Making Numbers Make Sense: Fiscal Regimes, GDP v. GNP, Discount Rates

Issue: Training
Country: International
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Participants began Day Two of the new Advanced Course sponsored by RWI, the NRC and the School of Public Policy at the CEU in Budapest; with questions, especially for Robert Conrad. Matthew Genasci had raised the issue of discount rate which came up several times the day before. “How do companies decide what discount rate to apply?” asked Abou Bakarr Kamara, a policy analyst at the Strategy and Policy Unit at the Office of the President in Sierra Leone. “Sometimes we feel that the figure applied by investors is too high and it affects the overall bottom line. Can we challenge the figure?”

“First of all, when someone says to you that the interest rate is, say 8 percent; the first thing you should say in your most simple minded economist expression is: What are you talking about?!” Conrad answered. “You need to ask: In what currency? What inflation rate? What period of time? The rest of the considerations are to do with the perceived risk, and this depends on the circumstances.” He went on to offer more details using every day examples; there were many nods of understanding.

During a session on practical modeling, we learned that countries should be more concerned with the Gross National Product (GNP) than the Gross Domestic Product (GDP). GNP takes into account income that remains in a country from a project, as opposed to also including income that doesn’t accrue to the country – such as imports and salaries paid to foreign workers.

Participants learned how to calculate the contribution of a mining project to the economy. “Remember, economists are lazy,” said Conrad, “and calculating change in GNP is too hard. Cash flow analysis, if properly measured, can measure incremental change in GNP and net national income relative to a project.” The reality hits that evaluating projects and designing fiscal regimes is complex!

For the government staff in the room, this advanced course will strengthen their ability to review applications to extract or not extract and to determine how their country will benefit over all. Representatives of civil society learn how to understand more of the factors behind government decision-making, and become better able to undertake independent evaluations of projects, and when necessary, challenge government decisions.

Later in the day, Conrad explained different types of fiscal regimes; the pros and cons of the royalty system as opposed to production-sharing agreements or service agreements.

By the end of day two, participants appreciated the importance of mastering these concepts; but also realized that it will not be a walk in the park. Genasci and David Manley of the Natural Resource Charter offered to start the next day half an hour earlier to go through excel spread sheet tools that will ease the modeling exercises for the next few days. I made a mental note to myself: Be there!

Angela Mugore is RWI Senior Capacity Development Program Officer.

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