Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Looking for a goldrush that keeps on giving

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Forward-thinking Otago prospectors used their hard-won gold to establish farms whose production continues to earn overseas income to this day. Photo / Supplied
Forward-thinking Otago prospectors used their hard-won gold to establish farms whose production continues to earn overseas income to this day. Photo / Supplied

Reading the Green Growth Advisory Group's report put me in mind, rather unexpectedly, of my great-grandfather.

A century and a half ago Matthew Fallow emigrated from Scotland to the goldfields of Otago.

Environmentalists would say that a goldrush, with its get-rich-quick mentality and heedless exploitation, is exactly the mindset we have not quite shaken off, and need to.

But that may be too harsh a view of our pioneering forebears.

In Matthew's case it took him 10 years to scrape together the capital needed to set about turning a patch of Southland into a sheep farm. Put another way, he converted one form of natural capital, mineral wealth, into another - productive farmland.

The gold is long gone but the farmland is still there, still contributing to the national income.

It is a definition of sustainable development that we should earn a living from the planet's resources only in ways that do not reduce the ability of future generations to do the same.

The Green Growth Advisory Group, in its discussion of the oil and mineral sector, says we need a greater public consensus on the future role of extractive industries in the country's future development.

"Further growth of these sectors will be difficult without ... greater consensus on what resources are available for extraction and under what circumstances, how the impact of these activities should be managed and mitigated, and how issues of intergenerational equity should be addressed."

The potential is large.

The World Bank has had a crack at estimating countries' natural capital, largely consisting of farmland, forests and mineral resources. It argues that national accounts would be far more informative if the depletion of natural capital was factored in, as the depreciation of physical assets like machinery and buildings is.

So does Green MP Kennedy Graham, who has a private member's bill in the hopper calling for more effort in that regard, on the grounds that we don't manage what we don't measure.

The World Bank's numbers are necessarily rough and ready, but it reckons New Zealand is, per capita, the eighth richest country in the world in terms of natural capital, ahead of Australia or Canada and well ahead of the United States.

The countries ahead of us on the list are all oil producers - Kuwait, Brunei, the United Arab Emirates, Norway, Saudi Arabia, Bahrain and Oman. New Zealand's natural capital is more about what grows here than what is under the soil or sea bed and ought to be easier to harvest in a sustainable way.

Even so, the Institute of Professional Engineers (IPENZ) in a gung-ho report last December titled "Realising our Hidden Treasure" made the point that both Australia and New Zealand earn just over two-thirds of their export income from primary production.

But, in our case, it is dominated by food production; minerals and fuels provide between 8 and 10 per cent of exports, compared with 48 per cent in Australia.

"Given the large energy and mineral reserves in New Zealand, the Australian comparison shows we may be vastly under-utilising these resources," IPENZ said, "and our unwillingness to capitalise on them may be a partial explanation of the [income] gap between New Zealand and Australia."

A durable public consensus on the development of mineral resources has to be built on three pillars - the management of risks, the fair apportionment of costs and the investment of the public's share of the proceeds.

Last year we spent $8 billion importing oil and refined oil products, 17 per cent of the total import bill. Since then world oil prices have only continued to rise.

One day, perhaps, the right combination of oil prices, log prices, carbon prices, capital costs and shipping costs will make a large-scale biomass-to-liquids industry viable here.

In the meantime, it is just as well that the number of wells drilled in New Zealand has been on a steadily rising trend over the past 10 years.

But the gruesome example of the calamity in the Gulf of Mexico in 2010 highlights the risk associated with oil wells in deep water and the heavy responsibility Parliament is in the throes of putting on the Environmental Protection Authority in managing those risks.

IPENZ contends that the environmental impacts of mining and oil production are more manageable than many of us think.

"Extracting minerals and petroleum whilst maintaining the quality of the environment is possible but requires world-class regulatory controls and expert management."

Some negative spillovers are inevitable, however, and it is important that the regulatory regime identifies and prices those impacts and sheets home the costs to those making money from the activity.

That applies just as much to dairy run-off fouling waterways and the wear and tear to roads from logging trucks.

Otherwise it is just another case of privatising the gains and socialising the losses.

The advisory group is right that a mature debate about these issues has to recognise all the cost and all the benefits, economic and environmental, local and national, contemporary and for posterity.

Royalty rates for mines are being reviewed but, apparently, only for new ventures. And it is a bit disconcerting to learn that New Zealand has the fourth lowest royalty and tax regime in the world.

The Government would probably say that is the price our geography - being small and remote - requires us to pay for being ranked by the Fraser Institute, an internationally recognised authority in such things, as the fifth most attractive country for investment in upstream oil activities.

But it is essential that any income the Government derives from the exploitation of the country's mineral wealth is not simply consumed but invested to provide a future income stream.

A sovereign wealth fund, along the lines of the Cullen Fund, is one option. Some of the oil producers have gone that way. Another would be to endow universities or research institutes with a view to building up intangible forms of capital such as knowledge and intellectual property.

As the advisory group says: "The one-off gains potentially derived from coal, petroleum and minerals extraction must create benefits that flow into the future, across generations - benefits that are commensurate with the risks and the economic, social and environmental costs of development."

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

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