Negotiating a royalty pricing agreement: lessons from Liberia

By Stephen E. Shay, Lecturer at Harvard Law School; Iain Steel, independent economics consultant; Gabrielle Beran, Governance and Program Manager, International Senior Lawyers Project-UK (ISLP-UK); Olumide Abimbola, Business Development Lead, CONNEX Support Unit.

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Mount Nimba, Liberia: an abandoned mining site and the highest point in West Africa

Countries often collect royalties on the sale of their natural resources, but how can they be sure that the price is right when a mining company sells iron ore to its own steel mills? This was the problem faced by Liberia with its largest iron ore mine – and a common problem around the world in mining and many other sectors.

Sales between “related parties”, where the companies share a common owner and are therefore not independent of each other, use a “transfer price[i]” that is supposed to reflect fair market value – the price two independent firms would have agreed transacting at arm’s length. In this article, we describe how governments can make use of pricing agreements with companies to determine transfer prices by reference to international benchmarks, and the importance of reviewing these agreements to ensure they remain fit for purpose over time. We also draw lessons for revenue authorities, host governments and donor partners from the recent renegotiation of a pricing agreement in Liberia. Continue reading

Middle East and North Africa: The challenge of a long-term strategy for oil exporting countries

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By Rahmat Poudineh, Senior Research Fellow and Director of Research, the Oxford Institute for Energy Studies


This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.


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Oil refinery plant in Qatar

There is no single successful strategy to shield oil-exporting countries of the Middle East and North Africa (MENA) from the long-term risks of an oil price crash, exposing them to serious long-term challenges.

Diversification for example, works only when it reduces risk by pooling uncorrelated income streams and sectors. If countries diversify only into sectors that rely on hydrocarbon infrastructure and where relationships (tangible and non-tangible) exist across fossil and non-fossil fuel businesses, they cannot build resilience. On the other hand, if they diversify into substantively different areas that have little in common with their current primary industry, which is the core of their comparative advantage, they run the risk of not being competitive. Moreover, the cost of reducing the long-term risks and increasing resilience of their core sector is to accept lower expected return on existing hydrocarbon assets, for instance, by investing in measures that align their hydrocarbon sector with low carbon scenarios. This lowers the overall return but reduces the risk of disruption in the long run. Continue reading

How COVID-19 could help eliminate fossil fuel subsidies

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By Mario Pezzini, Director of the OECD Development Centre and special adviser to the OECD Secretary-General on development, and Håvard Halland, Senior Economist at the OECD Development Centre


This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.


Oil pumpjacks in Tatarstan, Russia
Photo: Yegor Aleyev/Tass/PA Images

As oil-exporting countries struggle to respond to the crisis, there is a way to make critical fiscal resources available.

The Covid-19 pandemic has hit oil-exporting countries at the worst possible moment. Severely strained health systems, and the need for economic stimulus, call for unprecedented growth in public spending. At the same time, oil export revenues have plummeted, following the demand collapse caused by the pandemic and a breakdown of traditional price-setting mechanisms. As a result, many oil exporters in the low- and middle-income category will struggle to muster anything near the level of expenditure required for an efficient response to the virus. Continue reading

Face au COVID-19, les leçons d’Ebola et du secteur minier en Guinée

Par Nava Touré, Conseiller principal auprès du Ministre des Mines et de la Géologie, République de Guinée, et Ruya Perincek, Analyste des politiques, Ressources naturelles pour le développement, Centre de développement de l’OCDE


Ce blog fait partie d’une série sur la lutte contre le COVID-19 dans les pays en voie de développement. Visitez la page dédiée de l’OCDE pour accéder aux données, analyses et recommandations de l’OCDE sur les impacts sanitaires, économiques, financiers et sociétaux de COVID-19 dans le monde.


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Photo : Shutterstock

Alors que les pays à travers le monde, connaissent des réponses diversifiées à la pandémie de COVID-19 et anticipent des conséquences économiques sévères, la Guinée s’appuie essentiellement sur l’organisation qui a fait ses preuves pendant l’épidémie d’Ébola de 2014-2015 : des structures institutionnelles pour répondre aux crises sanitaires, en collaboration avec les partenaires internationaux et le secteur minier qui joue un rôle important dans l’économie nationale.  Cette expérience dans la réponse aux crises sanitaires et les mécanismes établis dans les contrats et conventions minières pour le contrôle des revenus tirés par l’État pourraient mettre le pays dans une meilleure position par rapport à d’autres pays en développement pour la riposte au COVID-19 et à la crise économique.

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Le rôle essentiel des villes dans la coopération transfrontalière, levier de l’intégration africaine

Par Yvan Pasteur, Chef de la Division Afrique de l’Ouest à la Direction du développement et de la coopération suisse

Depuis longtemps, l’Afrique de l’Ouest est considérée comme une région en voie d’intégration. Des études déjà anciennes ont désigné l’espace SKBo, réunissant les régions de Sikasso (Mali), Korhogo (Côte d’Ivoire) et Bobo Dioulasso (Burkina Faso), comme un exemple de dynamisme et de coopération transfrontalières [i]. Pour autant, dans la zone SKBo comme dans d’autres, les potentiels n’ont encore débouché concrètement que sur un petit nombre de projets transfrontaliers. Il faut donc s’interroger sur les causes de cette progression trop lente. Continue reading

We now have a Paris Agreement rulebook, where do we go from here? Insights on environmental policies from randomised impact evaluations

By Iqbal Dhaliwal, Executive Director, and Rebecca Toole, Senior Policy Associate, Abdul Latif Jameel Poverty Action Lab (J-PAL)

 

gas-pollutionAt the United Nations Climate Change Conference in December 2018 (COP24), parties agreed to a rulebook that lays out how governments will measure, report and verify emissions under the Paris Agreement. Now countries need to act — and know whether policies and programmes are meeting their climate goals.

Thanks to innovations in research design, improvements in measurement technology and an increasing political will to know what works, more opportunities to rigorously evaluate and learn from real-world environment and energy policies exist than many might think.

Take, for example, our work at the Abdul Latif Jameel Poverty Action Lab (J-PAL) to ensure that policy is informed by scientific evidence. J-PAL is anchored by a network of 171 affiliated professors at more than 50 universities who conduct randomised impact evaluations to answer critical questions in social policy. Our Environment & Energy sector measures the real-world impacts of environmental and energy policies on everything from pollution reduction to climate change mitigation and resilience.

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What gets measured gets managed: Tapping into local procurement in the mining industry to advance development

By Luke Balleny, Manager, Role of Mining and Metals in Society, International Council on Mining and Metals

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Zambia – crusher for manufactured sand. Photo: Shutterstock

How do mining companies spend their money? If you didn’t know and listened only to the media, you might think such companies spend the most on taxes and royalties. However, you’d be wrong.

When minerals or metals are monetised, the revenue is shared between four main stakeholders in the following ways:

  1. 50–65% of mining revenue goes to operating and capital expenditure, such as the suppliers who are paid for their inputs.
  2. 15–20% goes to government, which receives its share through royalties and taxes.
  3. 15–20% goes to investors who receive profits, typically a residual after the other payments have been made.
  4. 10–20% goes to employees who are paid their wages.

A World Gold Council (WGC) study shows that out of the total annual spending in 2012 of USD 55 billion by the 15 WGC members studied, some USD 35 billion were payments to other businesses, mostly subcontracting and procurement. Less than USD 10 billion were royalty and tax payments to governments.

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Call for Comments: Maximising development outcomes from natural resources through public-private collaboration

By Lahra Liberti, Senior Advisor and Head of the Policy Dialogue on Natural Resource-based Development at the OECD Development Centre

Governments and extractive firms are increasingly looking at how natural resources can generate benefits for their economies and societies as a whole. In Zambia, for every 10 direct mining jobs, approximately seven are created in first-tier mining suppliers. In turn, the incomes generated in mining and supplier industries stimulate non-mining industries. Accordingly, the total amount of employment created through mining in Zambia is almost five times as high as direct employment in the sector. Similarly, in Ghana’s gold sector, 2.8 jobs are created in first-tier mining suppliers for each job directly created in mining. These are just two among other positive examples.

However, generating positive economic spinoffs from extractives is not always easy. Past lessons show that over-reliance and dependence on resources can adversely affect an economy’s long-term competitiveness given increased exposure to external shocks, severe price volatility and little economic diversification. The conditions can be challenging too: The world’s known mineral, oil and gas reserves are often found in tough contexts beset by geographic remoteness, political risk, weak technological and skills capabilities and environmental pressures ranging from water scarcity to climate change to competition for access to limited resources. In addition, conflicts with local communities as well as investment disputes between governments and extractive companies complicate matters.

Recognizing both the opportunities and the challenges, new efforts are emerging for exploiting commodities and at the same time promoting structural transformation for sustainable and inclusive development. Why? Public scrutiny and awareness are on the rise as citizens increasingly demand greater participation in their economies. Consumer demand across many emerging markets is driving an unprecedented sustained demand for raw materials. There is a growing realization that weak infrastructure and poor governance are showstoppers. And even the organisational structures of leading commodity firms have evolved. In the past, mining, oil and gas companies were self-sufficient and vertically integrated: They made the majority of the intermediate goods and services they needed.  Today, they are much more often using external suppliers. The need to reduce cost pressure and increase flexibility has prompted multinationals to make their operations more flexible, outsource non-core activities and diversify their supply chains. Yet, shortages of skills across technical and managerial levels limit their progress. All these factors provide a substantial opportunity for a win-win alliance between leading commodity firms, local economies and national governments.

Indeed, lack of skills, insufficient technological and innovation capabilities, inadequate local infrastructure and weak local institutions require long-term coordination and collaboration to effectively create shared natural resource-value. This means, among other things, fully engaging all parties, clearly defining roles and responsibilities and tapping governments and industry to evaluate together the potential for local value creation. In short, public-private coordinated responses are vital to effectively overcome structural obstacles and develop targeted, local and mutually beneficial solutions.

That is why the OECD Development Centre is hosting a multi-stakeholder process to develop a systemic approach to resource-based development as part of its Policy Dialogue on Natural Resource-based Development. What has emerged is an advanced draft of the Operational Framework on Public-Private Collaboration for Shared Resource-based Value Creation. Liberia and Norway led the inclusive and transparent multi-stakeholder drafting of the Framework with the active involvement of Switzerland, South Africa, the African Union Commission, AngloAmerican, Antofagasta Minerals, the Chilean Mining Council, the Columbia Center on Sustainable Investment, Eni, Exxon Mobil, the International Council on Mining and Metals (ICMM), IPIECA (the global oil and gas industry association for environmental and social issues), Shell, Social Clarity and Total.

This Framework works to shape collaborative public-private solutions to maximise socio-economic benefits along the entire value chain of extractives. It intends to effectively enable deeper collaboration among governments, non-governmental organizations, development partners, the private sector, and communities to explain how extractives can contribute to the sustainable management and efficient use of natural resources. By doing this, it seeks to boost the competitiveness of local economies and generate opportunities for local development and greater well-being that outlive the life-cycle of extractives.

What do you think of the Framework? Comments and feedback are welcomed from September 15th to October 30th as part of a broad public consultation now underway. Comments received will inform further revisions of the operational Framework’s final text for possible endorsement this December. Be a part of the process and send comments directly to: DEV.NaturalResources@oecd.org

This article should not be reported as representing the official views of the OECD, the OECD Development Centre or of their member countries. The opinions expressed and arguments employed are those of the author.