Analysts were surprises that miners in risky jurisdictions don’t get better terms but rather end up paying more to the government, according to a report published in World Developments coming October issue.
Eric Adebayo was the lead author for the study Is Conventional Wisdom About Resource Taxation Correct? Mining Evidence From Transparency Reporting.
“An initial look at the data reveals a surprising pattern. In contrast to the conventional wisdom that riskier (and usually poorer) countries must compensate investors with lower take rates, countries that have the highest political and economic risk have the highest government take on average,” writes the authors of the study. “Contrary to conventional wisdom, government take is higher in lower-income countries than it is in higher-income countries.”
The authors devised an “extended political economy model” to fully capture government take in developing and developed countries.
The authors attempt to speculate why government take in developing countries is higher. One answer may be disclosure rules. The more a country knows about how the miner operates, the more avenues it has for taxation.
“[Policy] initiatives to improve competence and transparency in natural resource governance could have increased state capacity to generate revenues from natural resources,” writes the authors.
The other is the high cost of corruption.
“We cannot fully rule out the explanation that riskier, more corrupt countries with lower government effectiveness are also those places where government finance is required to sustain a patronage-driven political settlement in which mining taxes, particularly on foreign firms, provide political finance.”
The authors say that catch up may be needed by miners. In Australia and North America, social, economic, and environmental health of local communities are protected.
“[In] many developing countries such protections are often inadequate or poorly enforced. This has too often aroused the ire of the general public, with activists shining light on the destruction of Indigenous lives and livelihoods, forced displacement, and environmental destruction often wrought by western extractive firms operating abroad. If this is indeed the case, it could help explain why take rates are lower in developed nations, as mining firms must do more for local communities there in a way that was not captured by the simple dummy variable we used to proxy for community development costs.”