Economic Rent Considerations In International Mineral Development Finance

INTRODUCTION From the point of view of the consumer, the cost of mineral commodities might be viewed as the total price industry pays for mine output. Similarly, the mining company engaged in the ongoing business of finding, developing and operating new mines is concerned very much today with the distribution of all the revenue paid for mine output and not just with its direct or controllable cash costs. In other words, what will the labor force, the supplier of energy, explosives, and reagents, and the supplier of government services, management, capital, and the ore reserves receive for their contribution to production? A significant amount might be categorized as what economic theory classifies as economic rent. Mining companies are finding it increasingly difficult to negotiate concession or work contracts to develop ore reserves in lesser developed countries, just as they find themselves accused of taking excess profits in their own countries. The principal difficulty in reaching mutually satisfactory agreements in many cases is the difficulty in establishing an acceptable distribution of income, in particular the distribution of economic rent. (See Chapter 7). Further, it is logical that the decisions and policies of the interested parties be they government or industry should be and will be influenced by their competitive position relative to determining the distribution of economic rent. The raising of finance for a mining project today may be inhibited by too biased an extraction of economic rent by entities other than the risk takers, the mining companies. ECONOMIC RENT A British economist (Ricardo D. McGraw-Hill, 1955) first proposed the concept of economic rent (See Drechsler, H.D. earlier in this Chapter.) Ricardo pointed out that no rent would be paid until land became scarce. Ricardo also stressed the distinction that the price of farm produce was not higher because of the rent paid on farm land but that the rent or price of more fertile farm land was higher because the price of produce is higher. This led to the concept that economic rent is not a cost and that it is therefore not price determining, but is itself price determined. Economic rent may be viewed as a cost if cost is equated with the concept of payment or distribution of income to any factor used in production. However, if it is a criterion that a payment must be made to the supplier of the factor of production, then economic rent is not truly a cost because it is not necessarily distributed or "paid" to the supplier. Consider the commodity A which occurs in three grades: Al, A2, and A3. Any grade may be used as a substitute for another grade in all of the industrial uses of A. However, in industries X and Y the different grades have different productivities. Table 1 shows the relative productivities of each grade in industries X and Y, and in all other industries [~]. [ ]