Yaoure tax holiday costs Cote d’Ivoire $120 million

The publication of the financial model of Yaoure gold mine shows what can be done: both in the tricky area of what tax incentives offer, and in terms of building government analytical capacity.

OpenOil, with support from the German Corporation for International Cooperation (GIZ), worked with colleagues from Cote d’Ivoire’s Ministry of Mines to build the financial model and accompanying report. We believe this is the first time that officials themselves have substantially led the development of financial analysis.

The results are revealing at a couple of levels. Cote d’Ivoire has had a policy of a holiday on Corporate Income Tax in place for at least 20 years. During that time, many people have had much to say about the policy: successive governments have defended it as necessary, those opposed have denounced it for giving too much away – and sometimes effectively accused those who maintain the policy of having ulterior motives.

First of all, nobody had ever costed the tax holiday, and the model solves that.

Against a base scenario (explained in detail in the report), over $120 million of tax revenues will be foregone in the Yaoure gold mine in its first five years of production. That’s equivalent to more than a quarter of government revenues from the entire sector in 2015.

But the model goes a stage further. Because even knowing how much the incentive cost does not mean you can prove it was unnecessary. The case that if the holiday was not on offer the investor would walk has to be addressed.

This is where financial analysis comes into its own. The whole point of a government, or a CSO, building a financial model is to assess the business position of the investor – so as to know what constitutes a “fair” deal, what revenues governments can expect, and so on. This is done through estimating the rate of return, both before and after tax.

So, in the base scenario, the company (originally Amara, but Amara was then sold to Perseus Mining in Australia), earned nearly 30% rate of return after tax. Investors adjust for “country risk” and Cote d’Ivoire would certainly carry some of that. Nevertheless, it is a handsome return by any standard.

But that is with the tax holiday. What the Yaoure model then answers is: what would the investor’s rate of return be if the tax holiday were cancelled? And the answer is: a still fairly handsome post-tax Internal Rate of Return of 25%. This builds a strong case that the tax holiday is, in the case of the Yaoure mine, not necessary to provide an attractive enough incentive.

In other words it is money left on the table.

It does not follow, of course, that that will be the case in every mine. Elsewhere the economics could be different. Or not. What this project has done is deliver a tool to the government which enables it to run this kind of analysis, project by project, and lead an informed discussion about tax incentives in the country.

It is possible the results will need revision. We have based this model on data published by the company itself, but mainly in 2014 (A publication in 2016 was not comprehensive enough in an internally consistent manner to be able to build a model off). Costs and prices could both require adjustment which could change the overall numbers on the tax holiday question.

It is unlikely, though, that the numbers would change so much as to alter the basic conclusion – that the tax holiday at the Yaoure gold mine seems unnecessary. And if it did, it is the publication of the model which will have triggered the release of better data proving that case. Just as that better data could be easily slotted into this existing model.

The government in Abidjan is now considering how to deploy financial analysis more broadly. And maybe to require companies bidding for licenses to “show the model”, just as they are required to do with other documents.

This kind of financial modeling is available, and within the technical grasp of any government which would like to develop it. As the results from this one mine alone show, billions of dollars could be in play.

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