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382 Diagnosing Corruption in Ethiopia
demand side, officials realize the value of the license to the mining
company. Corrupt officials may therefore extort large bribes from a
mining company in return for a license or in return for imposing lessonerous
environmental or other controls.
• Mining is a high-risk enterprise. Success in a mining enterprise is not certain.
Considerable sums of money can be invested in a mining enterprise
that then fails for any number of reasons: (a) the minerals may not
be present in the quality or quantity estimated; (b) the cost of extracting
the minerals may be higher than expected; (c) the market price for the
minerals may be lower than expected; (d) the government may increase
the license charges, royalties, or taxes to a point where the mine becomes
uneconomic; or (e) the government may nationalize the mine with inadequate
or no compensation. It can be just as important to a mining company
to avoid a large loss as to make a profit, and therefore it may be
beneficial to the mining company to bribe an official to avert or minimize
a loss. Similarly, realizing the risk of loss to the mining company, an
official could extort large bribes with the threat that, if the company does
not pay, it will incur a loss far greater than the amount of the bribe.
• There are uncertainties in valuation. Numerous factors affect the value
of a mining concession (upon initial award or assignment), including
the estimated or actual
° Costs of exploring and evaluating a concession, developing the mine
and related infrastructure, extracting and processing the minerals,
and transporting them to the end user
° Output of the mine
° Sale price of the minerals
° Premiums, royalties, and taxes paid by the mining company to the
government.
Each one of these factors is difficult to establish. Comparative data
from other mines do not normally help to establish what these costs
should be because differences in the mine’s location and the mineral’s
quality and quantity can vary significantly among different mines,
affecting the costs. Mines are often in remote locations, making it difficult
for inspectors and auditors to verify production quantities and
costs. As a result, it is difficult to value a concession and to calculate
what the mining company should reasonably pay the government by
way of an up-front premium. It is also difficult for government inspectors