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ANZSOG 2014 - What business wants from government;Phil Edmands

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ANZSOG 2014 - What business wants from government;Phil Edmands

  1. 1. ANZSOG – 2014 China Advanced Leadership Program 28 November 2014 1 Australia New Zealand School of Government 2014 China Advanced Leadership Program “Business and Government” AMP Building 33 Alfred Street, Circular Quay, Sydney Friday, 28 November 2014 Phil Edmands Managing Director Rio Tinto Australia What Business wants from Government [ ] am – [ ] am CEO Roundtable (2): Businessand Government– What Businesswants from Government  Chair: Emma Alberici, Australian Broadcasting Corporation  Co-panellist: Andrew Michelmore, CEO MMG Ltd Good morning, my name is Phil Edmands. I am the Managing Director for Rio Tinto in Australia. I’m delighted to be here today to talk you on the topic What Businesswants from Government. My company, Rio Tinto, is the second largest mining company in the world, with operations spanning more than forty countries, and so my comments – which are intended to be practical and based on the company’s experience - will be from a mining perspective. The themes, nonetheless,should be applicable to businesses generally. To frame my comments I will use the example of Rio Tinto proposing to buy an interest in a multi-billion dollar mine, rail and port project, and then to develop that project and operate it over the long term with a local joint venture partner.
  2. 2. ANZSOG – 2014 China Advanced Leadership Program 28 November 2014 2 The first questionis whether the project will earn an adequate return. This will be a very long term projectwith very high upfront capital costs - which will need to be recovered over many years. The project will compete with other potential global projects forthe limited funds Rio Tinto has available for investment, and so the project’s return will need to be competitive. Consequently government policy that affects projectcosts will be vital. But government policy affecting risk will also be important since there are certain risks we would not be prepared to take (such as safety risks). Also the risks we are prepared to assume need to be priced and reflected in the return. We may also want political risk insurance, and will only be able to obtain it at reasonable cost if the risks are reasonable. Assuming the return is attractive we will want to know that there is some certainty of that return. We will accept that government policy cannot be frozen for the duration of this very long term project – but the basic rules that determine the return must remain in place. Finally we will need access to necessarybusiness inputs, plus an operating environment for the project that is conducive to the project’s successand doesn’tcause undue delays or costly operating difficulties. Let’s then work through the various stages of this project.
  3. 3. ANZSOG – 2014 China Advanced Leadership Program 28 November 2014 3 The first stage is the initial investment – both buying into the project,and then getting permissionto proceed with the development. We will not only want to know what approvals are required, we will want to know how bureaucratic the processof getting them is, the costs of obtaining the approvals, and whether others have rights to object. Time is money so lengthy approval processesare a problem. They are also a problem because we will have identified a market opportunity for this project, and if the projectis delayed market dynamics may have changed and the market opportunity may be lost (meaning the return is lower than we have assumed). So we will want clear transparent rules around investment and developmentapprovals, and will want the processof obtaining the approvals to be efficientand not overly costly. We won’t necessarily have a problem with third parties being able to lodge eg objections against environmental approvals as long as the principle that these be dealt with quickly and efficiently is observed. In short we will be interested in whether the framework for investment and development as established by government policy, and as administered by government officials,is business friendly. Conditions attached to any approvals also need to be reasonable. Sometimes Governments imposeconditions which do not really relate to the investment itself, but instead seekto achieve separate Government policy objectives. These may include local content requirements,or local labour requirements,or they may be
  4. 4. ANZSOG – 2014 China Advanced Leadership Program 28 November 2014 4 licensing requirements that mean the investor must provide other social benefits or services. Within reason these types of requirements are not necessarilya problem. They are a problem when they significantly load the projectwith additional cost, or they are impractical or hard for other than say a very local company to complywith - ie they are exclusionary. Our next concernwill be the developmentand operating environment for the project. A primary question will be the total taxes and imposts that apply. These will need to be competitive,but there is the further issue of how the rules are applied by fiscal authorities. Do those authorities have a track record of applying the rules efficiently, transparently and fairly – or are those agencies difficultto deal with, the processbureaucratic, and the outcomes uncertain? Also, whilst the total tax take needs to be competitive it is not simply a questionof the lower the better. Our projectis a long term one and so it needs to be sustainable. If the tax take is unreasonably low this will create pressure for change midway through the project,or for other action such as expropriation – in other words it may build in inherent instability. Furthermore Government returns cannot be unduly postponedbecause that too may create oppositionwhen the population sees no return for a very considerable period. So, taking a long term view, we will want to see a balanced fiscalpackage for this project.
  5. 5. ANZSOG – 2014 China Advanced Leadership Program 28 November 2014 5 We also need to have confidencethat the fiscal package will be stable – indeed that our title rights, our operating rights and the fiscal package are all stable. The extent of any guarantees we get here will depend to a considerable degree on how mature the investment environment is in the projectcountry. In environments such as emerging jurisdictions in Africa investors often require a stability agreement with the government that guarantees both title to the investment and the project’s investment framework – including the fiscal package – with a right to enforce these guarantees under international law and through international institutions. In developed countries with a track record of application of the rule of law and a record of protection of investor rights a stability agreement would not be required, and nor would it be available. Australia (and the United State and Canada) have had a record of government agreements for mineral developments but these have generally been to create a one stop shop for approvals and to give certain subsidiary protections. These have not guaranteed a fiscal package. Of course the project country may separately have an investment treaty with our home jurisdiction country that will protectthe investment. Ultimately the extent to which guarantees are given is a question of investor confidence in the jurisdiction. A history of stable regulation, and of transparent and consistentadministration, builds that investor confidence.
  6. 6. ANZSOG – 2014 China Advanced Leadership Program 28 November 2014 6 That protectionand stability is not just important to an investor, but also to financiers if funds are to be borrowed for the investment. If the investment is to be financeable it may also be necessaryto be able to pledge the projectassets as security to the financier. Two issues can arise here. First there will be a question whether the recipient country’s laws allow the giving of security. However, if our local partner is a government company they are often resistant to giving security, and partial security over only our interest could create security enforcementissues for a financier. Both financiers and projectdevelopers will also require the ability to remit money earned by the projectoverseas, and to freely exchange currency. There are then a host of practical issues. We will want to be able to import goods as needed without overly onerous tariffs. But the process ofimportation also needs to be efficient. If necessary capital equipment sits at the docks for months, or if local customs officials refuse to recognise the tariff regime that we have been granted by the central government, then these will be costly problems. Of course we will also want export authorities for our product. We will want the Government to supportanti-corruption compliance. To the extent that corruption is an issue that would not only be against our corporate values, but could expose us to great reputational risk, and to risk of criminal sanctions.
  7. 7. ANZSOG – 2014 China Advanced Leadership Program 28 November 2014 7 Then there are the necessaryinput factors. We will want government policy settings that allow us to source appropriate labour with the right skills, and labour laws that support competitive wages and conditions,flexibility in working arrangements, the ability of management to develop directrelationships with employees,and avoidance of unnecessary labour disputes. In particular we will want to avoid becoming involved in any way with civil disturbance or riots – these matters need to be dealt with by the Government, but in a way that respects human rights. Otherwise we could become embroiled in a civil disturbance that goes badly and severely damages our global reputation. As to other inputs we will want government to have an energy policy that makes energy available at stable and competitive prices. Also if there are distortions in the factormarket – in labour or energy or other inputs, or eg because of an aging population, we will want to know that government has a plan for dealing with this through an appropriate reform and innovation policy. Currently for example China does have some of these distortions but at the Third Plenum last year a reform programme to deal with them was outlined. Finally other applicable regulation needs to be reasonable and balanced, and not carry onerous compliance obligations. For instance we are proposing to build a rail line and port for the project. One question is whether we will be required to provide transport and port services to third parties, and if so on what basis.
  8. 8. ANZSOG – 2014 China Advanced Leadership Program 28 November 2014 8 So, as can be seen, we need a range of things from government - some relating to laws and some to the practical administration of those laws by government officials. But another very important point for us (and business)is that government and government officials are accessible,and that a relationship can be built up with them so that – when issues arise as they always do – these can hopefully be settled quickly, and with minimum disruption or cost. Thank-you, and I look forward to your questions.

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