Capturing an Economic Rent
A natural resource deposit has scarcity value when the content is in short supply (for example, a deposit of low-sulphur coal at a time of heightened demand because of tighter environmental regulation) or can be mined at a relatively low cost (for example, an ore body in which the ore is highly concentrated). The legal entity that controls such a natural resource deposit may be able to arrange long-term purchase contracts that are capable of supporting project financing and offer supernormal rates of return on investment. Economists refer to the portion of the total return that represents excess return as an economic rent. The project sponsors can monetize the economic rent by entering into long-term purchase contracts. These contracts, provided they are properly drafted, can be used to secure project borrowings to finance the development of the ore body. They will also generate the cash flow to service project debt and provide equity investors the return of and a return on their investment.