Rio Tinto gets well and truly rogered by Kiwis

Published by MAC on 2014-04-18
Source: CAFCA

Rio Tinto Wins 2013 Roger Award

Murray Horton

CAFCA Press Release

16 April 2014

The seven finalists for the 2013 Roger Award for the Worst Transnational Corporation Operating in Aotearoa/New Zealand were: ANZ, Chorus, IAG Insurance Group, Imperial Tobacco, Rio Tinto, Sky City Casino and Talent 2.

The criteria for judging are by assessing the transnational (a corporation with 25% or more foreign ownership) that has the most negative impact in each or all of the following categories: economic dominance - monopoly, profiteering, tax dodging, cultural imperialism; people - unemployment, impact on tangata whenua, impact on women, impact on children, abuse of workers/conditions, health and safety of workers and the public; environment - environmental damage, abuse of animals; and political interference - interference in democratic processes, running an ideological crusade.

Rio Tinto

It won the 2011 Roger Award and was runner up in 2012, 2009 and 08. One 2013 nomination said simply and in its entirety: "Blackmailing country". So, 2013 saw more of the same from the biggest recipient of corporate welfare - the Bluff smelter is the biggest bludger in the country. The 2011 Roger Award Judges' Report concluded that the company has a 50 year history of "suborning, blackmailing and conning successive New Zealand governments into paying massive subsidies on the smelter's electricity; dodging tax, and running a brilliantly effective PR machine to present a friendly, socially responsible and thoroughly greenwashed face to the media and the public". The 2012 Judges' Report is more succinct: "...it has us by the balls and has continued to squeeze ever since. It is corporate welfarism, but somehow doesn't attract the same vindictiveness as the sickness beneficiary".

To quote from the 2013 Judges' Statement by Chief Judge Wayne Hope: "Rio Tinto's Roger Award success boils down to two factors. Firstly, its' preferential treatment over pricing levels (in a market which it dominates) and the resulting effects on residential power bills, has had a major social impact. Any individual who relies upon the electricity grid for his or her everyday life is directly or indirectly affected. The scale of Rio Tinto's impact on people is greater than that of any other finalist. Secondly, Rio Tinto's political interference in the democratic process was very high, systematic and continually reinforced. In this respect it should be ranked slightly ahead of Sky City and well ahead of all other contestants. So, from a high class field, Rio Tinto takes the trophy for 2013".

And here's the concluding paragraph from the 2013 Judges' Report, incorporating the Financial Analysis: "Cheap electricity, research and development grants, ETS (Emissions Trading Scheme) profiteering, a $30 million cash gift from the Prime Minister on behalf of the long-suffering New Zealand public, apparently very little income tax actually paid, especially since the restructuring, and now Rio Tinto is leaving it to the Government to clean up the mess the smelter will leave behind. The Roger Award is in deserving hands".

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Judges' Report on Rio Tinto

New Zealanders have long been aware that the massive transmission lines running from Manapouri down to Bluff carry millions of dollars of subsidies from electricity consumers bundled with the smelter's power supply. What has attracted less attention until recently is the smelter's other big transmission link with the New Zealand economy: a cash pipeline running down to Bluff from the Beehive, carrying millions of dollars of tax deductions, Research & Development grants, Emissions Trading Scheme (ETS) credits, and now direct cash handouts from the Prime Minister in person, all to fatten Rio Tinto's bottom line profits at the expense of New Zealand taxpayers.1

The $30 million handout - "bridging the gap" as State-Owned Enterprises Minister Tony Ryall described it 2- was basically a bribe to Rio Tinto to stick around and shut up until the Government finished selling off half-shares in its electricity SOEs. But although this sounds like a big number, it's only the tip of the iceberg in relation to Rio Tinto Alcan (NZ) Ltd's various assaults on New Zealand's public funds.

A glance at the last financial statements, covering the year to December 2012, shows that on top of $757 million from selling aluminium, the company collected $12 million from a "research and development tax credit" (for what exactly is quite unclear) and $1.7 million from Emissions Trading Scheme credits granted - down a bit from the $5.1 million the company made from the ETS in 2011 3 (readers will recall that Rio Tinto won the 2011 Roger Award in recognition of its sterling performance in simultaneously obstructing and rorting the Emissions Trading Scheme).

On top of that the company reported a $57.6 million tax credit in 2012 as its reward for a spectacular $548.7 million write-down on the fixed assets of the Tiwai Point smelter - something explored in more detail below.

In fact Rio Tinto's performance as a corporate taxpayer in New Zealand has been less than stellar, and working out just how much tax it has paid is far from straightforward, given its accounting practices.

The last time the financial statements included a cashflow statement showing tax actually paid was 2004 when the company paid $17 million tax compared with pre-tax profit of $95 million - less than 18%. Looking at the figures for that period in Table 1 below shows that the income tax actually paid was pretty consistently less than the tax expense appearing in the profit-and-loss (P&L) accounts - on occasion, only half as great.

After 2004 the financial statements stopped showing any cashflow record of taxes paid, leaving only the highly deceptive "tax expense" in the P&L. The form of accounting used to produce this figure emerged in the US in the 1960s, when companies were being criticised for not paying enough tax and needed to polish up their image (without, of course, actually paying any more tax).

What is shown as tax expense in the income statement might be summarised as "the tax we would pay if we really had to pay tax on our profits". It misleads people into thinking that the tax expense reported is the tax paid.

Even the positively spun tax expense figure took a sudden tumble after 2007...total revenue held steady while operating costs suddenly shot through the roof, producing a collapse of accounting profits that was sufficient to bring the tax expense down to nothing. More precisely, over the five years to 2012 the total tax expense recorded was $27 million while profits were shown as negative in three of the five years.

Before reaching for a tissue to wipe away tears of sympathy, it's worth pausing to ask what actually happened between the 2007 and 2008 accounts to suddenly kill a healthy looking stream of accounting profits. The answer lies in that sudden jump in "operating expenses" from the $800 million reported in 2007 to $1,113 million reported in 2008, at a time when revenues and aluminium volumes were steady. The Global Financial Crisis was not the cause, since its full impact on the world economy was felt only some years further down the track.

The key is the restructuring of Rio Tinto's operations towards the end of calendar year 2007 which suddenly eliminated the company's reported profitability and its tax bill within New Zealand.

Name Changes

Up to the end of 2005 annual accounts were filed at the Companies Office by "Comalco New Zealand Ltd and Subsidiaries". In 2006 the name changed to "Rio Tinto Aluminium (New Zealand) Ltd and Subsidiaries" but this was merely a name change with no restructuring. The 2007 accounts, however, were in the name of "Rio Tinto Alcan (New Zealand) Ltd and Subsidiaries" and this is the name on all accounts since then.

The background to the second name change was set out as follows in the 2011 Roger Award Judges' Report:

"Until 2006 the main owner's name was Comalco, but then the ultimate owners, Rio Tinto, stepped out from behind the Australian company name. On 6 November 2006 Comalco New Zealand Ltd changed its name to Rio Tinto Aluminium (New Zealand) Ltd.4

"The following year there was another name change: On 3 December 2007, Rio Tinto Aluminium (New Zealand) Ltd changed its name to Rio Tinto Alcan (New Zealand) Ltd. 5

"These name changes reflected only a reshuffling of assets around the Rio not any substantive change from the point of view of New Zealand.

"What happened in 2007 was a successful takeover bid in October-November 2007 by Rio Tinto Plc's Canadian subsidiary Rio Tinto Canada Holding Inc for the Canadian aluminium producer Alcan Inc.6 The success of the bid was followed by merger of the two companies on 17 November 2007, resulting in a new company named Rio Tinto Alcan Inc.7

"The [company's share of the] Tiwai Point smelter was one of the assets shifted to Rio Tinto Alcan Inc in the reorganisation, but the ultimate owner throughout remained Rio Tinto Plc. Essentially the smelter was part of a game of pass-the-parcel around the Rio Tinto transnational organisation".

The transfer of ownership to Rio Tinto Canada was followed by a rearrangement of the cost structure that saw the profitability of the New Zealand operation drastically reduced via the sharp rise in costs... which effectively ended a period 1999-2007 during which reported profit averaged over $200 million and tax averaged around $65 million. From 2008 to 2012 reported losses averaged $72 million and "tax expense" averaged $5 million.

The big loss shown for the 2012 year is due primarily to "impairments" of $574.3 million from writing down plant and equipment, which will be explained later.

It is important to note that the jump in operating expenses between 2007 and 2008 was not related to any increase in either smelting costs at Tiwai Point or costs of imported alumina...There's no big step change in these in 2008 (though the tolling fee has an interesting cycle to it).

The increase in costs is also unrelated to changes in the NZ dollar. Most likely it was due to some new arrangement introduced at the time, under which the New Zealand operation paid overseas affiliates for services or finance.

The detail of this may be traced a little way into Rio Tinto Alcan (NZ) Ltd's Financial Report which separates out some expenses and shows unspecified "other operating expenses" as having jumped from $505 million in 2007 to $811 million in 2008,8 but provides no comment or explanation of why such a significant jump might have occurred.

It is not possible to know exactly what this is, but it is worth noting that the inter-company balance between Rio Tinto Alcan (NZ) Ltd and Rio Tinto Finance Ltd which is not part of the New Zealand group changed by a similar amount. If this cost increase, which first occurred in 2008 and continued subsequently, is simply a new payment to an overseas affiliate in the form of, say, a management fee, it will give the impression of increasing costs while being, in reality, yet another means to extract pre-tax profits from Rio Tinto's operations in New Zealand.

Rio Tinto's operations in New Zealand are multi-layered and involve much buying and selling between parts of the company, both within New Zealand and outside New Zealand. This means that Rio Tinto has considerable flexibility to use prices and arrangements that allow it to produce whatever it wants for the reported financial results in New Zealand.

Short Term Plans Only Now

Rio Tinto's tantrums over the last couple of years have made it clear to all that Rio's plans in New Zealand are now short term only. When world aluminium prices fell, the aluminium parts of Rio Tinto's Australian-based operations became perceived as struggling and in 2011, Rio Tinto decided to sell what it called Pacific Aluminium, which comprises all the Australian and New Zealand aluminium operations.9

In 2010, Rio Tinto had reported its recently negotiated electricity contract with Meridian would take effect in 2012 and run through until 2030. In 2011, Rio Tinto changed its mind over this contract and sought to renegotiate it, clearly seeking much lower prices and, it seems, a reduced term.

When Rio Tinto was unable to achieve what it called a "commercial outcome" with Meridian, it sought Ministerial involvement. According to the Treasury, in Rio Tinto's eyes, a "commercial outcome" meant "Meridian agreeing to PA's [Rio Tinto's] terms."10

Eventually, as we now know, Rio Tinto achieved a renegotiated (less costly) electricity contract that would also allow it to exit New Zealand earlier, plus a $30 million payment courtesy of New Zealand's taxpayers. So it wasn't just the $30 million that Rio Tinto extracted from New Zealand's taxpayers in 2013, it was also the amount of the reduction in electricity price.

While the actual figures are redacted in the Treasury's assessment of the economics of the smelter, Treasury did make it clear that "Meridian (and therefore the New Zealand public)" was being asked to transfer between [redacted] of value to [Rio Tinto's] share-holders."11

Commentary on Rio Tinto's "bumper profits" and increased dividends announcement for the 2013 financial year reports that "Rio Tinto has been among the most aggressive cost-cutters", but doesn't mention the practices used by Rio Tinto to achieve the reduced costs and increased profits. New Zealand experienced those practices in 2013.12

Rio Tinto's half billion dollar asset write-downs in 2012 gave the impression that Rio Tinto had actually invested that much in its New Zealand operations. The history of Rio Tinto's financial activities since 2007 reveals a different picture.

When Rio Tinto last won the Roger Award, the Reports to mark the award noted that:

"Rio Tinto's investment in New Zealand is represented by very small investments in ordinary shares and a much larger investment in hybrid financial instruments with characteristics of both shares and debt. Presumably this arrangement allows Rio Tinto to take best advantage of the tax regimes in each country."

While there had been a more significant investment prior to 2007, after that point the pattern was one of disinvestment as very large dividends were extracted and Rio Tinto's operations in New Zealand became largely debt funded, with the result that Rio Tinto's investment was relatively minor.

Rio Tinto's investment runs through several NZ Rio Tinto companies starting with RTA Investment (NZ) Ltd. An Australian company, RTA Pacific Pty Limited, owns the $5,000 of ordinary shares in this company and another Australian company, Rio Tinto Aluminium Ltd holds mandatory convertible notes which RTA Investment (NZ) Ltd records as a liability and on which it must pay interest. Each year the amount of interest due has been added to the mandatory convertible notes on issue with the result that from a starting point of $495 million in 2007, the liability recorded for these mandatory convertible notes has reached $916 million. By 31 December 2011, the equity interest recorded in RTA Investment (NZ) Ltd was $50 million, comprising $5,000 of shares and more than $49 million in retained earnings.

Hybrid Financial Instruments

The next level is RTA Pacific (NZ) Ltd where there is a similar picture. Until 2011, RTA Pacific Pty, Australia, held just $200,000 of shares in RTA Pacific (NZ) Ltd, while RTA Investment (NZ) Ltd held $680 million of redeemable participating preference shares. It was these arrangements in both RTA Investment (NZ) Ltd and RTA Pacific (NZ) Ltd with very small shareholdings plus the mandatory convertible notes and redeemable participating preference shares that prompted the comment about hybrid financial instruments in the previous Roger Award Report.

Hybrid instruments have been associated with tax avoidance schemes, although there is no way of knowing whether that is the intent with these ones.

That $200,000 investment in ordinary shares in RTA Pacific (NZ) Ltd continued until September 2011 by which time, as we know, Rio Tinto Australia had decided to sell all its aluminium operations. What followed seems strange because, in September 2011, RTA Pacific Pty Australia increased its share investment in RTA Pacific (NZ) Ltd from $200,000 to $550,200,000. In other words, RTA Pacific Pty Australia increased its investment in the New Zealand operation by the half a billion dollars, that it would write down just months later.

That increased investment in RTA Pacific (NZ) Ltd flowed down through the Rio Tinto operations in New Zealand. RTA Pacific (NZ) Ltd holds the shares in Rio Tinto Alcan (NZ) Ltd which is the main subject of analysis here. In 2010 RTA Pacific (NZ) Ltd held $300,564,000 of shares in Rio Tinto Alcan (NZ) Ltd but in 2011 this share investment was increased to $600,654,000, an increase of $250,000,000. And Rio Tinto Alcan (NZ) Ltd which held 79.36% of the shares in the New Zealand Aluminium Smelters recorded an advance of the same amount to NZAS.

Although Rio Tinto has long held 79.36% of NZAS' shares, with Sumitomo Chemical Company holding the remaining 20.64%, the arrangement was claimed to be a joint venture with the result that the method of accounting to produce the group Financial Reports simply recorded the amount of the investment in NZAS adjusted for profits and losses since the date of the investment.

In 2011, this investment was shown as $88,314,000. Had this method of accounting continued, the write-down on the NZAS investment would have been just this $88 million.

In 2012, Rio Tinto Alcan (NZ) Ltd changed its accounting policy for reporting the investment in NZAS. The effect of the change in policy was to bring 79.36% of all the assets and liabilities of the New Zealand Aluminium Smelters into Rio Tinto Alcan (NZ) Ltd's Financial Reports as if they are Rio Tinto Alcan (NZ) Ltd's assets. It is worth comparing Rio Tinto Alcan (NZ) Ltd's balance sheet over the three years of 2010, 2011, and 2012.

Between 2010 and 2011 the contributed equity in Rio Tinto Alcan (NZ) Ltd increased by $250,000,000 and retained earnings by a further $185,252,000 to give a much increased figure for shareholders funds at December 2011 of $471,548,000.

By including NZAS' assets and liabilities as if they were Rio Tinto Alcan (NZ) Ltd's the half a billion dollar write-down Rio Tinto wanted to make could then be applied against those assets. In 2012, the write-down meant that shareholders' funds ended up being reduced to minus $77 million. Changing the accounting policy for including NZAS in Rio Tinto Alcan (NZ) Ltd's accounts meant the write- down had to be made against the various assets that were now included. Such a write-down can't be applied against financial assets, so it has to be applied against the physical assets and intangible assets, such as computer software.

Consequently, the write-down was made against the NZAS reported assets which had been included in Rio Tinto's Financial Reports; the explanation given being that the write-down was based on the "fair value less costs of sale of the smelter." This write-down occurred independently of what shows in the New Zealand Aluminium Smelters' Financial Reports. No such write-down of assets has occurred in the New Zealand Aluminium Smelters' Financial Reports.

It appears on paper that Rio Tinto Australia increased its investment in Rio Tinto NZ just shortly before making the big write-downs so it could claim the big asset write-downs. It seems unlikely that this would have been solely for the purpose of grandstanding over how unprofitable the operation in New Zealand has become. There had been a change of management in Australia and one way of viewing this is to see it as the "big bath" accounting trick often used in companies when there is a change of management. Wikipedia provides a good explanation of big bath techniques.13

Toxic Waste Liability Dumped On Taxpayers

There is one final point to make in this analysis of Rio Tinto's operations in New Zealand. Aluminium smelting is known to be environmentally damaging, and for many years the waste product from smelting has been dumped in a landfill at Tiwai Point.

Rio Tinto's Financial Reports have long included an amount calculated to provide the environmental restoration necessary when it finishes its activities there. In its analysis of the economics of the NZ aluminium smelter, the Treasury had commented on the limited public information about the smelter's "obligations to remediate the site at Tiwai Point", noting that the closure plan to "cover, shape and revegetate the area...is not a public document". Treasury also noted there was a provision in NZAS' Financial Reports, but that "the provision is not backed by a cash reserve and only the assets of NZAS (mostly plant) support it."14

It is interesting to note that in 2012, the Government's Financial Reports disclosed for the first time a Government indemnity issued to the "New Zealand Aluminium Smelters and Comalco. The indemnity relates to costs incurred in removing aluminium dross and disposing of it at another site if required to do by an appropriate authority. The Minister of Finance signed the indemnity on 24 November 2003. In February 2004 a similar indemnity was signed in respect of aluminium dross currently stored at another site in Invercargill."15

It is difficult to know what to make of this new information, other than that it implies yet more taxpayer funding of Rio Tinto's activities. Does the indemnity relate to all waste dumped in the Tiwai Point landfill over the 40 years of Rio Tinto's activities in New Zealand or does it relate only to some? Rio Tinto's Sustainability Report for 2003 makes the following comment:

"In December 2003, Environment Southland granted resource consent for NZAS to dispose of dross, a waste product from the aluminium production process; that had been stored in a Bluff warehouse for many years. The material originally belonged to NZAS, but was sold to a recycling company that closed suddenly in 1991. The Ministry for the Environment, P&O (the owners of the warehouse) and NZAS have worked together to facilitate the movement of the dross to the NZAS landfill. NZAS has provided the landfill facility. P&O has paid for the transport and the Ministry has provided an indemnity in the unlikely event that the dross material ever has to be removed from the Tiwai landfill."16

Even as it prepares to depart New Zealand, it appears that Rio Tinto is leaving a legacy of thousands of tonnes of aluminium dross deposited in the Tiwai Point landfill that it will cover and plant over but, should this turn out to be toxic and require removal, the liability to remove it has, it seems, been transferred to New Zealand's taxpayers.

Cheap electricity, research and development grants, ETS profiteering, a $30 million cash gift from the Prime Minister on behalf of the long-suffering New Zealand public, apparently very little income tax actually paid, especially since the restructuring, and now Rio Tinto is leaving it to the Government to clean up the mess the smelter will leave behind.

The Roger Award is in deserving hands.

Endnotes

1 "New Zealand Taxpayers Aid Rio Tinto Profit Surge", New Zealand Herald 14/2/14, http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11201995 ; "Taxpayers' Gift To Rio Tinto", The Press 12/8/13.

2 Chalkie, "Pull The Other Leg, It's Made Of Aluminium", The Press 3/4/13 p.A12.

3 Rio Tinto Alcan (NZ) Ltd and Subsidiaries Annual Report for the year ended 31 December 2012 p.21 Note 4.

4 Rio Tinto Aluminium (NZ) Ltd and Subsidiaries Directors' Report for the year ended 31 December 2006, p.2.

5 Rio Tinto Alcan (NZ) Ltd and Subsidiaries Directors' Report for the year ended 31 December 2007, p.2.

6 http://www.riotinto.com/media/5157_6844.asp

7 http://en.wikipedia.org/wiki/Rio_Tinto_Alcan

8 Rio Tinto Alcan (NZ) Ltd and Subsidiaries Directors' Report for the year ended 31 December 2008, p.18 Note 5.

9 Matt Chambers, "Aluminium Unit Weighs Down On Rio Tinto", The Australian,18/1/12

10 Treasury, "Update On Project 14", T2012/2375, 21/9/12, p.4

11 Treasury report, "The Economics Of The NZ Aluminium Smelter" T2012/3275, 19/12/12, p.9

12 Rhiannon Hoyle, "Rio Tinto Swings To Profit", Wall Street Journal, 13/2/14, 13

13 http://en.wikipedia.org/wiki/Big_bath

14 Treasury, "Update On Project 14", T2012/2375, 21/9/12, p.3.

15 Government Financial Statements, year ended 30/6/12, Note 32

16 NZAS 2003 Sustainability Review, p.13.