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.

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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.

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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

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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.

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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.

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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.

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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.

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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.