Olle Östensson, Chief, Diversification and Natural Resources Section, UNCTAD

1. 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@unctad.org  www.unctad.org/commodities

2. 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

3. 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

4. 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

5. 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

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

7. 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?

8. 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

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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Corporate responsibility for development • Companies have no business in national policy – but they automatically become defendants of the government’s 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

17. 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?