Title Date 1 WAVES © 2014
Wealth Accounting and the Valuation of Ecosystem Services www.wavespartnership.org
Wealth Accounting and Fiscal Policy Keith Jefferis - Econsult Botswana 8th April 2015
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Asset Sustainability in a Mineral Economy Three fiscal (public finance) policy challenges:
1. TAXATION: Design a taxation system that appropriates mineral rents to the nation, while leaving the owners of factors of production with a return for inputs, including a reward for risk
2. SPENDING: Ensure that mineral revenues are spent on asset accumulation (investment) and not consumption (fiscal rules)
3. INVESTMENT: Ensure that investment is productive (generation of income to replace minerals in future)
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Taxation Regimes for Natural Resources What forms of taxation should be used?
• Royalties (related to production/sales) • Production sharing (common with oil) • Profits Tax
At what point should taxation be applied? • Production, exports; • Value-added (e.g. refining, smelting) vs production (extraction)
How should profits taxation be designed? • e.g. flat rate vs variable rate
Balance between simplicity and ideal characteristics in the real world, e.g.
• Royalties are simple to collect and difficult to avoid, but raise the fixed costs of production and reduce output
• Profits taxes are more “equitable” but are vulnerable to transfer pricing
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Taxation Regimes for Natural Resources How should ownership be handled?
• Distinction between ownership of resources and ownership of extraction operations
• Should government have a right to an ownership stake, and if so, how much?
• Should government’s stake be paid for or not (free carry)?
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Fiscal implications: Revenue mobilization from natural resources TAXATION issues:
• Setting the optimal taxation rate requires an assessment of the uncertainty of commodity prices. The higher the unit price, the larger the resource rents (assuming the marginal cost of production remains constant).
• Governments also need a good understanding of costs and reserves, as well as strong audit capacity to ensure contract enforcement.
Without this, the majority of the mineral rents will leave the country via
the international investor, rather than being channeled back into the country.
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Fiscal implications: Spending priorities
Current expenditure (which generates immediate benefits, but mostly in the short run) or Capital expenditure (which translates into higher returns in the future)?
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Fiscal Policy: Expenditure & Savings Key decisions: • How much to invest and how much to consume?
• (Hartwick rule says proceeds of taxation of rents – i.e. resource depletion - should all be reinvested)
• How to divide investment between types of assets: • Physical assets • Human capital (education) • Financial assets
• How to manage financial assets? • Sovereign Wealth Funds • Domestic / offshore mix
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Implementation of Hartwick Rule in Botswana: Sustainable Budgeting Index 1. Fiscal mineral revenues should be invested
1. i.e. should not be spent on recurrent items 2. Public investment includes:
1. Fixed assets (roads, infrastructure, buildings etc.) 2. Human capital (education and health spending) 3. Accumulation of financial assets (by Govt.)
3. Measured by: 1. Aggregate public investment (development) spending, plus 2. Recurrent spending on education and health (i.e. human capital)
4. Sustainable Budget Index 1. Ratio of non-investment spending to recurrent revenues (should be
less than 1)
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Mineral rents and fiscal policy – how well did Botswana do?
0
1,000
2,000
3,000
4,000
5,000
6,000 1
980/
81
198
3/84
1
986/
87
198
9/90
1
992/
93
199
5/96
19
98/9
9 20
01/0
2 20
04/0
5 20
07/0
8 20
10/1
1 20
13/1
4
Min
eral
rent
s, re
venu
es (r
eal,
1993
pric
es, P
mill
ion)
Mineral rents Mineral revenues
Mineral revenues have tracked rents well
On average, 93% of rents collected as fiscal revenues from 1980-2013
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Mineral rents and fiscal policy – how well did Botswana do?
0 2,000 4,000 6,000 8,000
10,000 12,000 14,000 16,000
198
2/83
1
985/
86
198
8/89
1
991/
92
199
4/95
1
997/
98
2000
/01
2003
/04
2006
/07
2009
/10
2012
/13
Min
eral
rent
s, re
venu
es (r
eal,
2006
pric
es, P
mill
ion)
Mineral rents Mineral revenues
Mineral revenues have tracked rents well
On average, 95% of rents collected as fiscal revenues from 1980-2013
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Appropriation of resource rent – mineral revenue Policy objectives:
Minerals owned by the state, on behalf of the nation Investors receive “right to mine” but not ownership of mineral
deposits Mineral tax system should appropriate rents for owner of resource,
while leaving investor with appropriate compensation for cost of production, capital and risk
Tax: Royalties, profits tax, withholding tax on dividends etc. How well has the policy objective been achieved?
Ownership Govt has right to acquire shares in mining company, but has to pay
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Appropriation of resource rent – mineral revenue Taxation: • A “Variable Rate Profits Tax” is
applied - rate of tax is determined by the profitability of the mining enterprise.
• Aim is to ensure that any super-normal or windfall profit accrues to government
• Rate of tax rises with the profitability of the mining company.
• Specific formula applied is: Annual tax rate = 70–(1,500/X)
where X is the profitability ratio, given by taxable income as a percentage of gross income.
0
10
20
30
40
50
60
30 40 50 60 70 80 90 100 Ta
x ra
te (p
erce
nt)
Gross profit (percent)
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Monitoring Spending: Sustainable Budget Index (SBI) Sustainable Budget Index • Ratio of non-investment (recurrent) spending to
recurrent revenues • If < 1, budget is sustainable
• Mineral revenues not being used to finance recurrent spending
• Mineral revenues being used to finance investment (accumulation of assets)
• Implementation of the Hartwick Rule • Largely observed in practice, despite being a policy rule
not a statutory rule
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Sustainable Budget Index
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
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How have mineral revenues been spent?
0 50 100 150 200 250 300 350 400 450 500
0 50
100 150 200 250 300 350 400 450 500
Education Health Other investment Mineral revenue
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How have mineral revenues been spent (1983-2014)?
Category P billion (real, 2012 prices)
Mineral revenues 420.4 Total investment (physical and human capital) 444.5 o/w Educa?on spending 185.9 Health spending 65.9 Other development (investment) spending 195.9 Recurrent revenues, excluding grants and sale of property 468.6 Recurrent spending, excluding health & educa?on 378.0 Net financial savings (GoB share of Pula Fund (GIA) less net debt, December 2013, nominal)
4.0
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Investment / expenditure / savings choices • For sustainability, mineral revenues should be invested,
but how? • Physical assets, human capital, financial assets?
• In low income countries, returns to investment in physical assets and human capital are likely to exceed returns on financial assets • But needs planning capacity that can ensure good quality
investment decisions (“invest in investment”) • Sovereign Wealth Fund
• should be part of the mix for mineral economies • should be invested offshore:
• Helps to avoid absorption capacity problems • Also reduces risk of “Dutch Disease” • And provides an annuity income for when minerals are depleted
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Natural Capital Accounting & Fiscal Policy Decisions in Practice Botswana: 1. Enables government to assess how effective its mining fiscal
regime has been in terms of collecting mineral rents 2. Assists in modernising the mining fiscal regime 3. Assists in providing the basis for negotiations with mining
companies for new projects 4. Enables government to manage expectations amongst the
population
• Enables the Ministry of Finance to manage expectations amongst spending ministries!
5. Enables government to assess the effectiveness of the implementation of fiscal rules
6. Provided the government with the rationale for establishing a sovereign wealth fund
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Natural Capital Accounting & Fiscal Policy Decisions in Practice Mauretania: 1. Assisting in developing a fiscal regime for the resource
sector that enables the government to recover an equitable share of resource rents;
2. Generating well-designed investment policies that use resource rents to generate sustainable returns over the long term
3. Renewal of EU-Mauritania Fishery Protocol. The most important sectoral agreement for both parties. A wealth accounting analysis was used during negotiations.
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QUESTIONS?
