The political risk of tax hikes

ARTHUR J Gallagher partner and political risks insurance specialist Mark Gubbins views royalties and taxation hikes as some of the biggest risks facing resources companies around the world. Can someone tell Julia Gillard?
The political risk of tax hikes The political risk of tax hikes The political risk of tax hikes The political risk of tax hikes The political risk of tax hikes


Blair Price

No one in this insurance field likes to publicly rank countries in terms of political risk, not that it is an easy matter.

“In a way, by definition which countries are in vogue or not could change daily,” Gubbins said yesterday at the Africa Downunder conference in Perth.

But when asked about the political risks posed by unexpected tax and royalties increases against mining companies, as illustrated by the super mining tax shenanigans in Australia, he had clearer views.

“Yes I think that the biggest [political risk] exposure for the resource industry is the revenue from royalties and taxation,” he said.

“Some countries have handled it better than others.”

Natural Resource Geo-strategy’s Col Roberts, who recently completed a negotiation in an “Asian” country on the matters of royalties, chaired the panel discussion on political risk.

While he noted that a country in an early stage of its resource development normally negotiated quite low royalties, he said this did not mean that this would never change.

“Governments change by ballot box or insurrection or whatever and all of a sudden these particular points are used as political tools,” Roberts said.

He said it was useful to negotiate a stabilisation clause with a government, which would typically be for five years.

Roberts added there was a lot debate around stabilisation clauses, especially in oil-rich nations, and said determining risk was a matter or “research, research and more research”

“But really you can never predict what a future government is going to do, particularly in the resources industry where we are looking at life of mine in the 25, 30, 40, 50 years or more.”

London-based Gubbins has specialised in political risks insurance for more than 25 years.

He said he had good previous experience in the African countries of Burkina Faso, Ivory Coast, Ghana, Mauritania, Senegal, Tanzania and Zambia.