Dear Natural Resource Extraction Companies, Time to Find Another Model – By Cristopher Sabatini

The tables are turned. For decades the mantra was the need for national governments to lower tax and regulatory obligations to better attract foreign investment. The idea placed the burden on national governments to be more business-friendly. (Think the now-discredited World Bank Doing Reports.)

Today, though, the usual threats by corporations—particularly investors in natural resource extraction—that if they don’t receive favorable treatment on tax and royalty regimes they would take their investment elsewhere, ring hollow. For one there is the matter of their sunk costs in production. It’s simply not easy to pack up a mine or oil or natural gas rig and move it elsewhere.

Today there’s also the urgent need to respond to the demands of populations around these investments that simply believe they have been cheated out of the benefits of investment and export of natural resource extraction. Mobilized citizens in those communities are expressing their discontent in disruptive, even violent, ways that reflect the fraying of party systems and historic social and geographic exclusion and racism. Social upheavals in Chile, Colombia, Ecuador, and Peru, have turned the tables on the neo-liberal agenda of “doing business” of lower taxes and regulation. More than what governments can do to reduce and streamline regulations on foreign investment, the question now is can international investors do a better job in promoting good governance and address these increasingly urgent and vocal demands? It is a two-fold problem that requires first corporations and investors to be willing to accept potentially higher taxes and royalties on their profits and second those corporations working with state officials (and quite likely international technocrats) to ensure those newly channeled public revenues are effectively invested in communities.

There are plenty of examples when this hasn’t been the case. It’s no longer a matter of corporate noblesse oblige of supporting feel-good projects but getting international investors to pony up on tax and royalty obligations. While understandable that large corporations were reluctant to plow taxes and unbranded corporate social responsibility initiatives into a corrupt, inefficient state, such projects failed to trickle down in any meaningful, broad way to rural populations to improve education, infrastructure, or health care.

It’s undeniable that resource extraction companies in these countries have largely been getting a pass on tax rates. Just to take some examples. In Australia, France, Portugal, and the UK, according to the World Bank corporate tax rates as a percent of GDP averaged around 24 percent. Compare that to Chile’s (16.2%), Colombia’s (14.2%) Ecuador’s (12.4%), and Peru’s (13.4%). While these overall corporate tax rates do not reflect the complex, difficult-to-untangle world-price-linked royalty rates of specific investments, they do indicate a severe mismatch generally.

It is understandable why those investors are reluctant to see taxes increase under the dysfunctional public sectors that exist in many of these countries. While Chile is somewhat of an exception, even its minimal effective state presence in mining areas in the north and struggles to ensure universal, broad access countrywide to education and health care are also a disincentive to paying higher taxes. In other countries, especially Peru, the distribution of mining royalties has become an unholy mess in which meaningful rural impact in the communities where extraction occurs becomes lost.

For this reason, it has become imperative for companies to invest in bureaucratic and administrative reform for the delivery of tax revenue to communities. To be sure, this will be difficult, given resource extraction companies’ reluctance to engage in anything that smacks of politics. This, however, is state building, along the lines of what international multilateral banks and donors have done with central banks across the region.

Are investors and businesses ready?

Dr. Christopher Sabatini
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Christopher Sabatini, PhD is the senior research fellow for Latin America at Chatham House in London and is a senior lecturer of policy at London School of Economics.  He recently edited Reclaiming Human Rights in a Changing World Order, published by Chatham House and Brookings Institution.

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