Policies to assure equitable distribution of mining benefits Inaugural Meeting of the Intergovernmental Forum for Mining, Minerals, Metals and Sustainable Development Geneva, 7-11 November 2005 Olle Östensson, Chief, Diversification and Natural Resources Section, UNCTAD

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

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

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

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

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

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?

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

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

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

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

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

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

Capacity building: National 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

Capacity building: Regional/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

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

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?