Issues in evaluating tax and payment arrangements for publicly owned minerals

Many developing countries are still heavily dependent on mineral extraction to generate fiscal revenue and to earn foreign exchange. When minerals form a significant proportion of the country's asset base it is particularly important to have a framework to evaluate the adequacy of compensation schemes. Are these countries collecting enough in return for depleting their reserves? Are these countries carrying too much of the risk? This paper describes work in progress in developing such a framework. In many mineral dependent countries, the government holds the mineral rights and enters into compensation agreements with public or private firms that will extract the resources. Given the high degree of risk and uncertainty associated with mineral development, determining tax/payment arrangements is further complicated by the need to develop risk-sharing schemes between government and the resource extractors. This paper reviews these issues briefly and concludes that when objectives are not perfectly correlated it is preferable to use multiple instruments and to match each instrument to an objectives.