Download RTF 80kB - Commonwealth Grants Commission

WESTERN AUSTRALIAN OCTOBER 2011 SUBMISSION
NEW ISSUES FOR THE 2012 UPDATE
Key Points
Treatment of New Commonwealth Payments

The Regional Infrastructure Fund should not impact on the relativities as it is
intended to fund economic development needs that are not assessed by the
CGC and are important to expand the productive capacity of the economy.

The Pilot of Drought Reform Measures in Western Australia should not impact
on the relativities as it is a trial program implemented at the behest of the
Australian Government.
Mining Revenue Assessment

We are of the firm view that the CGC should not reclassify iron ore fines from
‘low rate’ to ‘high rate’, despite the forthcoming increase in royalty rates for
iron ore fines in Western Australia.
- Nevertheless, we are prepared to accept the CGC staff proposal that the
CGC defer consideration of this issue, as it would have no impact prior to
the 2014 Update.

We support the CGC proposal that the one-off $350 million payment by
BHP Billiton and Rio Tinto should be classified to the Other Revenue
category, as:
- this payment does not relate to the sale of minerals; and
- the ABS has advised that this payment should be classified as other
revenue.
-2-
TREATMENT OF NEW NATIONAL PARTNERSHIP PROJECT AND FACILITATION PAYMENTS
Regional infrastructure fund
Subject to further details becoming available, we disagree with the proposal to
have the Regional Infrastructure Fund (RIF) Stream 1 impact on relativities.
The Commonwealth Grants Commission’s (CGC’s) guidelines for the treatment
of payments from the Commonwealth lists exceptions to the general rule that
payments should impact on relativities. We consider the following exception to
be potentially relevant:
needs have not been able to be assessed for the State expenses to which the
payment relates
The purpose of the RIF is “investing in critical infrastructure to expand the
productive capacity of the economy”.1
If the RIF funds are redistributed through the GST relativities, then States which
invest in infrastructure funded by these funds will have to reduce services or
other infrastructure or apply higher than standard revenue raising effort, all of
which would undermine the intention to “expand the productive capacity of the
economy”.
In the 2010 Review, the CGC was unable to assess economic development
needs. Also, as noted in our submission to the GST Distribution Review,
Western Australia’s unassessed needs in relation to upfront infrastructure
provision to facilitate economic development are likely to be substantial.
We note also that the CGC’s roads assessments do not accurately capture
economic activity needs, as the assessed network relates to the location of
major population centres rather than location of economic activity, and
metropolitan road lengths are assumed to be proportional to population. In this
regard, the Commonwealth Government has budgeted for the first tier of RIF
payments to include the Gateway WA project, which is located in the Perth
metropolitan area (Perth airport).2
Pilot of Drought Reform Measures in Western Australia
We disagree with the proposal that this payment affect the relativities.
The CGC’s guidelines state that payments should have no impact on the
relativities if:
they are for programs implemented at the behest of the Australian
Government and which lead to above average or unique State outcomes
(such as a trial program which is not part of services delivered under average
policy)
1
2011-12 Commonwealth Budget Paper 3, p3.
More detail on the Gateway WA project is available at:
http://www.mainroads.wa.gov.au/BuildingRoads/Projects/UrbanProjects/Pages/GatewayWA.aspx
2
-3-
The staff proposal is based on the reasoning that the type of activities being
funded by this payment are already being done under average policy.
However, the above criterion encompasses trial programs that aim to achieve
higher outcomes by using existing types of activities (e.g. income support) in
more effective ways. In this regard, we point to the following statement on the
Department of Agriculture and Food website: 3
The pilot is testing a package of new measures developed in response to the
national review of drought policy. The measures are designed to move from a
crisis management approach to risk management. The aim is to better
support farmers, their families and rural communities in preparing for future
challenges, rather than waiting until they are in crisis to offer assistance.
This program is clearly designed to go beyond normal policy.
We therefore conclude that the above criterion is relevant to this payment, which
should therefore have no impact on the relativities.
MINING REVENUE – TREATMENT OF IRON ORE FINES
We are of the firm view that the CGC should not reclassify iron ore fines from
‘low rate’ to ‘high rate’, despite the forthcoming increase in royalty rates for iron
ore fines in Western Australia.

Nevertheless, we are prepared to accept the CGC staff proposal that the CGC
defer consideration of this issue, as it would have no impact prior to the
2014 Update.
The CGC should not reclassify iron ore fines, as doing so would result in
Western Australia losing more GST revenue than it will raise from the royalty
increase. This cannot be considered consistent with the principle of policy
neutrality. Therefore, the CGC should interpret the composition of the ‘low rate’
and ‘high rate’ components, determined at the time of the 2010 Review after
consideration of various issues, as being fixed.
We also note that, in its 2011 Update Report, the CGC based its decision
making on a ‘shadow method’ comprising a mineral by mineral assessment.
This has not been published by the CGC. However, our modelling of what it
might look like suggests that, based on our Budget projections, when
Western Australia’s iron ore fines royalty rate rises to 6.5% in 2012-13,
assessing fines as ‘low rate’ will give a redistribution result closer to this ‘shadow
method’ than assessing fines as ‘high rate’.
If the CGC decides (contrary to the proposal expressed in the New Issues paper)
that it should make a decision on this issue in its 2012 Report, we believe that it
would be appropriate for Western Australia to have the opportunity to elaborate
on the above points, and to have access to the ‘shadow method’.
3
www.daff.gov.au/agriculture-food/drought-pilot
-4-
MINING REVENUE – ONE-OFF PAYMENT TO WESTERN AUSTRALIA
We strongly agree with the CGC staff proposal that the one-off $350 million
payment by BHP Billiton and Rio Tinto should be classified to the Other Revenue
category.
As stated in the discussion paper:

this payment does not relate to the sale of minerals; and

the ABS has advised that this payment should be classified as other revenue.
Western Australian Department of Treasury
October 2011