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OECD/African Dev. Bank Study: Renegotiate Unfavorable Contracts with Multinationals for A Fair Return

May 24, 2010
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Africa should eye tax hikes on resource firms-study
Mon May 24, 2010 7:00am EDT

* Contract reviews unlikely to scare off investors-study

* Chinese presence is chance to improve returns

* African countries should widen tax base

By Mark John

DAKAR, May 24 (Reuters) – African states should consider renegotiating unfavourable contracts with multinationals to ensure they get a fair return on their natural resources, a joint OECD/African Development Bank study urged on Monday.

The growing presence of companies from China and other emerging countries on the continent also gives governments the chance to reap higher rewards from mineral, energy and other resources by putting them to competitive bidding, it said.

“Where multinational firms fail to abide by minimal corporate governance standards in terms of tax contributions, governments should consider renegotiating concessions,” the report to the Bank’s annual meeting argued.

“African states are entitled to receive a fair deal for the exploitation of their natural resources,” it concluded.

The proposal was one of several made in a joint paper by the bank and the Paris-based Organisation for Economic Co-operation and Development aimed at gradually weaning the continent off foreign aid by boosting tax and other domestic revenues.

The lack of transparency surrounding many resource contracts in Africa and the fact that many of its governments have little experience in negotiating production agreements and tax regimes mean their terms vary wildly.

The report said some African governments were often hesitant to revisit unfavourable contracts and tax arrangements for fear of scaring off investors, but said that was unlikely to happen.

“Multinational enterprises may threaten to leave but they are unlikely to actually abandon the exploitation of mines because of a reasonable rise in taxes or royalties,” it said.


To the alarm of some potential investors, several mineral-rich countries have already made it clear they want to see more revenues from their resource sectors.

Following a sector-wide review of contracts in its lucrative mining sector, Democratic Republic of Congo has demanded changes to U.S.-listed Freeport-McMoRan’s (FCX.N) agreement for its Tenke Fungurume copper and cobalt mine.

Guinea’s current government argues Russian aluminium company UC RUSAL (0486.HK) underpaid for its Friguia alumina refinery in 2006 and is seeking $860 million in what it says are unpaid taxes, a claim RUSAL disputes.

Ghana, Africa’s second largest gold producer, has said it wants to double mining royalties, and Sierra Leone hiked royalties in the mining sector late in 2009.

For new contracts, the report called on African governments to take advantage of the growing demand for their resources by emerging economies to get the best deal possible.

“Increased interest in Africa’s minerals from Chinese corporations and other new partners is an opportunity for governments to reap the fiscal rewards of competitive bidding. African states must use this opportunity to generate higher public resources,” it said.

While urging governments to improve taxation of their extractive industries, the report called on them to widen and diversify the typically narrow tax bases across the continent.

While Equatorial Guinea was able in 2008 to collect $4,865 per capita in tax — largely in oil proceeds — others such as Burundi, Congo, Ethiopia and Guinea-Bissau have an annual tax take per head as low as $11, it calculated.

Options included targeting wealthier Africans with specific levies such as urban property taxes, road tolls or luxury good taxes, it argued, acknowledging many such moves would likely be opposed by influential elites.

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