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DR Congo Should, Righteously, Tax Cobalt And Copper Until Pips Squeak, Eyes Water

The Democratic Republic of the Congo, one of the poorest nations on the planet, is trying to gain more of the value from the minerals extracted from that desperately poor place. This is a good idea – mineral values should be taxed until the pips squeak, until eyes water. However, they’re also going around it the wrong way and they’re going to lower, not increase, the revenues they gain over time. We’ve the interaction of the usual governmental mistake – how much can we extract now without thinking about future incentives – with properly good and decent policy upon resource rents.

It’s a bit of a clash:

Democratic Republic of Congo President Joseph Kabila signed into law on Friday a new mining code that raises royalties and taxes on operators, the presidency said in a statement.

That’s not the way to do it.

President Joseph Kabila signed a new mining code into law on Friday.

The country is Africa’s biggest producer of copper and cobalt, a vital component in mobile phone batteries.

Foreign mining firms strongly opposed the law, saying their operations in DR Congo would stop being profitable.

That is indeed always a risk, it’s something that has to be worked out. But this is still not the way to do it:

Last month, the Democratic Republic of Congo (DRC) enacted a law to revise the country’s 2002 Mining Code. While the law improves environmental and social provisions, revisions to the fiscal regime – long considered relatively favorable to investors – were the focus. But mining companies and the government still seem to be in a deadlock over the changes to taxes and royalties, even after the law passed. Will these new terms help the DRC to capture a bigger share of the pie, which, if responsibly invested in key infrastructure and services, could potentially benefit the Congolese people? Or will the new terms end up, as some mining companies claim, stifling investment and reducing the pie for all?

Civil society can and should engage on these questions, considering both how revenues from mining can be maximized, and also how these revenues can be spent in a way that benefits the population and ensures public accountability.

Amazingly Oxfam does manage to pose the question correctly. What maximises revenue? They come to the wrong conclusion as well, which is less of a surprise.

The new mining code, which is a revision of a 2002 law, could see royalties rise as high as 10 per cent for minerals deemed “strategic” by the government.

It also applies immediately as it scraps a provision in the previous code that said miners would have 10 years following any change in the law to meet the new conditions.

Really, just not the way to do it.

So, to the basics of the situation which will then tell us how it should indeed be done.

No one has created the value of those minerals, sitting in the ground, in the Congo. This is the “resource value.” The pure happenstance that there are those minerals, in a form that can be extracted, in a specific location under a certain piece of the map. This value is tautological – it’s defined as the value of it simply existing. No one has created this value, it is by definition the value that no one has created. We must gain our tax money from somewhere, near all methods of taxation change incentives. But here we’ve a value – the amount of it is arguable – which hasn’t been created by anyone therefore there are no incentives to its production or not. We can thus tax the snot out of it and we should. On the very basic grounds that we’d like to get as much of our revenue as we can from places that don’t alter incentives (or are incentives to stop doing bad things) thus reducing the amount we try to raise from things we like people doing, like working to make a living.

Ricardian rents, resource rents, should be taxed until the pips squeak.

However, do note that this is about incentives. It’s also utilitarian. There’s bugger all here about rights, justice, righteousness or precious national resources and sovereignty.

Which is what brings us to the next part. Maybe those taxes – the royalties – on those resource rents were or are too low. Tough luck. Because we need to consider the effect upon incentives of raising them. Raising them upon new mines that people might open up into the future? Sure, go ahead, see who steps up to the plate to develop them or not. But breaching contracts already signed? Nope, no way. Because if the people willing to pour the hundreds of millions and billions into new mines find out that a deal isn’t worth the paper someone’s just wiped their clarts on then they’ll not turn up, will they?

No, it isn’t true that there’s only one place in the world to get a specific mineral from. No, it isn’t true that the mines must and will open whatever. Stealing cash off the last group to invest in mines won’t encourage people to invest in new ones.

For there’s a counterpart to that resource rent argument. Yes, we want to tax away all the value of the mere existence of those minerals extant under a particular piece of turf. But we want people to make a decent risk adjusted return on their capital, expertise and time that they put into lifting and processing those minerals. And the worse the surrounding economy – there is perhaps none worse than DR Congo currently – the higher that risk adjusted profit rate should be. And, obviously enough, the more the last lot of investors got expropriated the higher it’s going to be as well.

So, yes, tax the buggers, tax the buggers out of, that resource rent. But don’t have retroactive changes to deals already signed.

And that’s what should be done and isn’t being done.

One final point. Let us assume that long term revenue maximisation is the goal here. Not a fair or valid assumption in a place like DR Congo run as it is by the scumbags it is. But think of some ethereal perfection of a mineral deposit for a moment. If we do think that the royalty and tax rises moving off into the future will be revenue maximising, given the effects upon incentives, then we’ll bring them in anyway, won’t we? Only for those new deals so affected because we all do think they’ll be revenue maximising.

If we don’t think they will be we might well decide to make them retroactive. Because our argument isn’t that the new rules will be revenue maximising, instead it’s that the investments already made are a sunk cost and we can rip them off.

All of which gives us a very decent guide to the beliefs of those imposing the new prices and taxes. They don’t think they will be revenue maximising moving forward. Which is why they’re not willing to have them only for new deals but insist they must apply retroactively as well. Or, as we can now divine, they’re bad tax and royalty rates precisely because even those imposing them don’t think they’re revenue maximising.

Thus the miners are right here. And DR Congo could – possibly should – charge those taxes only for new developments. And then see if anyone turns up to invest in new mines or not. It’s that the government isn’t willing to do so which proves the miners are right.

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5 years ago

Well, even Oxfam gadflies were brought up with the fable about killing the goose that laid golden eggs, our classic illustration of the fault of excluding long-term consequences of actions. Kabila was probably not. I do not agree with maximizing “severance taxes.” Lowering costs for future copper miners, and prices for future copper users, is better than bulging coffers in Kinshasa. But indeed the pips will not squeak, whereas the mining companies can go elsewhere. You cannot “tax all the value” out of that underground metal, when Tim will readily admit that it has nothing but theoretical value until someone… Read more »

5 years ago

Oh cool. So this is an exception to the general rule that economics is all about the consumers not the producers. Squeeze away; guess who pays the taxes. And then some people wonder where Trumpanomics comes from.

5 years ago

Oh cool. So this is an exception to the general rule that economics is all about the consumers not the producers. Squeeze away; guess who pays the taxes. And then some people wonder where Trumpanomics comes from.

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