Chamber president Bruce Shapiro delivered the opening intervention at the Multi-Stakeholder Consultation session at the First Policy Dialogue on Natural Resource-Based Development hosted at by the OECD at their Development Centre in Paris on December 18, 2013.  The intervention suggested a new approach to the sharing of mining revenues for operators and mining jurisdictions and the concept generated a lively discussion by both stakeholders and representatives of the countries participating. The actual presentation is below:

I am honoured to be here today and would like to congratulate the OECD for this initiative and particularly the comprehensive scoping document.  I hope the outcomes of this Policy Dialogue lead to an equitable and sustainable approach to mining industry revenues vis a vis all stakeholders.  While not directly involved in the activity of mining the organizations of which I am president are closely associated with a variety of participant entities.

My opening statement is “the price of a commodity is irrelevant”. What is relevant to the investors is a ROI adequate for the risk profile of the investment and to the Host Jurisdiction it should be the total “resource rent” including all economic benefits resulting from the activity of mining. To be sustainable it must be a true and ongoing partnership between these entities.

 

The current focus on the price of a commodity leads to changes in legislation aimed at a jurisdiction receiving a larger share of the supposedly increased profits when prices are high.  Simply the rumour of impending negative change by a jurisdiction causes uncertainty and is unsettling to investors.  Also, in most cases, by the time amended legislation is in place there has been a collapse in the prices of commodities.  The current commodity cycle is a perfect example.

 

So, what to do?  Nationalize the extractive industry – there are too many examples where this has been done and failed miserably.

 

Perhaps the answer is for Jurisdictions to allow the investors an ROI sufficient for them to invest in that Jurisdiction given its risk profile as perceived by the investor and to allow that return, as a minimum, over the life of the investment.

 

Clearly both investors and Jurisdiction would want to benefit from the upside but on a minimum return basis the investors would likely be happy with a lower share of that upside. Some base income to the Jurisdiction could be included as a cost to the venture and thus included in the calculation of the ROI.

 

On the downside, the investor should be allowed to recoup for those years in which the agreed ROI was not achieved by receiving more than their agreed return in those years where excess ROI’s are achieved.

 

There would have to be a formula agreed by all participating Jurisdictions and the majority of investors. This formula would measure all input costs and output revenues on a regional basis.  The calculations would be made by neutral experts in the relevant fields to arrive at the ROI in any particular year.

 

The Jurisdictions should be made to publish what percentage or quantum of their revenue share is attributed to each branch or department of government on an annual basis.  This should certainly include the benefits to the communities in which the investor operates as without a social licence to operate the government licence may be meaningless.

 

Apart from creating clarity for the investor and the relevant Jurisdictions, such a formula would then limit negotiations to what is an acceptable ROI for the investor and resource rent for the jurisdiction, what the split of upside should be between the investor and the Jurisdiction above this agreed ROI to the investor and, in a recovery period, how much of the upside should go towards past shortfalls to the investor. Additionally, when a Jurisdiction wished to change its proportion of revenue it would simply have to change one number.

 

I realize this is a complex potential solution to achieve an equitable and sustainable revenue sharing arrangement in the mining industry, but it would result in greater clarity and transparency for all.  Additionally it would ultimately substantially reduce the cost and complexity of negotiating a deal and the disruptive nature of changes on an ongoing basis. The reduction in uncertainty would allow investors to take a slightly lower ROI, thereby allowing the jurisdiction a proportionately greater share of the revenues.

 

Bruce Shapiro

President

MineAfrica Inc. www.mineafrica.com

On The Ground Group www.onthegroundgroup.com

Canada-Southern Africa Chamber of Business www.canadasachamber.com