in regions where capital gains are far from guaranteed. In South West Queensland towns home ownership is likely to be the lowest-cost housing option for people who stay put for at least a decade, perhaps less, but there is likely to be a healthy demand for rental accommodation not only from people who cannot surmount the financial barriers to home ownership but from people who expect to be stationed in the town for less than a decade.
Two particular barriers to entry into home ownership were reported in the towns of South West Queensland: bank requirements for relatively high down payments, reported to be due to an assessment that employment continuity is risky in towns with a narrow economic base; and fear on the part of potential buyers that they might be landed with capital losses, again reflecting an estimate that the economic base is narrow and the risk of downturns is serious. These two barriers also affected investment by private landlords: hence the heavy reliance on employer-provided housing, including housing provided by the shires. Several of the shires have become active traders on the housing market in the attempt to keep house prices down in their towns.
The two barriers have a common cause: the risks that derive from a narrow economic base. However, pool together all the remote towns of Australia and one no longer has a narrow economic base. This is the classic basis for insurance. It is surprising that the finance sector, which so prides itself on its capacity to innovate, has not offered insurance against the risk of falling dwelling values in defined locations. Essentially the risk concerned is that of falling unimproved values, although it could also be based on average improved values for the town concerned. There is a case for Commonwealth government action to ensure that the finance sector provides such insurance, at least in remote areas (but possibly generally) at a reasonable price. If this risk can be specified and insured against, it should become easier to gain funds for investment in housing in remote areas. (A similar proposal is developed in R. Shiller, 2004, p. 118.)
Another suggestion is to invest in the upgrading of removable homes. Historically, a high proportion of the dwellings in South West Queensland have been wooden, designed so that, if they are no longer needed on a particular site, they can be uplifted from their stumps and re-erected elsewhere. In view of the uncertain prospects for employment based on mineral resources, there is a case for a continuation of this tradition, with opportunities to use prefabrication and modern materials. Such techniques are already in general use for temporary camp dongas and the challenge is to move them upmarket. There is also a challenge to local government to ensure provision of adequate sites for such homes, not in caravan parks but urban lots so that the resident families can integrate into the town population without stigma. Such land developments should include plans for re-use of the sites should this become necessary.
As noted above, the only industry in the region with the capacity to pay developer charges to councils to assist with new housing construction is the resource exploitation industry, where such charges may be required as part of the price of the resource. Many factors enter into the decision as to whether a given mining licensee should be required to contribute to housing development, particularly the permanence of the development and its location vis-à-vis employee source towns. However, councils should not be shy of arguing for such contributions.
Gender balance in employment
It is now accepted Australian practice that both men and women wish to be in paid employment while they are of workforce age. Therefore, if families are to be attracted to live in country towns suitable paid work must be available for both husbands and wives. Second-earner work does not necessarily have to be full-time (many second-earners prefer part-time work), but it does have to be available, along with complementary services, particularly child care.
The labour market in the towns of South West Queensland has proved reasonably accommodating in supplying work for married couples. The service industries are adept at creating part-time positions, the gender stereotyping of jobs has broken down and the TAFE network assists in providing necessary skills. However, there is still a responsibility for councils and other public institutions, in their role as employers, to watch the local labour market and endeavour in their employment policies to ensure that couples can find satisfactory work for both partners.
Tax concessions and government services in remote areas
In this article the consequences of the resources boom for South West Queensland have been reviewed. The region has participated in the boom, although not fully: mineral resource exploitation has not become its dominant economic activity. On the assumption that booms do not last forever, we have considered ways in which the pastoral, tourism and other industries can be sustained, not only for the sake of their current economic contribution but even more in anticipation of their continued contribution once the resources boom has subsided.
The discussion has not been exhaustive and, in particular, two groups of policies have not been mentioned. First, the Commonwealth offers tax incentives to work in remote areas. These can be helpful in recruitment and payment of personnel. Second, both the Commonwealth and state governments pursue policies on service provision which can be helpful in recruiting personnel to work in South West Queensland. These topics (which are related) are discussed in a companion article.
On balance, South West Queensland is benefiting from the mineral resources boom: some shires more than others. However, to ensure that benefits continue, it is necessary to plan for what will happen after the boom has run its course. There are two main concerns. First, infrastructure should not be allowed to deteriorate as a result of boom usage. Similarly, infrastructure put in place as a result of the boom (including transport, water management and urban development) should be designed for maximum value after as well as during the boom. Second, the boom should not be allowed to detract from the productive capacity of the pastoral, tourism and other non-mineral resource industries in which the region has expertise. Even during the boom these industries continue to dominate the region’s economic and employment base, and the region will once again turn to them when the resource boom subsides.
Numerous measures have been canvassed in this paper. One such measure is ensuring that the mineral resources industry makes appropriate contributions to local infrastructure through a rural equivalent of the urban developer charge system. (The local governments of the region are already doing this but there may be room for systematisation.) Another is ensuring that the mineral resources industry makes appropriate direct contributions to local government. (The local governments of the region are already doing this through differential rating but there may be room for underpinning what are essentially now negotiated contributions.) In addition, state royalties could be increased to fund a regional development trust, as pioneered in Western Australia. Financial regulations should require appropriate financial intermediaries to insure housing values in the towns of the region. Finally, investment is necessary to improve the quality of transportable homes.
Australian Bureau of Statistics, 2012, ‘Business Indicators, Australia, Mar 2012’, cat. no. 5676.0, ABS, Canberra.
Shiller, R., 2004, The New Financial Order, Scribe, Melbourne.
Blainey, G., The Rush That Never Ended, Melbourne University Press, Melbourne.