This paper investigates the determinants of mining projects, with a focus on green minerals. The research question is the effect of political risk on investment decisions, the size of projects, the volume of ore mined, and the ensuing resource rents captured by the host country. The paper shows the challenges of measuring and capturing resource rents, using a mathematical model of resource rent maximization for the host country under the constraint of a positive after-tax cash flow for investors. The analysis finds that the optimal approach for taxing extraction is a progressive profit tax on mining revenues that generates revenues for the country while minimally deterring investment. Alternatively, taxing cash flow, which can be non-distortionary, can be implemented. Using the S&P Capital IQ database, the analysis finds that the low-quality of governance, institutions, infrastructure, skills, and services dampens the exploration and exploitation of copper, a key mineral for green energy. The opportunity cost in terms of unexplored or underexploited deposits translates into suboptimal global copper production and forgone revenues for the poorest host countries. To unlock exploration, the paper proposes measures to mitigate political risk, including investing in geological surveys and institutions and designing stable tax systems. For underexploited projects, it proposes that countries not only invest in infrastructure, skills, and services, but also improve governance and institutions. This would lower the metal grade at which investors would be willing to commit, ultimately producing more metal from identified mineral deposits. Interventions from international financial institutions can help to alleviate all country risks, including political risks, that hinder credible intertemporal commitments between investors and countries.
Authors
Davis, Graham A., Bou Habib, Chadi, Solheim, Gaute, Lokanc, Martin
- Citation
- “ Davis, Graham A. ; Bou Habib, Chadi ; Solheim, Gaute ; Lokanc, Martin . 2024 . Maximizing Output and Government Revenues from Mining in Developing Countries: The Role of Country Political Risk and Investors’ Return, and Implications for the Energy Transition . Policy Research Working Paper; 10965 . © Washington, DC: World Bank . http://hdl.handle.net/10986/42404 License: CC BY 3.0 IGO . ”
- Collection(s)
- Policy Research Working Papers
- DOI
- http://dx.doi.org/10.1596/1813-9450-10965
- Identifier externaldocumentum
- 34417215
- Identifier internaldocumentum
- 34417215
- Pages
- 50
- Published in
- United States of America
- RelationisPartofseries
- Policy Research Working Paper; 10965
- Report
- WPS10965
- Rights
- CC BY 3.0 IGO
- Rights Holder
- World Bank
- Rights URI
- https://creativecommons.org/licenses/by/3.0/igo/
- UNIT
- Prosperity-Econ Pol-Mac/Fis-Tax (EMFTX)
- URI
- https://hdl.handle.net/10986/42404
- date disclosure
- 2024-11-12
- region geographical
- World
- theme
- Inclusive Growth,Energy,Economic Policy,Public Finance Management,Economic Growth and Planning,Fiscal Policy,Energy Policies & Reform,Environment and Natural Resource Management,Domestic Revenue Administration,Public Sector Management,Tax policy
Files
Table of Contents
- Maximizing Output and Government Revenues from Mining in Developing Countries: The Role of Country Political Risk and Investors’ Return, and Implications for the Energy Transition 3
- Abstract 3
- Introduction 4
- Section 1: Dispelling Resource Rent Myths 6
- A. Resource Rents and Surplus Can Be Measured and Taxed 6
- B. Resource Rent Equals Mining Profit 7
- C. Rents and Surplus Are Unique to Minerals 8
- D. Governments Tax Only a Small Proportion of Mining Project Rents 9
- E. Mining Rents and Surplus Are Relatively Large 9
- F. Government Taxation of Mining Projects Is Highly Inefficient 13
- G. Tax Competition Requires Governments to Compete on Mine Tax Policy 14
- H. Decarbonization of the Earth’s Energy Sources Will Lead to Soaring Mining Rents 14
- Section 2: Resource Rent and Surplus at Mining Projects – Building a Theoretical Model 16
- A. Computation of Rent 16
- B. The Practical Impossibility of Non-distortionary Resource Rent Taxation 18
- C. A Practical Solution to Resource Rent Taxation 20
- D. What Creates a High Resource Rent Mining Project? 22
- E. How Does Political Risk Affect the Resource Rent at a Mining Project? 23
- Section 3: Mining Firm Evaluation and Operation of Mining Projects 25
- Section 4: Government Policy and Political Risk - A Simple Numerical Example 28
- Section 5: Empirical Findings from Copper Projects in Selected Countries 35
- A. Project Grade and Country Characteristics 35
- B. The Missing Projects 38
- C. Poor Quality of Infrastructure and Services versus Poor Governance 39
- Conclusion 46
- References 48
