Resource Development on Customary Land - Using Option Pricing Theory to Share the Benefits from the Exploitation of Land Based Resources

The World Bank
Publication Type:
Conference Proceeding
Proceedings of Annual World Bank Conference on Land and Poverty - 2013, 2013, pp. 1 - 22
Issue Date:
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Building on prior research that identified the benefits of engaging a synergistic value approach to land resource compensation, this paper explores the potential of applying option-pricing theory as a proxy for the economic value of the `marriage of stakeholder interests associated with mineral exploitation. Drawing on the example of a copper and gold reserve in Fiji, and equally applicable to other Pacific Islands or African contexts, the research adapts, evolves and explains the findings of recent modeling to recommend equitable stakeholder benefit sharing in the context of customary land. The synergistic compensation model, informed by (and acknowledging the limitations of) option pricing theory, offers a key transparent negotiation tool for all parties but highlights the need for increased negotiation capacity in developing countries. Informed by publicly available data, it places the onus on the exploration company to prove or disprove the data. It also offers a policy framework that enables the custom landowners to be the direct financial beneficiaries of the scheme (potentially by taking a share in bullion rather than cash), with the national fiscal benefit to the State being derived from standard taxation arrangements over the custom landowners newfound source of revenue.
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