26 June 2017
Mike Henry, President Operations, Minerals Australia
WA Leadership Matters in Perth, Australia, 26 June 2017
Let me begin by acknowledging the Traditional Custodians of the land on which we are gathered, the Whadjuk people, and pay respect to their continuing culture and the contribution they make to the life of this city and this region.
Welcome to our distinguished guests, ladies and gentleman.
It’s a pleasure to be here – and thank you to The West for inviting me to speak to you today. Thanks to Kerry and Ryan Stokes for hosting this event.
The choice to look outwards
So, a comment about the video that was shown as I was making my way to the stage. Normally I’d shy away from using materials like that at an event like this – pretty strongly in fact. But in this case I elected to show it as its genesis and the messages it contains have a lot of relevance to the broader themes of the short talk I’m giving today.
Like the video, let me start with a reflection on history. Rather than the BHP history though, the WA history, and most particularly the recent role resources exports have played in the fairy-tale economic success of the state.
Just 50-60 years ago, WA was an incredibly different place. At the time the nation was but a decade or so on from the war. The population of WA was circa half a million or around just over one twentieth of the total Australian population. The state lagged the rest of Australia in terms of wealth.
Up in the Pilbara, there was little by way of infrastructure. There was certainly no iron ore industry to speak of, and no major iron-ore exports. As I’m sure many in the room know, iron-ore exports were banned at the time. It was believed that the national endowment of iron ore was relatively small and that reserves needed to be retained domestically to support manufacturing, with the hope being that domestic manufacturing would displace imports. In the immediate post war period the government had maintained a relatively heavy hand in the economy, with a bent towards nationalisation of key industries, strong regulation and government stimulus.
But big ideas were at play. The political discourse of the day saw somewhat of a pull between, on the one hand, those who wanted government to continue to play a heavy, direct role in the economy and for Australia to remain somewhat inwardly focused, at least in certain industries, to on the other hand, those who believed that the way to state and national prosperity was through opening up and strengthening connectedness to the rest of the world and through stimulating private investment.
The leaders of the day chose the latter, or perhaps I should say the people chose the latter. And it was a choice. Steps were taken to put in place the building blocks that would enable the country to more fully benefit from the opportunities presented by global markets, be it the opportunity to export even more Australian resources, goods and knowhow, or the ability to secure global capital and the best that other countries had to offer.
The government pursued a series of trade agreements with other nations, it moved to open up exports and it took steps to encourage the private investment that would lead to job creation and economic growth.
And it was this time that saw the development of the Kwinana Industrial Hub, the start of mining of bauxite in the Darling Ranges and the opening up of the Pilbara iron ore industry. All of which are so important to the WA economy of today.
The return on trust
Specifically in respect of the iron ore industry, there were two important events. The first was the 1957 Agreement on Commerce between Australia and Japan; and the second was the lifting of the national ban on iron-ore exports in 1960.
These changes triggered investment in to the Pilbara. The industry that was born has been pivotal for Western Australia and the nation. And at the heart of what allowed that to happen was trust. Trust in economic principles or theory and trust in the expected benefit of freer trade and a more open economy. The trust the electorate vested in those politicians of the day who decided to take the nation in a different direction. The trust required to re-establish trade ties with a recent adversary. And the trust between government and private industry that was required to underpin the flow of capital in to open up the Pilbara.
We all know of course what those events have done for the state of WA and for the nation.
Iron ore alone has grown to be one of Australia’s largest exports, with over 750 million tonnes shipped annually from WA, with annual revenue of over A$50 billion. We’ve seen a massive influx of investment – and by the way, in spite of what some assume, there’s more to come. There’s been over 3,000 km of rail laid, 50 iron ore deposits opened up, many hundreds of thousands of jobs created – both directly and indirectly, and of course billions of dollars annually in royalties and taxes, into state and federal coffers. Those who’ve invested the capital required to make this happen have also benefited, including the average Australians who own shares. And of course it’s not just in iron ore. There’s similar stories to be told across Australia in coal, in oil and gas, in nickel and copper, in alumina and in precious metals.
Australia’s resources have launched many successful companies – a number of them who call WA home – FMG, Woodside, Wesfarmers, Hancock, South 32 and countless other medium and small-sized enterprises. These companies provide opportunities for Australians on the global stage and WA now has some of world’s best -- the best talent, skills and expertise.
The choices made a half a century ago have underpinned Australia’s ability to grow wealth more quickly than the OECD average over that period. And as for WA, it’s gone from lagging some other states to now having the highest average income in Australia.
That sounds like a good deal, right? We should all be pretty happy! So why doesn’t it feel like that.
Where we find ourselves today
Well, you know what they say. You’re only as good as your last game. Notwithstanding this prosperous history, in the here and now we are facing a well-documented erosion of trust. Of course this isn’t just erosion of trust in this industry or in big corporates, its loss of trust in government and our other institutions – state, national and global, its loss of trust in media – sorry Kerry!
How do we see that playing out around us? Of course we see it in the rise of populism and nationalism. We see it in the pulling back from freer trade – a la the US withdrawal from the TPP and the mooted or actual imposition of trade barriers in some countries.
But we do see it even closer to home. There’s certainly been a degree of disillusionment with major resources companies. We saw this sentiment rear its head in the recent election campaign here in WA. We’ve seen it in the recent review of the PRRT, we’ve seen it in a more populist and aggressive stance on tax. We continue to see it in the countless inquiries on any range of issues where the starting assumption is that business can’t be trusted.
Now, as sad as that is, I kind of get it. People do see instances of bad behaviour on the part of some companies. And in today’s world of the social media echo chamber, the speed with which those instances permeate the social conscience is pretty quick. And of course politicians face ever greater pressure to respond to public sentiment in the moment.
It wouldn’t be fair though to stick all of the erosion of trust to a few bad apples and increasing information transparency.
Society quite justifiably expects companies like mine to not only operate within the law, but to ensure a sustainable quid pro quo in terms of ongoing investment, job creation, upskilling, support to ensure sustainable communities, and of course ongoing opportunities for local businesses to share in the wealth pie.
When that’s not what they’re experiencing or perhaps simply not seeing, then the social contract can start to fray at the edges. Recently investment has slowed, commodity prices and therefore royalties have fallen, businesses like mine have sought to rapidly recalibrate to the new reality by becoming more productive, and that has seen flow on impacts to workers, local business and local communities. This has been tough and it’s not surprising that we’ve seen the beginnings of an erosion in support and trust in some quarters.
That’s not good. It’s a problem for all of us. For without that trust, we start to move back into the world that we broke away from all those years ago. It brings with it the risk of creating a negative loop of short-sighted populist policy, increasing insularity, a heavier hand of government in the economy, of investment drying up on the back of policy instability and of jobs falling away as we lose competitiveness.
So what can we do about it? What’s required to ensure we maintain or recapture the trust that has been a key ingredient in our historic prosperity – in order to secure our future?
Well that’s a pretty big question and not one that I’ll seek to answer in its broadest sense, but I can talk to how we’re thinking about it in terms of the role of a company like ours.
Building our future together
Maybe this isn’t that hard. After all, all we need to do is continue to invest, create jobs, build skills, support sustainable communities, and create opportunities for local businesses.
Well of course it’s not quite that simple. As we said in the video, we live in a changing world. We all want this to be a competitive, prosperous industry that will be here for the next 50 years and beyond. In order to ensure that, sometimes we need to make some hard choices, where it’s difficult to meet all of those dimensions at the same time.
It’s ever more important though that we seek to balance the interests of different, sometimes competing, stakeholders. We need to be engaged in a way that helps to build shared context and which enables us to make decisions that are increasingly effective in balancing the interests of different stakeholders.
And just as we seek to secure trust from others, we also need to be willing and able to trust in others. In our case we invest in projects that will be around for decades. We aren’t just trusting in the people across the table today, we’re trusting in people and policies many years hence. We’re trusting in the system including for stable policy. Hence, why the recent tax campaign was potentially so damaging.
Thankfully though we’ve had trust reinforced through the reaffirmation of stable policy on the part of the current government. This stability and trust is important for investment. And I’m very happy to have announced this morning that BHP has approved an initial phase of funding for some early construction work on the South Flank project. This initial funding alone will bring with it several hundred construction jobs and opportunities for local business. We intend to take the full project forward for approval in the first half of next calendar year. If approved, the project will require investment of on the order of A$3-4 billion, will create several thousand construction jobs, many hundreds of ongoing operational jobs, continued opportunities for local business big and small, and of course an ongoing stream of royalties for all West Australians. And we’re not the only ones investing. Our peers also have their own mooted investments. There’s still so much to play for.
This is great for us, for the state, for local business and local communities and great for all West Australians. But again it is only made possible with trust.
Now of course things would be much easier if everything we did involved good news stories like these. But it’s not always that simple. I spoke earlier about the impacts that employees, local business and local communities have felt as we’ve needed to tighten our belts. The world continues to change and in our efforts to stay globally competitive, we will need to continue to be flexible and adapt to the threats and opportunities that arise.
However, in doing so, we need to be more attuned to the local impacts of these changes, and we then need to work with local stakeholders to ensure that not only are those impacts softened but that in fact local opportunities are created in the change. Let’s use the example of automation.
I know that sometimes we get pretty excited by the new world of driverless trucks, driverless drills, and driverless trains. And this is actually really exciting stuff! Seeing a big 200-300 tonne truck driving around with no-one at the wheel is pretty amazing. I still remember the first time I saw this – it was a bit disorienting to be honest.
But let’s face it, that excitement probably isn’t shared by all. Some will be worried about the impact on their jobs, others about the impact on local communities and local business. It’s imperative that we listen to those voices.
We need to be as transparent as we can be in our plans. We need to help people understand the ‘why’ –and that or that we need advancements like these to keep us competitive. And importantly we also need to help people understand the magnificent inherent opportunity for upskilling and for new business. And of course we need to be looking at how we can ensure that affected employees and communities are supported through things like retraining or through deliberate fostering of new local opportunities, including supporting local business partners to move up the technology curve or to expand their markets.
We need to work to ensure not only a sustainably competitive industry, but also sustainable communities, a sustainable business eco-system and sustainable skills and opportunities for our people.
Let me be clear, big business does already engage with, and invest in, people and communities in a very big way. We haven’t necessarily done a great job of making sure this is broadly known, but the effort and dollars have been there. BHP alone has invested $1.6 billion in local communities in the Pilbara in the past 5 years. Many or most of our peers in the resources industry and more broadly can also talk to the strong contribution they’ve made.
Sometimes though our effort and spend hasn’t been as efficient, effective or appreciated as it could have been. And just like we seek to be as productive as we can be as businesses, we should also be chasing opportunities to be as productive as we can be with our support for people and communities.
At the end of the day we want our effort and investment to have maximum impact in terms of the value it creates for our stakeholders now and in the future.
I think there’s growing recognition of the opportunity to get better at how we go about this. Only the week before last, community leaders, state government, and industry – Rio, FMG, Roy Hill, Westrac, CME and ourselves gathered in Port Hedland to discuss a different approach to how we come together for the sake of supporting sustainable communities.
The concept that is being developed is one that unites stakeholders around a long-term vision and plan for the community in question. It involves the creation of a long-term community development plan, informed by world class planning expertise, with input from community, government and industry. This long-term plan, owned by the community and local government, then provides a more integrated backdrop against which investment in infrastructure and programmes can occur over time in a way that builds towards something greater. It moves away from a more piecemeal approach where effort and investment are made less effective through simple lack of vision and integration. The process of developing and owning this plan can be expected to also draw various stakeholders into a conversation that builds understanding, alignment and commitment. And at the end of the day, that helps to build trust.
Now there’s one final point I’d like to touch on related to trust. Trust requires more than transactional relationships. Trust requires commitment to one another and to looking out for one another’s interests. Now, I’m not trying to be naïve here. We each have our own interests to look after and there’ll be times when the decisions we take can be painful for others. But at a macro level we need to start from a desire to support each other’s interests, in addition to looking after our own.
We need to be committed to the well-being of the system or industry which is so good for all of us, and committed to ensuring that benefits continue to flow from the industry to all stakeholders.
Which brings me to the GST distribution mechanism and the treatment of resource royalties therein. The current mechanism doesn’t seem to be equitable nor is it in the interests of the industry.
I don’t need to tell anyone in this room, how tough it’s felt to be in WA and watch WA’s share of the national funding pool fall by two thirds in the past decade, to the point that WA now only receives 30 cents on the dollar and receives less in absolute terms than it did at the time the GST was conceived, in spite of national GST receipts more than doubling over that period.
Part of why this occurs is because, unlike something like say pokies revenue, state resource royalties get captured in the pooling mechanism in a way that sees increased royalties translate into less GST.
The potentially perverse effect of this is that it dulls the incentive for states to stimulate development of resources, for what they receive in the one hand they lose from the other. I think it can be argued that that isn’t in the interests of the states nor the nation.
A distribution that saw states retain a portion of resource royalties outside of the funding pool, would increase the incentive towards resource developments. All other things being equal, this would mean more investment, more jobs and more opportunities for local business. That would mean a stronger economy, which would be good for not only the states but the nation. And it would be more equitable.
A fairer distribution, where communities could more clearly see the benefit from resources accruing to their state, would also strengthen community trust in the system.
And key players in the industry and the state, like ourselves, have a role to play in advocating for an approach that stimulates investment in the industry, is good for our communities and in this case which is likely better for the state and the nation.
So in closing, the success of our industry and of WA has relied not only on the vision of half a century ago, but on the trust that allowed that vision to be translated into reality and which has underpinned our mutual effort in the decades since.
In a world in which society’s expectations are constantly changing, and perhaps at an even greater pace as of late given the advent of social media, we all have a role to play in assuring that trust. Not a naïve, blind trust but a grown-up trust that is built upon a foundation of the shared context, alignment and mutual commitment required to resolve real world competing interests and tensions.
We need to do what we can to engender trust on the part of our stakeholders by building their understanding of the industry and the benefits that already arise from our businesses. And we also need to be willing to step up and be heard on issues of mutual interest.
But we need to do more than just get better about how we explain ourselves or how we advocate of how we advocate. We need to continue to lift our game in terms of the way we engage and the way we operate. We need to face outward and seek to build bridges just as leaders did at the start of this journey.
For if we are able to strengthen the foundation of trust in the industry and amongst all stakeholders, then we can assure an industry, economy and communities that continue to advance and which are sustainable for many decades to come. And with that I’ll close on the same note as the video.
If we can get this right then imagine what we can achieve next.