Optimal royalty rate for coal mining in Colombia: and empirical analysis

摘要

Revenue mobilization is one of the most important restrictions for economic growth in middle and low-income countries, given the high dependence on natural resources -- Colombia is not an exception, and in fact, the current coal industry’s position contributes close to 1.6% of the GDP -- As a consequence, the royalties systems and tax collection structure from 20 years ago are still valid -- Yet, in the last few years, due to high coal prices, some arguments consider that the income produced by current mining and royalty rates is insufficient and should be increased -- This paper evaluates the current Royalty Policy of Coal Mining in Colombia using a Mixed Integer Linear Programming Model -- This strategy allows for the estimation of the optimal royalty rate under an approach that maximizes the present value of the revenue from private sector payments to the Colombian Government -- The results show that under the current royalty scheme and assumptions applied, the royalty rate is quite close to optimal -- However, the royalty system represents a huge risk to the development of exploration activities and mining projects given the lag of neutrality for investments, and approaches based on company profit offer interesting alternatives