The World Bank Group is a unique global partnership, with five institutions working for sustainable solutions that reduce poverty and build shared prosperity in developing countries. It has 189 member-countries, staff from more than 170 countries, and offices in over 130 locations. We spoke to Former Practice Manager, Extractive Industries Unit, Paulo de Sa about how the mining royalty process in Mexico can be improved.
Q: What role can the mining industry play in the sustainable economic development of a country?
A: The mining industry can make a significant contribution to a country’s economic development because it often generates large fiscal payments to the public purse and contributes to the wellbeing of communities. More often than not, mining projects create economic opportunities for communities in remote areas. The World Bank Group, through the World Bank and the IFC, helps authorities refine their policies and ensure that mining is contributing to the overall economic development of their country. It can also make suggestions on the social and environmental management of the sector and benchmark policies.
The World Bank has completed many economic studies on what mining can do in terms of poverty and inequality, although the image of the industry is not always very positive. With the recognition that there is room for improvement in the sustainability practices of the industry, these studies find that mining can offer countries concrete possibilities when it comes to reducing poverty. However, they also find that in terms of inequality the mining industry can increase the differences between the haves and have-nots, creating even wider gaps.
Q: What forces in the market are controlling trends in the mining industry?
A: Market forces will be greatly driven by cost reduction. Digitalization will also play a bigger role in the industry in the near-term. It will allow new players with lower costs and more competitive technologies to enter the sector. This could lead to a bigger concentration in the industry through the development of larger projects. It is an interesting period for the sector as prices have improved and companies have replenished their balance sheets, which gives them the opportunity to reinvest. Hopefully, the mistakes of the previous supercycle will not be repeated. We are also seeing that companies in the industry have more power. Previously, market prices were controlled by consumers, but this is reversing as companies are increasingly able to influence prices.
For example, over the last 15 years, China has had an overwhelming influence on the global mining industry. As China’s domestic resource base is being progressively depleted or struggles to meet the quality requirements of modern manufacturing, new opportunities are emerging for the large mining companies. Through their superior capability to access the best mineral reserves, deploy the most competitive technologies and access capital in the best conditions, they have filled most of China’s recent import requirements. This trend is very clear in the steel industry, where the iron ore export market is controlled by the three biggest companies, and the so-called “Big Four” are expanding their reach over the seaborne coal trade. After 2010, price formation in these two markets shifted from long-term contracts, where buyers prevailed, to spot prices where producers are more capable of taking advantage of short-term changes in the markets.
Q: How does Mexico compare to other mining jurisdictions in Latin America?
A: Mexico has a very strong mining industry that has the participation of large national players. This is worth mentioning because other countries like Colombia have a growing mining industry but lack stronger national participation. We believe that countries should keep an eye on demand for minerals as this is being influenced more and more by technology, electrical vehicles (EVs) and renewable energy. Metals used in batteries, such as copper, nickel, cobalt, lithium, and graphite, are gaining importance.
Q: How can countries properly implement revenue-sharing mechanisms such as the Mining Fund in Mexico?
A: Centralized mechanisms for revenue-sharing are very difficult to implement as it is hard to please everyone. We support these initiatives but we have seen that using them adequately is not an easy task. The funds need to be used in a very transparent manner and authorities need to make sure that they are investing in projects that support the well-being of communities. Listening to their priorities and giving them a voice in the decision-making process is essential. Peru, for instance, transfers 50 percent of the revenues it receives from the mining industry to surrounding communities but the government has not been capable of properly overseeing the use of these funds. This means that municipal leaders have invested in the wrong types of projects, leading to cases of corruption. Revenue-sharing is meant to eliminate conflict between authorities and communities but it can sometimes end up causing more problems instead.
Q: What are some best practices Mexico should implement when it comes to the development of its Deputy Ministry of Mining?
A: We see many mining ministers implementing policies that focus solely on mining technicalities and do not include a broader context of elements, such as environmental, social and infrastructure matters. Ministries tend to be ineffective when they do not properly interact with other agencies. It may sound a little controversial but we always suggest mine ministers establish close ties with the environmental ministry of the country. A proper mining policy cannot be developed unless it goes hand-in-hand with environmental regulation.
It is also important for governments to develop one-stop-shops for the mining industry to reduce the time needed for the approval of key procedures like environmental licenses. These permits should be provided within a reasonable time period. Other countries like Peru have already implemented these practices but it is not an easy feat.
Q: What can authorities do to adequately implement taxes and fiscal regimes in the mining industry considering the cyclical nature of metal prices?
A: Many countries have increased royalty rates over the last few years but these measures are not easy to implement because they face resistance from the industry. We believe that royalties should be flexible and linked to the price of metals. Authorities need to implement these reforms cautiously to make sure that they do not cause investment to go to other countries. When prices are low the royalties should be smaller and when prices rise royalties should automatically rise as well so that countries can benefit from the added revenues companies are receiving. Flexible royalties allow both the government and companies to share the risks of prices in the industry, as has been shown in Chile and Peru. They create more alignment between authorities and the mining industry. Countries should have a savings mechanism they can draw upon when price cycles are low and they are receiving fewer revenues from the sector.
This is an exclusive preview of the 2019 edition of Mexico Mining Review. If you want to get all the information, plus other relevant insights regarding this industry, pre-order your copy Mexico Mining Review or access our digital copy of the 2018 edition.
Don’t miss out on your chance to rub shoulders with the industry’s leaders at the launch of the new edition, Mexico Mining Forum 2019, at the Sheraton Maria Isabel hotel in Mexico City this February 6! Register here!