According to the Australian National Audit Office, when it comes to the process for levying royalties on resources from the North West Shelf, pretty much everything — from keeping the agreement on levying royalties up to date to the equipment used to measure oil and gas to the auditing of the process and the verification of deductions — is done badly. The result is an unknown — and now, probably unknowable — loss of tax revenue for both the Commonwealth and the Western Australian government, because bureaucrats in Canberra and Perth have overseen a ramshackle royalty collection system. And the beneficiaries of the chaos are some of the world’s biggest resource companies, like BP, BHP, Chevron and our very own Woodside.

And the reasons are an accumulation of public service practices that read like a how-not-to of policy administration.

First, administration of the royalty collection scheme is split between the Department of Industry — probably the department best known in Canberra for taking its riding instructions from industry — and the Western Australian Department of Mines and Petroleum, because the royalties from the North West Shelf are split between WA and the Commonwealth. But the WA department does all the work — at the Canberra end is “one employee reporting to a supervisor, both of whom have other responsibilities within the Uranium and R&E International Branch of the department’s Resources Division.”

That’s for a source of revenue worth $600 million to the Commonwealth in the 18 months to December 2015.

And the Industry end is not much more than a postbox — a bureaucrat who cuts and pastes numbers received from WA into a spreadsheet. There’s no quality assurance or risk management, no sense that, this being a source of revenue derived from industry, there might need to be some checking to ensure the Commonwealth is getting what it is entitled to.

And long has it been so — a report as far back as 1981 found that the equivalent department in the Fraser years had “been too willing to vacate the field in favour of the state authorities and have not made sufficient effort to establish check procedures by which to ensure that royalty payments are correctly determined”.

As it stands, the Western Australians do the measurement of petroleum extracted and then reconcile that with shipping transactions and internal company reports and calculate the relevant amount for each of the different producers, then calculate the royalty. Industry’s role is purely check to see if the numbers in the spreadsheet that arrives from Perth actually add up. Any checking role is limited to an annual volume review, which is explicitly not intended to be an audit and has no internal documentation on how it is to be performed. Instead, knowledge of how to do the review has been handed down across the bureaucratic generations. Lost files from the distant past form a recurring theme in the ANAO’s review.

Then there’s the problem of how, exactly, to calculate the royalty — the document that is used to do so was last updated in 2006, and the process for changes relating to what can be deducted for expenses by the producers is cumbersome and slow, administered entirely by the Western Australians. At the start, Industry didn’t appear to have too strong a grasp of exactly what is being approved as an expense; happily, the ANAO reports “DIIS has now developed a good understanding of the titles on which royalties should be charged, and the royalty rates that are to be charged,” as a result of the audit.

The problem is, we can’t actually be sure that the amount of petroleum and gas on which the royalty is based is correct, because the process for verifying the accuracy of the meters measuring it is all over the shop. It’s contracted out to a third party, checks aren’t carried out on offshore meters at all, back-up metres are left broken for extended periods, and the process for allocating production correctly to each producer can’t be checked — probably more a problem for them than for the taxpayer, but symbolic of the relaxed approach of the West Australians to checking that what is actually flowing out of the North West Shelf is what is being assessed for royalties.

But the big problem is about expenses. Put simply, neither Industry nor the Western Australian government checks — or is even able to check — the accuracy of the costs that the producers claim, which reduce the royalties they pay. In the 18 months to the end of 2015, producers claimed more than $5 billion in production costs and capital depreciation — as against revenue of just under $20 billion. Industry leaves the entire costs verification process to the WA department. This appalls the ANAO.

“Given the actual and potential size of allowable deductions being claimed by NWS producers on a monthly basis, it would be reasonable to expect DIIS, in consultation with DMP, to have developed and implemented a robust compliance strategy and included strong controls around verifying the validity of deductions being claimed. In this regard, DIIS has not agreed any procedures with DMP or sought to obtain any direct assurance, on behalf of the Australian Government, that deductions are being claimed correctly.”

Problem is, Industry doesn’t care. “DIIS considers that this is not its role, and advised the ANAO that validity of deductions is a task delegated to DMP.” Only, in the ANAO’s view, producers are claiming expenses that aren’t authorised under the royalty schedule, which Industry and the West Australians interpret differently. Worse, no one is bothering to check if the costs claimed by producers are actually being incurred. Industry says it’s the West Australians’ responsibility; the last audit of costs was 17 years ago, apart from a recent review of a tiny fraction of claimed costs by the West Australians, which found a net underpayment of $8 million.

That means a full audit of costs could find hundreds of millions of dollars in underpayments. So why not a proper audit of the costs claimed by the resources companies?

“As resourced, neither DIIS nor DMP has the time or expertise to scrutinise deductions claimed in their entirety. DIIS is supportive of commissioning this type of work for future cost audits, however recognises that even then, there can be no guarantee of absolute assurance due to the size of the NWS project. It is unreasonable to expect that DIIS and DMP should deliver 100 per cent assurance over the completeness and accuracy of NWS royalty revenue.”

In effect, NWS producers can claim what they like in costs without facing the risk of being challenged or found out, from under-resourced and uninterested bureaucrats.

As the ANAO says, the Commonwealth’s interests are not being protected here. Both the Western Australian and federal governments have an incentive to maximise royalties, but the process of assessing and verifying royalties has been left almost entirely to the West Australian department, with Industry choosing to see its role as one of ticking and flicking the numbers coming from Perth, only stirring if it spots an egregious error in the final spreadsheet that emerges from the process. Worse, neither has the capacity or, in Industry’s case, apparently the interest, to check that producers aren’t ripping taxpayers off.

It’s rare to see the stereotype of the reactive, responsibility-averse shiny-bum public servant confirmed so strongly. And it is probably costing taxpayers hundreds of millions of dollars.

Peter Fray

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