Race to the Top

March 30, 2012

One of the unfortunate hallmarks of globalization is that governments must compete fiercely with one another to attract business to their shores. Playing governments like a Stradivarius, transnational mining companies have forced them to weaken environmental and other regulations, as well as reduce tax rates and even tax holidays.  The result is the greatest transfer of wealth in history from taxpayers who own the minerals to companies exploiting the resources who have been enjoying super profits for decades. For example, in the last ten years global miners have increased profits tenfold, which was hardly slowed by the global financial crisis.  But could this trend be reversed, as governments realize that they own the mineral resources and not the mining companies, and therefore hold the upper hand?

Up to now transnational mining companies have been able to get away with pitting one country against the other so that they pay minimal royalties and taxes through the employment of clever accountants and slippery lawyers.  At the same time they expect host governments to invest billions of dollars in infrastructure while contributing relatively little themselves.  When challenged, they fall back on a familiar refrain: If countries want them to invest in exploration and mining, they must offer incentives.

Swimming against the tide, the Australian government decided to increase taxes on resources to limit excessive profit-making. When this legislation was first mooted, all hell broke loose. For the mining companies, it was not just a matter of having to live with modest profits from their Australian operations; they were nervous that other countries could follow its lead.

Despite intense lobbying, in which the mining companies spend millions on advertising, the legislation went through at the end of March, although somewhat compromised.

Could this really start a race to the top? Certainly some in the mining industry believe that Australia has created a “disease” that could spread. According to Mark Calderwood, managing director of Perseus Mining,

This disease that started in Canberra is spreading … So you will see more and more of it around the world. The new political risk is around taxes and royalties rather than security and tenure.

Calderwood went on to say that once one “government is getting away with it … It’s hard to resist” when others do the same.

While mining executives are in a funk, the penny has dropped for governments around the world. They now realize that their resources are worth much more than what they’re getting from royalties.  For example, Ghana, Africa’s second-biggest gold producer, plans to raise mining taxes from 25 to 35%, on top of levying a windfall tax on profits.  South Africa is also looking at a windfall tax, which it wants to set at 50%, as well as establishing a 50% capital gains tax on the sale of mining tenements.  Other countries joining the queue are India, Peru, Congo, Zambia and Kazakhstan.

Once mining companies understand that a race to the top is on, they will have to live with reduced profits. Contrary to the scare that they are trying to put on governments, investment and exploration will not slow down because there will always be profits in mining—just not super profits.

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