Policies to assure equitable distribution of mining benefits Inaugural Meeting of the Intergovernmen

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Policies to assure equitable distribution of
mining benefitsInaugural Meeting of the
Intergovernmental Forum for Mining, Minerals,
Metals and Sustainable DevelopmentGeneva, 7-11
November 2005

• Olle Östensson, Chief, Diversification and
  Natural Resources Section, UNCTAD
• olle.ostensson_at_unctad.org
•  www.unctad.org/commodities

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The public and private sector policies that can
best assure equitable local, regional and
national distribution of economic and social
benefits (of mining)

• Distribution of benefits over time and space
• Fiscal policies
• Capacity building
• Corporate responsibility for development
• Questions to address

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Distribution of benefits over time

• Tax revenue from mining usually starts flowing
  several years after investment in social and
  physical infrastructure is incurred
• Fluctuations in metals prices can lead to strain
  on budget
• Surge in export revenues can lead to real
  exchange rate appreciation and loss of
  competitiveness
• Major costs occur at the time of closure when tax
  revenues are low

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Distribution of benefits over space

• Mining provides major stimulus to local
  economies, particularly during the construction
  phase, nearby communities may miss out on the
  benefits
• Mining projects lead to demographic and social
  changes that place demands on physical and social
  infrastructure, necessitating costly investment
  by local governments
• Mining is associated with social and
  environmental costs for which local communities
  demand compensation
• Mining reduces the returns to other economic
  activities, for which local communities feel they
  should be compensated

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Complicating factors

• Local communities in mining areas are usually far
  from urban centres and view central government
  with distrust, even more so if they belong to
  ethnic minorities
• Other regions or communities may be in even
  greater need of support

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Fiscal policies

• Mismatch between revenue and cost streams
• The budget management problem
• Avoiding Dutch disease
• Regional redistribution of revenues

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Matching revenues and costs

• Governments have been willing to postpone income
  in order to attract investment
• Problems of public perception
• Problems financing necessary investment
• Solutions
• Transparence
• Shift towards royalty type taxation?
• New financing mechanisms, securitized by future
  income streams or global fund?

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Budget management

• Transparence
• Prudent fiscal policy
• Mineral revenue only used for investment
  expenditure
• Stabilization funds
• Mixed experience, requires central government
  credibility and good governenance
• Hedging mining tax revenues
• Requires good governance and sophisticated
  administration

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Dutch disease

• A problem of distribution?
• Active exchange rate policy
• Prudent fiscal management
• Store surplus offshore
• Transparence about objectives and mechanisms
• Predictability

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Redistribution of revenues Suggested and tried
solutions

• Centralized allocation and management of mining
  revenues
• Redistribution to lower level governments
• Devolution of mining taxation authority to lower
  level governments

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Centralized allocation and management of revenues

• Advantages
• Fairness vis-à-vis other, possible poorer
  communities
• Suboptimal resource allocation is avoided
• Capacity to manage development projects
• Allows control over spending to avoid excess
  liquidity and inflation
• Drawbacks
• Central government may have limited credibility
• Lack of transparency breeds suspicions
• Risk of appropriation of revenues to buy
  political influence, purchase arms, reinforce
  oppression

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Redistribution of mining revenues to communities
or lower level governments

• Advantages
• Fairness
• Transparency
• Reduces risks of conflict
• Drawbacks
• Has to be formula based, otherwise it becomes
  chaotic, but any formula will be considered
  unfair by some
• Limited capacity of lower level governments to
  allocate funds and manage development projects
• Risk of corruption
• Risk of overheating local economies

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Devolution of taxation authority to lower level
governments

• Advantages
• Logical solution in a federal system not
  otherwise
• Reinforces link and consistency between taxation
  and spending policies
• Drawbacks
• May create large inequalities and conflicts over
  rents
• Risks of overheating local economies

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Capacity buildingNational level

• Requires interministerial cooperation to make
  fiscal departments aware of sectoral concerns and
  avoid mismatch with social and environmental
  policies
• Major role for international agencies, material
  is available

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Capacity buildingRegional/local level

• Only regional/local governments have the detailed
  knowledge, networks and credibility to
  succesfully promote local economic development
• Lower level governments normally lack knowledge
  of mining
• Regional development plans are usually wish
  lists without any strategic vision
• Development planning has to be participatory to
  be credible
• Development planning is needed throughout the
  life cycle of the mine
• Development planning needs to be based on a
  realistic assessment of opportunities

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Corporate responsibility for development

• Companies have no business in national policy
  but they automatically become defendants of the
  governments mining tax policy when it is
  criticised
• Companies cannot replace government but they
  sometimes become providers of last resort of
  public services
• Companies have an interest in the economic
  wellbeing of the local community
• Companies have no competence in development
  planning but they have an interest
• Company efforts can make a difference local
  sourcing, training, technical assistance

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Questions to be asked

• How can governments, companies and civil society
  ensure that policies are understood?
• Does the right to a share of revenues necessarily
  imply a right to manage them?
• How can the capacity of lower level governments
  to manage revenues be strengthened?
• How can the rights of future generations be
  protected?