27 August 2014

Royalties – Why Gisborne would need a ‘local share’ of royalty payments

Every year the Government receives hundreds of millions of dollars in royalty payments for oil, gas, coal and mineral extraction in New Zealand.

If exploration company TAG Oil realises the billions of barrels of oil it hopes to locate in the East Coast basin, then those figures could include a massive contribution from Gisborne. However, currently, none of those royalties would be flowing directly back into the region.

Local Government New Zealand (LGNZ) and Gisborne Mayor Meng Foon argue that shouldn’t be the case. These payments are, in part, made possible by the regions which provide much of the infrastructure and housing needed to support these industries. Local government in these regions develops roads and provides services and amenities that enable extraction, yet these regions don’t currently receive any direct benefit from these royalties.

LGNZ has argued strongly for the development of a ‘local share’ programme. It’s an argument supported by the success of overseas ‘local share’ initiatives, such as the Royalties for Regions programme which has operated in Western Australia since 2008.

Oil is New Zealand’s fourth largest export and our oil, gas and minerals industries contribute about $4 billion to New Zealand’s GDP annually. In the five years to 2012 $89.5 million was paid to the Crown in royalties and energy resource levies (ERL) from mineral production. Over the same period, petroleum production contributed a further $1.8 billion in royalties and ERL.

Oil and gas from Taranaki made up the largest amount of royalty payments in 2013 with more than $381 million in oil and gas royalties and a further $26,000 in mineral royalties, followed by coal and minerals from the West Coast and Waikato. However, royalties are also paid out for Auckland, Bay of Plenty, Canterbury, Northland and Tasman regions.

These payments are made to the Crown directly. Any return to the regions from where returns are generated happens as a corollary to the distribution of Crown funds generally, across New Zealand. Importantly, that type of distribution does not take into account the significant infrastructure burden shouldered by specific regions.

Community infrastructure, such as roads, wastewater and water treatment can be put under great strain during an extraction boom. Local authorities also face environmental management costs.

Gisborne could face massive bills to upgrade its roads if oil and gas exploration proves successful in the region.

Mayor Foon has pointed out that, for the mining industry to be successful, Gisborne’s roads and bridges need to be updated and water tables improved. Who will pay for that? The amount Gisborne District Council currently draws from fuel and road taxes is not enough to maintain the roads for existing forestry industry traffic, let alone expanded mining operations.

A number of overseas jurisdictions, including Western Australia, recognise the importance of reinvesting royalties directly into the local communities where extraction is taking place. It is time for New Zealand to follow suit.

Royalty sharing would provide local authorities such as Gisborne with funding towards the additional infrastructure costs they face to support the presence of extraction industries.

Council leaders affected by this issue will be among those taking part in the ‘Royalty Payments – the case for a local share’ forum in Wellington on 4 September.

Lead speaker for the LGNZ-hosted event will be Kelvyn Eglinton Western Australian Regional Manager for Newmont Asia Pacific, one of Australia’s significant mining companies and the owner of Newmont Waihi Gold.

Mr Eglinton will outline how billions of dollars have been distributed to communities through Western Australia’s Royalties for Regions programme.

Western Australian extraction royalties make up a quarter of the state’s annual revenue – and 25 per cent of the forecast royalty payments are allocated to the programme each year. This equates to approximately five per cent of the overall state expenditure.

The Government of Western Australia’s goal is to build strong and vibrant regional communities that are desirable places to live. By 2015 it is estimated that there will be 2,500 Royalties for Regions funded projects across Western Australia.

It’s a pioneering programme which recognises the amount of growth and pressure on infrastructure created by extractive industries in a region. It recognises that investment back into a region by government improves the prospect of future external investment into new projects.

Royalties for Regions is administered by the Government’s Department of Regional Development. It includes three sub funds - the Regional Infrastructure and Headworks Fund, the Country Local Government Fund and the Regional Community Services Fund.

The Regional fund is for the large-scale, strategically-important, regional infrastructure projects.

The Country Local Government fund is about supporting local community and infrastructure requirements.

The Regional Community Services Fund is about enhancing quality of life for residents.

The key premise is that dollars are put back into the community to deal with the issues generated because of the mining boom. It funds regional and local priorities, put forward at a local level, supporting and enhancing projects which are already planned and funded locally. If a community is going to upgrade roads it can support it to upgrade more roads. If is planning a wastewater programme, it will support a bigger programme to benefit a wider area.

Royalties for Regions provides an excellent model to adapt and build upon for a similar scheme for New Zealand. It is vital for local authorities and communities affected by extractive industries. Regions like Taranaki and the West Coast have provided infrastructure support for extraction industries for years without any direct royalty benefits. Gisborne could be facing this scenario in the coming years. A scheme which returns a local share of royalties needs to be implemented as soon as possible to strengthen regional development for the benefit of these communities and the industries they support.

Malcolm Alexander is the Chief Executive of Local Government New Zealand

ENDS

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