With large upfront costs, years – if not decades – of hard work, along with the lingering prospect of the project being ultimately unsuccessful, the risks associated with mining exploration are high and often hard to mitigate. For countries wishing to attract new investment in mineral exploration, tax and other financial incentives have often been the go-to solution.

In recent decades, a great number of countries have introduced new mining laws designed to unlock investment and kick-start exploration. But they can be controversial, particularly in developing countries. While the goal of a government’s mining tax system is to juggle the need for investment with the public good, experts say they often get the balance wrong.

For many resource-rich developing countries, “incentives may significantly reduce government revenue, especially when investors use them in ways that exceed the tax benefit initially intended by government,” said a report last year by the Organisation for Economic Co-operation and Development (OECD).

The OECD report notes that tax incentives alone are unlikely to attract investment and that “effectiveness also depends on the type of foreign investment that is being made. The mining sector involves location-specific resources that cannot be moved, making investment less mobile and less responsive to incentives.”

But incentives do still offer effective support mechanisms for exploration firms when designed correctly. Below, we profile a few recent efforts – from British Columbia to Nigeria – and ask how successful they have been.

Saskatchewan’s untapped metals

Saskatchewan, a landlocked province in Western Canada, is primarily known for its flat, rural terrain and vast fields of wheat. But the area is also rich in minerals including oil, natural gas, uranium and coal. Province authorities recently introduced the Targeted Mineral Exploration Incentive (TMEI) scheme as part of its wider Mineral Development Strategy.

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The incentive is designed to boost drilling activities by contributing to the cost associated with ground-based exploration. It focuses on the region’s lesser-known base metals, precious metals and diamonds, which have significant unrealised potential.

“We’re very pleased to see that there have been some positive developments out of this,” said Saskatchewan’s minister of energy and resources, Bronwyn Eyre. “The best-case scenario can be new mines, and we’re also hearing from junior mining companies that because incentives existed in other provinces they were occasionally bypassing Saskatchewan when it came to these non-traditional metals.”

British Columbia’s permanent tax credits

Hoping to attract more investment to the industry, in January the government of British Columbia, Canada’s westernmost province, announced plans to make two pre-existing mining tax credits permanent.

The decision came amid a tough period for the region’s mining sector, which is facing low metal prices. In January, the Vancouver-based Imperial Metals said it would suspend operations at its Mount Polley open-pit mine in south-central British Columbia, affecting roughly 250 jobs.

The two new permanent incentives, which will no longer be evaluated on a yearly basis, are the Mining Flow-Through Share tax credit (MFTS) and the Mining Exploration Tax Credit (METC).

The former provides a non-refundable income tax credit to individuals who have purchased flow-through shares from a British Columbian mining company, while the latter is a refundable income tax credit for eligible individuals and corporations doing grassroots mineral exploration in the region.

“This is a major step to building a sustainable and strong mining industry – one that all British Columbians can be proud of,” said Edie Thome, CEO and president of the Association of Mineral Explorations.

Putting Australia back on the mining map

Ever since its first gold rush in May 1851, the mining sector has been a major contributor to Australia’s economy. But over the past two decades, there has been no major mineral discoveries.

To tackle this, Australia’s minister for finance, Mathias Cormann, and minister for resources and Northern Australia, Matthew Canavan, recently announced that more than A$31m would be made available for 46 mining companies under the Junior Minerals Exploration Incentive (JMEI) for 2018-19.

“This scheme is giving smaller, or ‘junior’, exploration companies a strong incentive to explore new areas for mineral deposits and that’s something Australia needs, despite the strength of our existing mining industry and its major contribution to the national economy,” Canavan said adding that, “Australia needs to increase exploration now to secure a pipeline of projects for the future and remain competitive with other prospective nations.”

Nigeria’s tax holidays

As oil prices fall, Africa’s top crude producer and most populous country is hoping to diversify its economy, with mineral resources including gold, zinc, iron ore and other rare earth metals all on its radar.

In November, Abubakar Bawa Bwari, Nigeria’s mining and steel development minister said the country had awarded mining contracts to ten exploration and consulting companies.

The contracts included three to five year “tax holidays”, duty waivers on imported equipment, and the ability to take profits out of Nigeria. Variations of these incentives had already been available in existing legislation.

It remains to be seen how successful the incentives will be. A recent briefing by PWC listed a number of non-tax issues ‘plaguing’ the mining industry including infrastructure challenges, the cost of loan capital in Nigeria, policy changes and host community relations.

Boosting South African mining

Despite its large, established mining sector, financial institutions and private equity firms say investing in junior mining companies in South Africa can be more risk than it’s worth. Amid dwindling mineral reserves, regulatory uncertainty and labour unrest, the industry’s GDP contribution has been in decline for a number of years.

To encourage investment, the government introduced a new tax incentive in 2009, triggering a “flurry of capital from the private sector”, Jonty Sacks, a partner at financial consultancy firm Jaltech wrote in Mining Review. But mining output dropped 10.8% from 1 October 2018 – 31 December according to recent Central Bank data.

In November, trade and industry minister Rob Davies said the South African Government was investigating the introduction of new tax incentives in key industries including mining. But echoing the recent OECD report, Duane Newman founding partner of Cova Advisory called for “good governance when designing and managing tax incentives.”

“This includes having clear, measurable policy objectives for any incentives regime, plus detailed monitoring,” Newman said in an article for the South African daily newspaper, Business Day.