“It’s a high-risk country, there’s no infrastructure, and the resources are low quality.” I have heard these arguments countless times over the years from investors in extractives projects. And in every single negotiation I have advised governments on, across Africa and Asia-Pacific, investors have asked for tax incentives that they claim are necessary for financial viability. But how are governments to judge these claims when investors don’t share the underlying data?
Extractives projects are uncertain and risky. Nobody knows the true geology of the asset before it is developed, the precise amount of investment required, and the operating costs to extract and refine the resources. And the only thing we really know about commodity prices is that they’re volatile and unpredictable. Who would have thought in January 2020 that within four months the price of oil would be negative?
Unbalanced deals are a bad result for all parties
Investors often have better information than governments when negotiating extractives contracts. This is not a criticism of governments, but a function of the work that is usually undertaken by investors. Investors tend to explore for resources and commission studies to determine the technical and financial feasibility of projects. They are also likely to have deeper sectoral expertise and experience than governments, and know the value of their intellectual property.Continue reading