An analysis of barriers to exploration investment
A well-developed mining sector can produce great economic and community benefits. This leads many countries and subnational jurisdictions around the world to eagerly seek out mining investment. But as with all private sector activities, mining is competitive and investment capital is mobile. To encourage a robust development of the mining sector, governments must put forth attractive and competitive policies.
Where is the most attractive for investment?
Since 1997, the Fraser Institute has surveyed mining and exploration company executives to assess how mineral endowments and public policy factors such as taxation and regulation affect exploration investment. Our purpose is to create a ‘report card’ governments can use to improve their mining-related public policy and attract investment in their mining sector to better their economic productivity and employment.
The most recent edition of the survey was circulated electronically to over 3800 individuals between 15 September and 27 November 2015.
A total of 449 responses were received from individuals. Over half of the respondents (58 per cent) are either the company president or vice-president, and a further 24 per cent are either managers
or senior managers. The companies participating in the survey reported exploration spending of US$2.2 billion in 2015 and US$2.5 billion in 2014.
The survey was designed to capture the opinions of managers and executives regarding the level of investment barriers in jurisdictions in which their companies were familiar. Respondents were asked to indicate how 15 different policy factors influence company decisions to invest in various jurisdictions.
For each of the 15 factors, respondents were asked to select one of the following five responses that best described each jurisdiction with which they were familiar: encourages exploration investment; not a deterrent to exploration investment; is a mild deterrent to exploration investment; is a strong deterrent to exploration investment; would not pursue exploration investment in this region due to this factor.
Survey responses were tallied to rank provinces, states and countries according to the extent that public policy factors encourage or discourage investment. Sufficient data was provided to evaluate 109 jurisdictions (Jackson and Green, 2016).
An overall Investment Attractiveness Index is constructed by combining the Best Practices Mineral Potential Index, which rates regions based on their geologic attractiveness, and the Policy Perception Index (PPI), a composite index that measures the effects of government policy on attitudes toward exploration investment. While it is certainly useful to measure the attractiveness of a jurisdiction based on policy factors such as onerous regulations, taxation levels, the quality of infrastructure and the other policy-related questions respondents answered, the PPI alone does not recognise the fact that investment decisions are often sizably based on the pure mineral potential of a jurisdiction. Respondents consistently indicate that only about 40 per cent of their investment decision is determined by policy factors.
The top jurisdiction in the world for investment based on the Investment Attractiveness Index is Western Australia, which moved up to first from fourth in 2014. Saskatchewan remained in second place this year. Nevada dropped to third, after Western Australia displaced it as the most attractive jurisdiction in the world. Ireland moved up ten spots into fourth place. Rounding out the top ten are Finland, Alaska, Northern Territory, Quebec, Utah and South Australia.
When considering both policy and mineral potential in the Investment Attractiveness Index, the Argentinian province of La Rioja ranks as the least attractive jurisdiction in the world for investment. Also in the bottom ten (beginning with the worst) are Venezuela, Honduras, Greece, Solomon Islands, Chubut, Guinea (Conakry), Kenya, Mendoza and Rio Negro.
While geologic and economic considerations are important factors in mineral exploration, a region’s policy climate is also an important investment consideration. The PPI is a composite index, measuring the overall policy attractiveness of the 109 jurisdictions in the survey. The index is composed of survey responses to policy factors that affect investment decisions. Policy factors examined include uncertainty concerning the administration of current regulations, environmental regulations, regulatory duplication, the legal system and taxation regime, uncertainty concerning protected areas and disputed land claims, infrastructure, socioeconomic and community development conditions, trade barriers, political stability, labour regulations, quality of the geological database, security, and labour and skills availability.
For the third year in a row, Ireland had the highest PPI score of 100. Ireland was followed by Wyoming in second, which moved up from ninth in the previous year. Along with Ireland and Wyoming, the top ten ranked jurisdictions are Sweden, Saskatchewan, Finland, Nevada, Alberta, Western Australia, New Brunswick and Portugal. Western Australia and Portugal were the only two jurisdictions not in the top ten in the previous year.
The ten least attractive jurisdictions for investment based on the PPI rankings are (starting with the worst) Venezuela, Myanmar, La Rioja, Zimbabwe, Chubut, Neuquen, Niger, Kyrgyzstan, Rio Negro and Honduras. Kyrgyzstan, Zimbabwe and Venezuela were all in the bottom ten jurisdictions last year. Four out of the ten lowest rated jurisdictions based on policy were Argentinian provinces. Displaced from the bottom ten in 2015 were Philippines, Bolivia, Ecuador, Mendoza and Mongolia.
The final major index compiled in the survey is the Best Practices Mineral Potential Index, which rates a region’s attractiveness based on mining company executives’ perceptions of a jurisdiction’s geology. Survey respondents were asked to rate the pure mineral potential of each jurisdiction with which they were familiar, assuming their policies are based on ‘best practices’ (ie a world class regulatory environment, highly competitive taxation, no political risk or uncertainty and a fully stable mining regime).
In the 2015 survey, Western Australia was viewed as having the most attractive pure mineral potential of the jurisdictions ranked. Western Australia displaced Yukon from the top spot, as the Canadian territory fell to fourth. Rounding out the top five were Alaska in second, Indonesia in third and Northern Territory in fifth. Other top-ranked jurisdictions include Nevada (sixth), Saskatchewan (seventh), Nunavut (eighth), Quebec (ninth) and Kazakhstan (tenth).
An analysis of the regional trends in the results of the Investment Attractiveness Index (based on both mineral potential and policy factors) from the 2015 mining survey indicates a stark difference between geographical regions, notably the divide between Australia, Canada and the United States and the rest of the world. As indicated by Figure 1, as a region, Australia surpassed both Canada and the United States this year to become the most attractive region in the world for investment.
The regional trend for policy measures (Figure 2) is again dominated by certain regions (Canada, the United States, Australia and Europe). The presence of Europe with the other top performing regions, when only policy is considered but not when mineral potential is included, indicates that it is likely that mineral potential is holding Europe back from being in the same category as the three other most attractive regions in the world. Of the regions included in the survey, Argentina now has the least attractive policy environment. When considering only the policy environment, Canada continues to be the most attractive.
What are the greatest deterrents to investment?
Our survey data allows us to assess which areas of policy pose the greatest barriers to investment. The analysis below will also indicate which areas of policy could benefit most from reform, possibly allowing jurisdictions to know which areas of reform could help them stand apart from other jurisdictions in an attempt to attract more investment.
This analysis focused only on jurisdictions for which we had data on that were also classified as advanced economies by the IMF (2016) in order to compare jurisdictions that would have institutions and characteristics that are more similar to each other.
Figure 3 shows the weighted averages for the responses ‘mild deterrent to investment, strong deterrent, and would not invest’ in advanced economies. The averages were weighted by the number of responses received for the individual jurisdictions, which tend to be an indicator of the amount of exploration activity taking place within each jurisdiction.
For advanced economies there is a wide margin between policy dimensions that appear to be acting as large deterrents to investment and those that are of relatively minor concern.
Consider the high and low scores for policies that deter investment in mining. The 2015 average score for security was two per cent, meaning that on average two per cent of respondents in advanced economies indicated the security environment in these jurisdictions was a deterrent to investment. On the other hand, uncertainty concerning protected areas is the policy area that appears to be acting as the largest deterrent to investment in advanced economies, having an average ‘deters investment’ response rate of 51 per cent. Further, the results reveal that policy factors acting as the greatest deterrents to investment in advanced economies are issues surrounding disputed and protected land, regulations (in particular regulatory duplication and environmental regulation), and to some extent taxation.
When only looking at Australia, Canada and the United States, three countries that attract a large amount of exploration investment, the results are relatively consistent with those of the broader advanced economies.
In Canada, the greatest concern for miners is the uncertainty surrounding land claims and protected areas in the country. While uncertainty concerning protected areas is a central concern for miners in all three countries, Table 1 shows that uncertainty concerning disputed land claims appears to be much more of a concern in Canada and Australia, where 55 per cent and 49 per cent of respondents on average, respectively, indicated that uncertainty in this area was a deterrent to investment, compared to the United States where only 22 per cent of respondents on average indicated that this was a deterrent to investment. The concern over disputed land claims and protected areas in Canada is at least somewhat due to uncertainty that has resulted from a number of recent court cases in the country regarding aboriginal land claims (see Bains 2014, 2015). While Canada also has challenges with various areas of regulation, infrastructure appears to be much more of a deterrent to investment in the country than in the United States or Australia.
The main barriers to exploration investment in the United States appear to be regulatory in nature. On average, over 49 per cent of respondents for jurisdictions in the United States indicated that uncertainty resulting from environmental regulations and regulatory duplication and inconsistencies were acting as deterrents to investment. In addition, 37 per cent of respondents on average indicated that uncertainty concerning the administration and enforcement of existing regulations was acting as a deterrent to investment. The results on this last area are higher than in both Canada and Australia.
Similar to Canada and the United States, the largest barriers to investment in Australia centre on issues regarding land claims and protected areas, as well as regulatory uncertainty. However, one area of policy, taxation, stands out as a greater barrier to investment than in either Canada or the United States. In Australia, 37 per cent of respondents indicated the taxation regime (which includes personal, corporate, payroll, capital, and other taxes, and the complexity of tax compliance) was a deterrent to investment. In Canada and the United States, only 25 per cent of respondents indicated the taxation regime was a barrier to investment.
While country overviews allow for a broad understanding of the issues acting as deterrents to investment, there can be wide variations in the perceptions of policies within countries. For example, miners appear to be most concerned about uncertainty resulting from protected areas in Australia, with an average of 53 per cent of respondents for jurisdictions within the country indicating that this was a deterrent to investment. But if only considering Queensland, 66 per cent of respondents for that jurisdiction indicated that uncertainty concerning protected areas is a deterrent to investment. This compares to only 33 per cent of respondents in Western Australia.
What makes policies unattractive?
Regardless of the area of policy – taxation, regulation, land use, etc – miners responding to the survey have consistently highlighted three reccurring themes present in poor policies. The first theme is lack of stability. One of the greatest concerns for the mining industry is risk induced by governmental instability and abrupt and arbitrary changes to policy. Examples of such changes range from sudden shifts in tax policy to recent bans on the mining of specific minerals in many jurisdictions. There is little surprise in this, as mining investment occurs far in advance of returns on investment from actual mining activity. In order to attract investment, governments must seek to instil long-term confidence in the private sector.
Simplicity of policies, or rather a lack thereof, is another consistent concern raised by mining companies. Complex and burdensome policies increase the compliance costs firms must incur, and also increase the potential for arbitrary decision making and corruption when such policies are open to interpretation, leaving officials with discretion which can be ‘monetised’. Such policies can include forms of taxation with multiple layers or duplications of regulations by different levels of government. A lack of simplicity increases the cost of doing business, and can act as a barrier to investment.
A third area of concern raised by mining companies is a lack of transparency by governments. Transparency by governments about decisions or new policies can go a long way to creating a perception of stability. Mining firms often comment that they were not consulted or given a chance to explain their concerns about policy changes. Similarly, decisions during the permitting process lacking transparency can act as a further deterrent to investment. By being open with mining firms, governments could help foster the long-term confidence necessary to have a favorable investment climate.
While Australia, Canada and the United States appears to present much more attractive policy environments for exploration investment than other regions around the world, these countries appear to have room to improve public policy to become more attractive to investors, particularly in the areas of land-use and regulation. Reform in these areas could allow for provinces and states in these countries to set themselves apart from their peers, in terms of offering the most attractive investment climates. In general, regarding all policies, governments seeking to attract and retain mining investment should strive to encourage stability, simplicity and transparency.
Bains R, 2014. A real game changer: an analysis of the Supreme Court of Canada Tsilhqot’in Nation v. British Columbia decision, Fraser Institute, Vancouver. Available from: https://www.fraserinstitute.org/ sites/default/files/real-game-changer-supremecourt-of-canada-tsilhqotin-decision.pdf. [3 August 2016].
Bains R, 2015. Economic development in jeopardy? Implications of the Saik’uz First Nation and Stellat’en First Nation v. Rio Tinto decision, Fraser Institute, Vancouver. Available from: https://www.fraserinstitute.org/sites/default/files/economicdevelopment-projects-in-jeopardy.pdf. [3 August 2016].
International Monetary Fund [IMF], 2016. World economic outlook: too slow for too long, IMF, Washington D.C. Available from: http://www.imf.org/external/pubs/ft/weo/2016/01/pdf/text.pdf. [3 August 2016].
Jackson T and Green KP, 2016. Fraser Institute annual survey of mining companies, 2015, Fraser Institute, Vancouver. Available from: https://www.fraserinstitute.org/sites/default/files/survey-ofmining-companies-2015.pdf. [3 August 2016].