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.

Liberia-mining-natural-resources
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