Paulo de Sa
Former Practice Manager, Extractive Industries Unit
World Bank
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View from the Top

Flexible Royalties, a Solution To Public and Private Discord

Mon, 10/22/2018 - 12:23

Q: What role can the mining industry play in the sustainable economic development of a country?
A: The mining industry can make a significant contribution to a country’s economic development because it often generates large fiscal payments to the public purse and contributes to the wellbeing of communities. More often than not, mining projects create economic opportunities for communities in remote areas. The World Bank Group, through the World Bank and the IFC, helps authorities refine their policies and ensure that mining is contributing to the overall economic development of their country. It can also make suggestions on the social and environmental management of the sector and benchmark policies.
The World Bank has completed many economic studies on what mining can do in terms of poverty and inequality, although the image of the industry is not always very positive. With the recognition that there is room for improvement in sustainability practices of the industry, these studies find that mining can offer countries concrete possibilities when it comes to reducing poverty. However, they also find that in terms of inequality the mining industry can increase the differences between the haves and have-nots, thus creating even wider gaps.
Q: What forces in the market are controlling trends in the mining industry?
A: Market forces will be greatly driven by cost-reduction. Hopefully, the mistakes of the previous supercycle will not be repeated. We are also seeing that companies in the industry have more power. Previously, market prices were controlled by consumers, but this is reversing as companies are increasingly able to influence prices.
For example, over the last 15 years, China has had an overwhelming influence on the global mining industry. As China’s domestic resource base is being progressively depleted or struggles to meet the quality requirements of modern manufacturing, new opportunities are emerging for the large mining companies. Through their superior capability to access the best mineral reserves, deploy the most competitive technologies and access capital in the best conditions, companies have filled most of China’s recent import requirements. This trend is very clear in the steel industry, where the iron ore export market is controlled by the three biggest companies, while the so-called “Big Four” are expanding their reach over the seaborne coal trade. After 2010, price formation in these two markets shifted from long-term contracts, where buyers prevailed, to spot prices where producers are more capable of taking advantage of short-term changes in the markets.
Q: How can countries properly implement revenue-sharing mechanisms such as the Mining Fund in Mexico?
A: Centralized mechanisms for revenue-sharing are very difficult to implement as it is hard to please everyone. We support these initiatives but we have seen that using them adequately is not an easy task. The funds need to be used in a very transparent manner and authorities need to make sure that they are investing in projects that support the well-being of communities. Listening to their priorities and giving them a voice in the decision-making process is essential. Peru, for instance, transfers 50 percent of its revenues from the mining industry to surrounding communities but the government has not been capable of properly overseeing the use of these funds. This means that municipal leaders have invested in the wrong types of projects, leading to cases of corruption. Revenue-sharing is meant to eliminate conflict between authorities and communities but it can sometimes end up causing more problems instead.