Rent sharing in mining in Sub Saharan Africa theory, instruments, proxies, determinants

and political economy

OlavLundstølPhdCandidate-AfricanTaxIns:tute-UniversityofPretoria

Counsellor-EconomyandEnergy-RoyalNorwegianEmbassyinBrazil

ICTDAnnualConferenceAddisAbaba,11February2016

Content

1.  Whytheimportanceofresourcerentsharing2.  Theoryofresourcerent3.  Fiscalinstrumentsandgovernmenttake4.  Empiricalproxiesanddeterminantsofgovernmenttake5.  Poli:caleconomyofrentseekingandcorrup:on6.  Poli:caleconomyofpriva:za:onandrenego:a:on7.  Preliminarylessonsforresourcerichpoordevelopingcountries

1. Why the importance of resource rent sharing

•  Naturalwealth(ledbysub-soilassets)oXenhavedomina:ngroleinna:onalwealth(>50%)inRRPCs(resourcerichpoorcountries)(WB2010)

•  Extrac:onofsub-soilassetsmustnotonlyraiseeconomicoutput,butalsotheadjustedwealthinordertosupportsustainabledevelopment(Hartwickrule)

•  Veryfewempiricalstudiesbasedonlonger:meandcrosssec:onaldetaileddataonactualbenefitsharingmeasuredthroughgovernmenttakeespeciallyinRRPCsbutalsooverall

•  Clausing&Durst(2015):«noliteraturetodaycomparingtheadministra:vesuccessofdifferentkindsoffiscalregimesinprac:ce»intheareaofEIincludingmining

1. Why the importance of resource rent sharing

•  Africasofars:lltheleastexploredcon:nentintheworldwithregardstosubsoilandsubseamineralresources(Collier,2010)

•  Supercyclesinmineralprices,andfrom2002-3realpriceincreaseingoldandcopperrespec:velyof240and200%(Cuddingtonetal,2008andCochilco,2015)

•  Top40globalminingcompaniesin2011aloneincreasednetprofitlevelsby156percentreaching110billionUSDandconfirmedassetsof1trillion(PWC,2011)

•  Globalminingsectorincomeincreasedbyafactorof4.6whiletheresourcetaxcollectedincreasedbyonly1.15from2002-2010(Laporteetal,2015)

2. Theory of resource rent

Naturalresourcetheoriesofrent

Rentcomponents

Theorydriver

RicardianRent- Differen:alRent

QuasiRent OtherRent PureRent

Differentnaturalresourcequality,nofocusonnon-renewablecharacter-scarcityoftheresource

HotellingRent- ScarcityRent

UserCost Focusonthenon-renewablecharacter-scarcityoftheresource

SchumpeterianRent-EntrepreneurialRent- TechnologyRent

Innova:onRent

Focusondynamicinterac:onbetweengeology,technology,innova:onandsupply-demand

2. Theory of resource rent •  MajorityofliteraturefollowingGray(1914)andHotelling(1931)hasbeenonscarcityandakemptstomeasureusercoststylerent

•  Theore:calelabora:onpar:cularlyin1970-80s(Solow,Dasgupta,S:glitz,Nordhaus,Heal,Pindyck),butsofartheempiricsoftheHotelling-Scarcityrentseemelusiveandlimited(Hart-Spiro,2011)

•  Duetoareliancehoweverofaveragecostandrevenuedataall/mosttestssofarhoweverarenotabletocalculategrossmarginsandrents(Solow,1993),oreventodis:nguishRicardianandHotellingrent(Bjerkholt,2004)

•  Likledoubthoweverthattechnologicalchange,con:nousdiscoveriesofreservesandmarketstructuralshiXshavestronglyinfluencedtherevenue,profitandrents(Livernois,2009andGelbetal,2012)

•  NeverthelessconsideringSolow(1993),aswellasalargeliterature(Gelbetal,2010,Collier,2011andBarmaetal,2012),theres:llwouldseemtobeastrongcasethattherecanbeandhasbeen,bothatthemine-fieldlevelaswellasoverallsignificantrentinduringprolongedperiods

3. Fiscal instruments and government take

•  Mostfiscalregimesinminingtendtohavecombina:onofatleastthreeofthefollowinginstrumentsub-groups:directtax(CIT,PAYE,WHT,otherrenttaxes),indirecttax(VAT),nontax(Royalty,CustomsandExcise)andownershipinterest

•  Fiscalinstrumentsaretypicallyamixofgrossandnetincomeorvaluerelatedsoastobalancetherisksharingandrevenuecollec:onprofileoverall

•  Fiscalregimesneedtoaccomodateforlargedifferencesregardinglow-highpriceandlow-highcosts,andnetversusgrosstaxandnontaxinstrumentsaremoreorlessefficientinadjus:ngtothiscomplexity(ÅrsnesandLundstøl,2013)

•  Inextrac:veindustryincludingminingfiscalregimes,thebulkofthegovernmenttakefromdifferentinstrumentsover:meisnormallydesignedandexpectedtocomefromdirecttaxesandinpar:cularcorporatedirecttaxes(includinghereprofitsharingtypes)

•  Inprincipleanyfiscalframeworkshouldbedesignedsoastoop:mize-notmaximize-simultaneouslyoverthelifeoftheresource,thelevelsofinvestment,produc:onandbenefitsharing,andideallyperhapsthenetpresentvalueofsocialbenefits(Tilton,2004)

3. Fiscal instruments and government take

•  In2011thefiscalcontribu:onsfromthemajorMNCsinminingshowed:55%frompeopletaxes(employees),27%fromprofittaxes(mainlyCIT)and18%fromproduc:ontaxes(RoyaltyandVAT)(TTCreportbyPWC,2011)

•  StudiesofZambiaandTanzaniahaveshownsimilartrendsintermsofminingfiscalcontribu:onsdominatedbyPAYEwith30-50%andRoyaltywith15-30%(LundstølandRaballand,2013)

•  ComparisonsoflegislatedtotaltaxratesincludingCITandRoyalty(calculatedintoCITequivalent)intheperiodfrom1994-2013for7majorminingcountries,showedavaria:onfrom26.5to57%(Lundstøl,2016)

•  Consideringthatmineralsarenonrenewableresourcesandthattherelikelyisconsiderablerentinpar:cularduringsuper-cycles,theabovecollec:onpakernoftaxrepresentaparadoxandpoten:allyalostdevelopmentopportunity

•  Buttowhatextent?Conrad(2012)arguesthat«mineralrevenuesshouldbeagreatershareoftotalrevenuerela:vetothesectorvalueadded»becauseofrentthatrepresentafactorpaymentthatisdis:nctfrommanyotherac:vi:es

4. Empirical proxies and determinants of government take Averages for the period 1994-2013

MGDP/TGDP ME/TGDP MGT/TR MGT/TR:MGDP/TGDP MGT/TR:ME/TGDPGhana 2,80 8,60 3,10 1,33 0,34SouthAfrica 7,30 7,20 2,70 0,35 0,37Zambia 10,50 24,40 11,50 1,10 0,39Australia 11,20 11,40 5,50 0,53 0,47Tanzania 2,83 4,60 4,50 1,47 0,78Chile 10,70 13,16 14,90 1,44 1,21Botswana 27,60 29,70 51,90 1,94 1,80Average 10,42 14,15 13,44 1,17 0,77

4. Empirical proxies and determinants of government take Adjusted simulation for the period 1994-2013

(A-O)/GDP (C-O)/GDP (H-O)/GDP (A-O)/TR (C-O)/TR (H-O)/TRZambia 3,2% 5,6% 13,0% 13,7% 23,7% 54,8%Ghana 1,3% 2,0% 4,4% 6,1% 9,4% 20,8%Australia 0,8% 0,6% 2,2% 2,6% 4,5% 11,3%SouthAfrica 1,7% 1,3% 3,3% 4,6% 3,7% 9,0%Tanzania 0,0% 0,2% 2,0% -0,1% 2,0% 9,1%Chile -1,3% -0,6% 3,0% -6,3% -3,0% 8,5%Botswana -8,7% -6,8% 0,0% -23,0% -17,8% 0,0%

4. Empirical proxies and determinants of government take Panel regression results- determinants of MGT

All A-B-C-SA-Tln(Price) 1.494*** 0,98***

(0.158) (0,24)ln(Production) 0,581*** 2,63***

(0.134) (0,58)ln(Investment) 0.105 0,51***

(0.107) (0,12)ln(Cashcost) -0,06

(0,11)ln(Tax) 4.632*** 6,1***

(0.691) (1,27)Observations 136 60Countries 7 5Timeperiod 1994-2013 2001-2012FixedorRandom Fixed RandomR-Sq-adj 0.88 0.85***porz<0,01**porz<0,05*porZ<0,1prob>chi2(Hausman) 0.004

5. Political economy of rent seeking and corruption •  Rentseekingistheprocesswherebyinterests(publicandprivate)areactedupon

normallyinillegaland/orillicitwaystogainaccesstorightsoverassetswithassociatedvaluesinamarket

•  Corrup:oncanbetheoutcome-resultoftherentseekingac:vi:es-methodswithinaspecificregulatoryframeworkofbothpoli:calandeconomicaspectsandconsequences(Svensson,2005)

•  Keymethods-ac:vi:esofrentseekingare;bribe,collusion,embezzlement-theX,fraud,extor:onandabuseofdiscre:on(Vargasetal,2009)

•  Anincreasingrecogni:onthatmethods-ac:vi:esofrentseekingandresul:ngcorruptoutcomesmaybedescribedaslegalorratherillicitoragainstthe«spirit»orinten:onofthemoral-norma:vefundamentoftherelevantlawsandregula:ons(Eriksen,2012)

•  AccordingtoNdikumana(2013)corrup:onbyMNCsrobAfricatwice,firstbyevadingandavoidingtaxandsecondlythroughillegallyand/orillicitlysecuringtaxexemp:onsandincen:vesthatresultinunfairrentsharingintheeconomy

6. Political economy of privatization •  SequencethroughoutmostoftheSSAfromlate1980s-1990swithstabiliza:on,

liberaliza:on,priva:za:on,debtforgivenessandaidfundingandTAprograms•  Inmanycountriesandsectorssuchasmining,includingourcasecountriesZambiaandTanzania,someemergingagreementonnecessityforreformsasinvestment,produc:on,exportlevelslowandfiscaldraingrowing

•  Condi:onalityapproachlinkingdebtrelieftoreformstoTArolloutinminingbytheWBincludinganen:reregulatoryapproachwithassociatedlegisla:on,regula:onandcontractualmodel

•  Mainpurposetoakractprivateforeigninvestmenttoturnaroundindustry.Highlevelofpoli:calinvolvementandextensivenego:a:onsofdevelopmentagreementsbyteamsconsi:ngoftrustedclosealliesofthePresidentswithcloseindustryalliancesandinterests

•  Resul:nginfiscal-taxregimeswithvaryinglevelsofextensiveexemp:onsandincen:vesbeyondandoverrulinglegisla:onandregula:onandstabilityclausesinboth1stand2ndand3rdroundpriva:za:ondeals,andforthelakertwoinpar:cularinsomecaseshugecarryforwardlosses,debtabsorp:onbygovernmentandinsomecaseslowentryprices

•  Followingtheonsetofthefourthsupercyclefromfrom2003-4un:lrecentyears,itbecameobviousinmanycountriesinSSAandotherRRPCsincludinginTanzaniaandZambiathatthefiscalregimesinMDAswerenoteffec:veinsecuringarobustrentsharingwithhighernorinfactlowpricesbefore

6. After privatization •  Largeincreasesininvestment,exportandsubcontractedemploymentinlargescalemininginbothcountries.Slowbutgradualriseintaxpaymentsupto2006-7.

•  Effec:vetaxrates(CITandRoyalty)inlargescalemininglowinbothcountrieswith26.5%inZambiaand31.4%inTanzania,significantlybelowtherangefortheothercountriesinoursampleabovethatvariedbetween37-48%

•  Themajorityofmineswithcomplexrelatedpartystructureswheresales,inputandfinancingwere/aremanagedthroughen::esregisteredintaxhavens(e.g.IsleofMan,Cayman,Barbados,Bri:shVirginIslands,Irland)

•  InZambiamajorissuesbothonrevenueandcostside,linkedtoquan::es,quality,price,cashcosts,financingandhedginglosses,andinaddi:onsomemajorminesespeciallywith2ndor3rdroundowners(someofwhichwere-arenotmininghouses)withenormouscarryforwardlossesfromearlierowners,nodebtandlowbuyingprice,inrealityrecoveringfulllongterminvestmentcostsin3-4yearsbutopera:ngwithtaxaccountlosses

•  Mosthaveextensiveuseofprojectfinanceandderiva:vesmanagedthroughthesameorrelatedtaxhavenregisteredrelatedcompanies,withcon:nousonesidedlossesandalackofconsistentaccoun:ngofderiva:vecontracts

•  Inperiodfrom2000-2006thecontribu:onsra:osinpar:cularofZambiawith0.02-0.15andTanzanialesssowith0.45-0.85,wereoverallsignificantlybelowrelevantbenchmarksconsideringtherealpricesandactualcostslikelyincurred

6. Political economy of renegotiation •  ExternalreportsbytheIMF,WB,CSOandacademics,aswellasinternalcommissioneddomes:cwork,indicatedinbothcountriesthatthefiscalregimeswerebelowcomparators

•  Ra:osshowedthatthecontribu:onofminingtorevenuerela:vetoitscontribu:ontovalueaddedwaspar:cularlylowinZambiaat0.02-0.15,andsomewhathigherinTanzaniawith0.45-0.85from2000-2006.Overalltaxratesandextensiveincen:vess:lldominated(bothindirectandindirecttaxaswellaswithregardstocapitalallowancesincludingupliXinTanzania)

•  Inbothcountriesrenego:a:oncommikeeswereformed,somewhatearlierinZambia,andanalysisandexternaladviceandexperiencesaccessedfromdifferentsources.Civilsocietycampaigningwithanalysisanddisclosureefforts,mixedwithpoli:cal-presiden:alelec:onprepara:onsandanoverallemergingregionalawarenessandmomentum,ledtoradicalchangesthroughfirstanakemptofnego:a:onsandthenunilateralandlegisla:veprocessinZambiain2008,whereasinTanzaniamorepiece-mealadjustmentsweremadefrom2008-2010

•  AlthoughsomeofthechangesinZambiawereshortlivedduetotheglobalfinancialcrisis-pricecrashmixedwithapoli:calchange,s:lltheactualfiscalregimemaintainedandevolvingaXer2009wasonethatbroughtsignficantlyhighergovernmenttake,andinTanzaniaaswellthelevelsofcollec:onincreasedsignficantlyduetovariouseffortsincludingamajorproduc:on,priceandcostauditdriveledbytheTMAAtogetherwiththeTRA

•  Inbothcountriesapackageofsupporteffortspar:cularlyintheareasofevidencebasedtaxpolicythroughinternalmodellingwithauditeddata,togetherwithspecializedtaxadministra:onfocussingonauditsandenforcement,provedtobehighlyeffec:veinincreasingtaxrevenuecollected

6. After renegotiations •  Con:nuedstrongincreasesinbothinvestment,exportandmorerapidlyintaxpaymentsfrom2008onwardsfollowingrenego:a:ons.Regressionsshownonearlierslidesindicateapar:cuarlystronginfluencebytaxrateincreases

•  Asimportanthoweverweremostlikelyincreasedeffortstoaudittheminesandenforcetaxrulesandregula:onsthroughspecializedcapaci:es(bothinZRAandTMAA-TRA),asthisleadtoincreasedrecoveryandsomeimportantreversalsofdeduc:ons

•  Contribu:onra:osfrommining(torevenuerela:vetovalueadded)jumpedmarkedlyfrom2007-8inZambia(from0.36to1.69),whereasthemajorchangewasfrom2009-10inTanzania(0.48to0.95),andthereaXeratahigherlevel

•  Usingsomepreliminaryavailableauditedaccounts,effec:vetaxrates(tax/grossprofit)calculatedforTanzaniafollowingpriva:za:onvarysignificantlybetweenmines,withforexampeNorthMarathelowestofthelargeminessofarat12%(2002-2013),Geitaat23%(2000-2013)andGoldenPrideat44%(1999-2013)andsomewithnetlossessofar(Bulyanhulu).Forseveralofthesehowever,thelife:meremainingissignifiantlylongerandrateswillchangeover:me

•  InZambiathewindfalltaxthatendedupbeingimplementeddifferentfromwhatthetechnicalcomikehadrecommended(mainproblemwasnotmakingitdeduc:blefromCITasoriginallyproposed),provedtobehighlyeffec:veinsecuringes:matedgovernmenttakeandinanupcomingpaperweanalyzetheactualfinancialandeconomicimpactandcharacteris:csofthisinstrumentintheZambianspecificminecontextwithinahistorical,poli:calandfiscalframework

7. Preliminary lessons for resource rich poor developing countries

•  Foregonegovernmenttakefrompoorlydesignedandimplementedfiscal-taxregimesinminingcouldhavebeenasubstan:alsourceofdevelopmentfinance

•  Op:malfiscal-taxregimesinspecificcountrysitua:onsarealmostnever/nevergoingtobefirstbestsolu:onsinastrictsenseifoneconsiderthefulleconomic,poli:cal,organiza:onalandins:tu:onalreali:es

•  Overthelastfewdecades,inpar:culartaxratesbutalsomineralpriceswerethestrongestdeterminantsoflevelsofgovernmenttake

•  Inves:ngincountrylevelownedtaxmodellingtoolsandspecializedproduc:onandtaxaudittoolsandins:tu:onalcapacity,increasinglyenablingevidencebasedregulatoryefforts,canhaveveryhighreturns

•  Legislateratherthannego:atewhenitcomestokeyfiscal,socialandenvironmentalterms

•  Ifrealis:c/possible,introducecompe::onthroughauc:onsandencourageexplora:onsimilartoinoil-gaswithbekerfollowupofdatasharingandproduc:on-investmentplans