Peru Mining Tax Increase Ahead?
By Vedran Vuk
Dear Reader,
Yesterday I read about a new company called Alta Bicycle Share in Forbes magazine. The service is pretty simple: At docking stations users can rent bikes with the swipe of a credit card.
Immediate problems with the service come to mind. Personally, I don't commute with a bike and neither do most people. The Zipcar service is one thing, but a rentable bike doesn't make much sense outside a vacation resort setting.
There's a second problem with the business model. Suppose I want to get around on a bike. Buying a bicycle isn't exactly going to break the bank. Zipcar works because owning a car is expensive and in many places highly inconvenient. There's the purchase price plus maintenance, insurance, parking fees, etc. With bikes, none of these issues exist. What's the point of renting a bike? It isn't exactly unaffordable or inconvenient to own one.
These seem like problems for this business model. But don't worry, Alison Cohen (founder of Alta Bicycle Share) has conquered them. Her goal is not to sell the service to consumers, but rather to the government. The article notes, "Cities buy the bikes and install docking stations where users can rent them with the swipe of a credit card. Alta looks after the bikes and collects payment, earning either a cut of the revenue or a flat annual management fee."
Why exactly does the government need to subsidize her bike business? If Alison's company wants to offer consumers an attractive service, I'm more than happy for her efforts. But rather than appeal to consumers, she's taking money from their back pockets through taxes.
In the print edition, above the article in big letters is the word "entrepreneurs." But is this what an entrepreneur really is? When folks say, "We need more entrepreneurship in this country," do they mean more businesses fighting for government contracts? I've mentioned this downward spiral in a previous article. When young businesspeople would rather find ways to sell their ideas to the government than to consumers, we're in real trouble. It reveals a change of mentality.
When a good government connection is more valuable than a good business idea, the end is near. This sort of business environment is a defining characteristic of every backward country in the world.
Often folks complain that our country doesn't produce anything tangible, and as a result, we're headed down the wrong path. But the route of courting government business is even worse. Consider this example: I visit my regular burger joint and order some food. The business pays its employees and earns a slight profit. I'm willing to pay more than the cost of the burger. The owner is better off, the employees get a wage, and I'm satisfied with the convenience.
Here's the problem with the government-contract bikes: The company apparently can't make it in the marketplace alone. Consumers aren't willing to pay for the service because they don't value it enough. When the government forces them to pay anyway, consumers are worse off, and the bike company is better off.
Maybe the service industry isn't the path to prosperity, but this form of government "entrepreneurship" is a straight shot for disaster. What makes free markets work is the voluntary exchange between parties. Each is better off in some form or another.
Yes, some are much better off than others. At the burger joint, I'm better off than having to go home and cook the burger myself. The business owner clearly benefits from the transaction. And the employee's wage is better than no wage at all. Everyone gets something.
In the case of Alta Bicycle Share, my life would be better without its existence. It's just another tax leech lobbying for my money to provide a service that I don't want. This isn't the way to prosperity, and it shouldn't be celebrated in the "entrepreneurs" section.
Follow-Up on Peru: Windfall Tax Still Lurking Ahead
by Andrey Dashkov
Ollanta Humala, the newly elected president of Peru, will take office on July 28th. Having focused on improving macroeconomic stability and reducing poverty and inequality during his campaign, he made a number of claims that didn't sound quite promising to the local mining industry. His proposals included extended control of mining or oil and gas concessions by the local communities and mining royalty increases.
Both would impact one of Peru's top business sectors. Peru, one of the world's leading copper and silver producers, is responsible for over 60 percent of exports and to a large extent, also for much of Peru's overall economic growth, including increased employment and reduced poverty (from over 48% in 2005 to 30% in 2010). Mining investments that are hoped to boost Peru's production are at stake as Peru's business climate may change for the worse. The rate of capital inflow has already started slowing down, as Bloomberg reports:
Investment has slowed over the past three months in Peru amid concern over Humala's proposals, Peru's National Society of Mining, Petroleum & Energy said July 7. As much as $42 billion in investment that aims to quadruple copper output by 2020 may be shelved if Humala changes investment rules, the group's president Pedro Martinez said.
Yet the Financial Times released an article this Wednesday stating that Humala may not be as harsh on mining as he appears. The current head of the country's central bank remains in power; his continued tenure in the Humala administration should serve as a signal of Humala's good economic intentions.
That may be the case, but private companies have slowed down investment in Peru: This May, the country's economy expanded at the slowest pace in fifteen months. The president of the Peruvian central bank - whose appointment seems to have meant that Humala has become less radical - himself didn't make it clear if the royalties are going to be introduced or not:
"If the mining tax regulation that's introduced allows the industry to remain competitive, mining investment will continue, albeit with delays," Velarde said today at an event in Lima. "Clear signals are needed for confidence to recover."
The delays, as one can see, seem to be happening already. The signals the investment community has been receiving so far are not reassuring: Producing companies will be invited for a conversation on "corporate social responsibility," while protests against a Canadian development-stage silver company turned deadly.
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In conflicts like this, investors need reassurance that the government will act as a peaceful mediator, and that unfortunately does not seem to be the case with Humala, whose promises to battle inequality and poverty seem linked to a fight against one of the most profitable sectors in the economy. The notion of "competitive enough" that Humala and Velarde seem to apply to the local business climate seems illogical. Fortunately, we always take politicians' statements with a huge grain of salt and exited our Peru plays before the election.
Still, the place has a lot of metals, so we will be watching developments in Peru and reporting to you when the risk drops to a level that makes investing there attractive again.
[Investing in mining companies is a global game, where the rules can change without warning. Let Louis James and his team do the globetrotting and rock-kicking for you - try a risk-free trial subscription to Casey International Speculator today.]
Vedran Vuk
Casey Daily Dispatch Editor
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