Transcript 1. Generous contracts pre-2008

Capturing Revenues from Extractive
Industries for Financing Structural Change
FTC Annual Conference
Lima 14-15 October
Example of Forgone Revenues:
The Zambian Copper Sector
• No significant revenue capture both
under private and public ownership
• Under state ownership – collapse of
world markets, low investments
• Under private ownership it is a:
1. A result of contracts that provided
generous terms to companies; and
2. Transfer pricing schemes.
1. Generous contracts pre-2008
• Mineral royalty rate of 0.6%
• Below the IMF’s own estimates of between 5% and
10% for developing countries
• No VAT charged on mine related transactions
• Capital expenditure had a deductible allowance of
100%
• Tax stability periods of up to 20 years
• The World Bank noted that the marginal effective tax
rate was in the neighbourhood of 0%
2. Transfer Pricing
• Companies registered in Switzerland have copper
producing subsidiaries in Zambia
• A Zambian based subsidiary sells copper to its
Swiss-based mother company at a price well
below the market (so profits are not recorded in
Zambia)
• The Swiss-based company sells the copper at
world prices as if it originated from Switzerland
• Zambia lost US$17.3 billion (in real 2010 prices)
in illicit capital flows between 1970 and 2010
-10.00
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
Mineral Revenues
(percent of total revenue)
60.00
50.00
40.00
30.00
20.00
10.00
0.00
Fiscal Revenue and Export Earnings
Actual and Counterfactual Revenue Flows
(% of GDP)
12.46
10.68
8.90
7.12
5.34
Counterfactual - Actual = Average 3.7 % of GDP Forgone
3.56
1.78
Counterfactual
Actual
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0.00
Contrasting Examples:
Botswana’s Revenue Capture
• Govt. of Botswana has a 15% share
holding in De Beers
• Debswana Diamond Company, a
De Beers – GoB joint venture (on
50/50 shareholding) and
• 80/20 revenue share (in favour of
GoB)
Botswana: Revenue Utilization
• 93% of expenditure on education is
public.
• School fees abolished: adult illiteracy rate
fell by half (1980-2001)
• 61% of expenditure on health is public
• Maternal & under-five mortality rates less
than 40% of the average for SS Africa
• Total roads network increased from
8,134km in 1991 to 25,798km in 2005
Revenues for Diversification:
Indonesia
• Share of oil and gas in Indonesia’s public
revenue fell from 49% in 1982 to 23% in
2005
• Promoted exports of non-oil goods (textiles
& footwear) through tax incentives, credit
and subsidies
• 12% average annual growth rate of
manufacturing (1965-2000)
Malaysia
• Focused on labour intensive highskill manufacturing
• Selected products for exports
(electronics, aircraft parts, building
materials, furniture, chemicals etc.)
• Incentive measures were drawn up
for each of these commodities tax, credit, subsidy, mainly for
SMEs
Thailand
• Focused on value addition (agroprocessing)
• Flexible financing from commercial banks
• Exports of raw farm and marine products
fell from 63% to 16.5% of total exports
(1970-2000)
• Processed farm and marine products
increased from 0.6% to 9.4%. (e.g. export
tinned tuna, tinned fruit)
Chile
• Policy incentives were designed to
promote the winery, horticulture and
salmon fishing sectors
• Royalty payments from mining to fund
R&D, technological transfer & diffusion,
vocational education and training
• Established the Fund for Innovation and
Competitiveness (FIC)
Policy Implications
• Strengthen contract negotiation and tax
collection capacity
• Strengthen capacity to select key sectors to
support through fiscal measures: tax, credit,
subsidy incentives
• Policy lending or low interest finance, in an
environment of underdeveloped financial sector
• Macroeconomic policies - exchange rate policy
for export promotion
• But: Know when to exit and phase out industrial
policies
Thank You
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