A review of the state's royalty system still has several months to run. Photo: Louie Douvis
It won allies in the mining sector over its stance against the Kevin Rudd-styled mining tax. Now the conservative West Australian government is facing a backlash from miners on its own review into whether miners are paying their fair share.
Promoted as a consultative and lengthy review process, the Colin Barnett-led government's royalty rate assessment is coming under increasing criticism for allegedly having a pre-determined outcome that is designed to plug its leaking coffers.
Resources giant Rio Tinto has accused the government of hiding a potential plan to lift mineral royalty rates before its landslide victory in March.
In a submission to the state's royalty review, Rio representatives said the state government was now considering changing the benchmark royalty rate, constituting a "major point of difference to the election platform of the Liberal Party".
"This disparity is concerning from a transparency perspective, particularly given that no indication of any change to the review objectives was advised in the 14 months between the announcement of the review and release of the [terms of reference]," Rio's submission said.
Mr Barnett's government won a landslide re-election in March, before suffering a string of economic and political setbacks that included the loss of its triple-A credit rating.
A review of the state's royalty system still has several months to run.
However, the government has already booked an extra $367 million in revenue between 2015 and 2017 from the outcome of the review, which is yet to be determined.
This helped the government publish thin forecast surpluses rather than a string of deficits in this year's budget papers.
Royalty rates are designed to capture 10 per cent of the "mine head value" of a mineral, which translates to a different royalty rate depending on how much processing the mineral requires.
The iron ore royalty rate is 7.5 per cent of value of crushed and screened ore. Base metals such as nickel and silver are charged a royalty rate of 5 per cent of the value of concentrate at the smelter. Gold is subject to a 2.5 per cent rate based on the gross value of metal.
There is a view within government that the current system does not capture that 10 per cent mine head value target.
Rio's criticism stems from not being made aware before the election that the 10 per cent benchmark could be revised, when the sector believed the review would primarily focus on the enforcement of the current benchmark.
The updated terms of reference say the benchmark would be examined and that if the review recommended an alternative benchmark, an analysis of royalty rate structures would need to take place to meet that new target.
Miners are concerned that if the review recommends a higher benchmark, royalty rates would rise.
Mr Barnett said in a written statement that the review was designed to address anomalies in the state's royalty system, rather than to make changes to the benchmark rate.
"The review team is currently in extensive consultation with industry and stakeholders, and this consultation will help shape the review's outcome."
The apparent contradiction between Mr Barnett's public comments and the review's stated aims has caused confusion in the mining sector.
The gold industry is concerned that it is a soft target for a rate rise and small iron ore miners have expressed concern that they could be subjected to a higher rate than majors Rio and BHP Billiton.
The tension between WA's mining sector and the Liberal state government contrasts with the events of 2010, when the sector and state government ran a successful campaign against the Mr Rudd-styled Resource Super Profit Tax.
Mr Rudd was removed as Prime Minister in 2010, and Julia Gillard introduced the replacement Minerals Resource Rent Tax, which was more palatable to the mining sector.
Jonathan Barrett is the Perth Bureau Chief at The Australian Financial Review. @afr_barrett