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sharing in governance of extractive industries

New mining technologies and the fiscal space: ensuring shared value and sustainable development

Addressing the potential loss of benefits from local employment when new mining technologies are introduced: What new arrangements are needed between host governments and mining companies?

The adoption of new technologies in the mining sector presents a fundamental challenge for governments and companies to safeguard their economic interests within the context of the shared value paradigm.

 

There are growing indications of widespread socio-economic disruption due to technological change in the mining sector. Initial estimates from the African Development Bank show that up to 200,000 jobs could be lost over the next decade due to mechanisation in Southern Africa’s mining sector. Many African countries are not fully prepared for such a jobs crisis.

 

But there are several types of fiscal solutions that can help countries and industries to navigate this ‘new deal.’

 

  • Policymakers can reconfigure fiscal regimes and commercial arrangements to allow greater state participation (and risk-bearing) in mining operations. These could resemble the production sharing contracts and joint ventures that are more widely used in the petroleum sector.

 

  • The petroleum sector also provides examples of progressive fiscal regimes that self-adjust according to prices and commodity market dynamics, effectively distributing a fair share of the risks to governments and companies. However, to put such a flexible regime in place demands technical and political capacity, if local players want to redesign the rules without scuppering relations with mining companies.

  • Stakeholders could cooperate on stronger investments in knowledge generation and infrastructure —by focusing on tertiary and STEM education, R&D and innovation, and other technical skills. It's possible to reskill affected mineworkers and build a new labour pool for the mines of the future, but that is a long-term endeavour, while the effects of technological disruption are more immediate. There are regional mechanisms (such as the Africa Continental Free Trade Area, Regional Mineral Value Chains) that can help to close national skill gaps and generate linkages to local industry.

  • Countries can promote the growth of alternative industries (e.g. agriculture, manufacturing) to absorb displaced workers, and create opportunities for more diversified and resilient economies.

 

In sum, the glass may be half full. Governments have the opportunity to address these challenges by crafting fiscal models that allow them to be more nimble. And, recognising the limits of maximising mineral rents as a development strategy, they can invest in high-tech skills, research, and innovation, which will help transform mineral endowments into lasting economic prosperity.

This may be an optimistic view, but it is rooted in real practices with proven value. I am keen to know if others share my optimism, believing that such new fiscal arrangements and investments in "soft infrastructure" can make a difference.

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Comment by Vanessa Ushie on May 29, 2019 at 10:17

Dear David - mining is of course, an enclave activity, which is highly capital-intensive. The rationale behind the 'new tech, new deal initiative' is to begin to examine what happens if the jobs (at whatever scale) associated with mining across the value chain are affected by technological advances (from mechanisation, to automation, digital technologies and the use of AI/robotics). In this specific context, what types of fiscal and contractual agreements between governments and mining companies would ensure that shared value is preserved. I mentioned the prospect of PSC-type fiscal regimes being applied to mining, or the use of service agreements. There may be other fiscal frameworks that also emerge over time.

The broader question on the poor growth performance of mineral-rich countries is one that is still very relevant today. There are some exceptions to the rule, such as Botswana and Chile. However, the combination of institutional dexterity, (smart) policy choices and the national political economy seem to play a determining role in the long-term relationship between resource abundance and growth. Related to this point is the fact that developing countries do not capture the most value from their minerals, and are often concentrated on primary (ore) extraction. The rise of policy initiatives on local content, value addition and linkages (such as the Africa Mining Vision) is in response to this challenge.

I think that this is an evolving discussion, and there are important lessons to be learnt from various mineral-exporting developing countries, as the world prepares for the economic impacts of new mining technologies.

Comment by David Noko on May 28, 2019 at 23:50

Dear Vanessa, I would like to share a few facts about mining, governments and employment.

I will be not elaborate much at this stage except to state the facts as they have been over the years and remain valid today:

1. Contrary to general belief, mining at an extraction level is NOT a large employer. Most the jobs are created downstream in the conversions/processing of the mineral into specific sellable product, like copper cables, jewellery, steel etc. 

2. Mining historically has always been highly regulated by hosts government, with prescriptions of various types of taxation regimes placed on the companies. 

3. The Big question to ask is Why are Resources dependent countries, especially developing countries are not demonstrating the kind of economic progress and successes commensurate with the wealth they are producing. 

Comment by Vanessa Ushie on May 28, 2019 at 10:55

Dear Roger, thank you for sharing your thoughts. I fully agree that petroleum PSCs would have to be remodeled to fit large-scale mining operations, and that they have some underlying weaknesses. However, the key point here is the recognition that governments have to bear more risk in developing mineral assets, given the impact of technological change on jobs and mine operations. To reduce regulatory burdens, they may choose service agreements that allow companies run local mining operations based on fiscal guidelines on output and tax returns. In this case, determining the distribution of shared value and benefits between governments and mining companies is very crucial.

On human capital and skills - In several countries, there are vocational skills programmes, and SME/business development initiatives (some targeting ASM), but these have not necessarily been tied to a resilience framework to respond to tech. disruption in mining or other extractives. There is certainly a need for more joined-up policies that connect the dots between job creation, skilling and reskilling disrupted mine workers and building other economic sectors including agriculture, manufacturing and services (tourism, hospitality, etc.) that could provide decent job alternatives. Again the objective should be to prioritise investments in human capital, skills and innovation that leverage the new, high-tech economic opportunities emerging around mining.

Comment by Rene Roger Tissot on May 27, 2019 at 21:32

Dear Vanessa, I would like to share your optimism. The fiscal models you suggest from the oil sector are valid, but also not free of challenges such as transfer pricing issues and gold plating. PSA tend to impose a heavy regulatory burden on host governments and companies. Royalty/Tax regimes are easier but reduce the level of government participation (no the government take since technically one can obtain the same results). I think (and mining is an area I am just learning) one would want to develop two clearly different approaches. For small mining the focus should be on securing property rights, capital support and technical upgrading. For large mining one can look at- as often suggested- share value (infrastructure, etc). But essential to any strategy is the development of human capital as you recommend. Too often training and capacity building concentrates in the sector (oil/gas or mining). Perhaps governments should reconsider the value of national technical institutes that provide solid (and certifiable) training in many trades (tourism, cooking, energy, etc). This of course is not a new or very creative idea, but in the places where it has been adopted - even with many flaws -it has helped to build a national workforce.

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