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How are the benefits of projects that exploit natural resources distributed?
Cost-benefit analysis can be developed from different perspectives, and depending on the perspective, the distribution of benefits also changes. Benefits are associated with an increase in welfare, either through an increase in producer surplus or consumer surplus.
From a national perspective, the benefit associated with the increase in producer surplus is broken down into net earnings (after taxes) from operations and the income tax. Net earnings are distributed to the owners of the operations in the form of dividends, which increases the welfare of this group in society, while the income tax is transferred to public treasury. In summary, the benefit includes both the net profits and the income tax collected.
From the perspective of local communities of producing districts, the increase in producer surplus translates into benefits through the distribution of the taxes received by the jurisdictions of these communities. It is common for countries to establish distribution mechanisms, such as the “mining canon” or “mineral canon,” which is associated with a percentage of the income tax collected. For example, in Peru, 50% of the income tax is allocated to the regions where the resource extraction takes place.
Distribution of benefits in projects with foreign ownership of producing assets
When the owners of a project that exploits natural resources are foreign, the magnitude of the producer surplus must be adjusted. In the extreme case where the operation is 100% foreign-owned, from a national perspective, only the income tax collection is considered a benefit. If 60% of the operation is owned by national capital and 40% by foreign capital, then 60% of net earnings and the income tax collected are considered national benefits.
Treatment of mining royalties
In Peru, mining royalty is defined as “the economic compensation that mining activity subjects pay to the State for the exploitation of metallic and non-metallic mineral resources” and it is calculated based on operating profit at a marginal rate that varies from 1% to 12%, depending on the operating margin. In Peru, mining royalties are distributed to regional, provincial, and local governments, as well as educational institutions in the regions where the resource is exploited.
Mining royalties, in the Peruvian case, are estimated similarly to income tax, meaning they come from the producer surplus generated by the project. Unlike income tax, the resources from mining royalties are entirely allocated to the communities in the producing region.
Therefore, from both national and local perspectives, mining royalties should be considered as benefits in the cost-benefit analysis, as they are part of the increase in society welfare associated with the execution of a mining project.
