Environment protection is one area in which many

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Environment protection is one area in which many governments have started to impose greater restrictions on investors’ freedom to operate. In some case, investors are asked to post performance bonds as security to comply with abandonment obligations. In other cases, environmental taxes are imposed. Insurance policies to cover environmental dam- ages are also a normal requirement. The costs associated with the protection of environ- ment are normally considered part of the cost of operations and are tax deductible. In some cases, penalties and the cost of remedial actions associated with damages in excess of those permitted by environmental regulations are not tax deductible. In the petroleum sector, bonds indemnify authorities against the investors’ failure to comply with contractual obligations or the terms of the concession. This safeguards the government against technical and financial failure and premature or unplanned project termination. The value of the bond is normally reduced in proportion to the value of the outstanding obligations. In some cases, holding company guarantees are used in addition to or instead of performance bonds. Advantages and Disadvantages to Host Governments Direct taxation of environmental damages may be conceptually good for correcting divergence between private and social costs. However, it is quite complex to implement. In defining the tax treatment of environmental conservation and remediation, policy makers need to avoid penalizing responsible operators. This is generally done by allowing the amortization of environmental mitigation structures and equipment over their useful life and the deduction of current environmental expenses for tax calculation purposes. Under an ideal bonding regime, the financial risk is shifted from the government to the investor. In case of default, funds necessary to complete contractual obligations would be promptly available, which makes it possible to avoid complicated and costly legal processes. Effect on Investment Decisions The tax treatment of environmental obligations is of great importance to investors. The ability to deduct the cost of environmental compliance for tax calculation purposes lowers the costs of compliance. Performance bonds have been greatly standardized and do not present particular problems to investors. The cost of a bond will depend on the guarantees the financial institution imposes on or is willing to accept from the investors. Those guarantees are, in turn, a function of the country and project risks and of the investor’s standing and of the competitiveness of the chosen financial market.
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46 World Bank Working Paper Table 21. Local Content Obligations How do they work? Local content obligations cover areas such as training requirement, local employment quotas, and the purchase of local goods and services. The objective of training obligations is to facilitate the transfer of know-how from the investor to the host government/country.
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  • Winter '14
  • Bijay K Behra
  • host government, fiscal systems, world bank working

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