sharing in governance of extractive industries
Africa Progress Panel report puts it simply: ''If Africa is so resource-rich, why are its people not better educated, its children well-nourished and its adults longer-lived?'' The decades old question remains spot-on today as yesterday.
Africa’s subsoil is rich enormously and will remain so, at least for some years to come. It host an estimated 30 percent of the world’s mineral reserves, and even greater share of key precious and base metals including diamond and platinum. Over 9 percent of the world’s petroleum reserves and 7.5 percent of gas reserves are found in the continent. After agriculture, the extractive sector is the most important in terms of contribution to gross domestic product. The International Monetary Fund has grouped more than 20 African countries as heavily dependent on natural resources, with resource revenues accounting for over 20 percent of their tax and export revenues. Many more countries are increasingly dependent even more for revenues, than before.
Yet, to translate the abundant wealth into lasting riches for all citizens remains a challenge, of taxing proportion. So far, few countries have fared relatively well. Most have not. Without a forward-looking approach to fix governance, the contribution of the sector to broad-based and inclusive growth in countries will continue to be less than desired. The extractive sector stands out for its enormous rents— surplus income which could potentially be taxed away by governments without any impact on investment decision. But most African governments continue to tax the sector badly and spend the revenues poorly. The net result sticks like a ‘curse’ with crippling consequence.
Overall tax picture is mixed. Countries have made progress in mobilizing greater owned revenues to fund their priorities. Tax revenues have trended upwards in absolute terms, both in resource-rich and resource-poor countries, peaking at $561billion in 2013, before dropping to $400billion in 2015, following the prolonged slump in commodity prices. As a share of GDP, Africa collects about 23 percent of its revenues from taxes, up from 17.5 percent in 1980. However, this contrasts with OECD countries which mobilize over a third of their revenues from taxes. Yet average hides differences. As a result of the commodity boom, tax revenues from natural resources as a share of overall revenue peaked to about 50 percent, in 2012, before collapsing afterwards. In fact, resource revenues halved both in absolute and proportional terms, tumbling from 14 percent of GDP in 2012 to 7 percent in 2015. Government revenue from taxes fell to crisis levels in many resource dependent countries: Algeria (50%), Angola(52%), Chad(65%), Nigeria(35%).
Weak tax effort means revenues are subpar, unsure and unreliable. The tax base of resource rich countries is relatively narrow. While tax revenues from natural resources move up and down with commodity cycles, revenues collected from other sectors of the economy as proportion of GDP have remained flat over the decade, averaging 6 percent. This contrasts with non-resource rich economies, where domestic revenues over the period 2010-2015 have increased by 9.6 percent, as a result of broadening of the tax base to capture a greater share of non-resource revenues. The star performers include Ethiopia(60%), and Rwanda(44%). Mckinsey estimates that by stepping up their tax efforts a little more, governments in Africa could collect an additional $175 billion to $355 billion in domestic resources.
Mineral-rich African countries failed to take advantage of the just ended boom. Besides the negative correlation, resource endowed countries are not collecting a fair share of tax revenues from natural resources. A broken tax system bleeds countries of revenues with rules and practices that are ill adapted to mobilize adequate revenues along the entire value chain. Mining companies continue to shift their profits from resource rich countries where economic activity occurs to shell establishments in low tax jurisdictions often created for the purpose of paying minimal or no tax at all. In eroding the tax base, multinational companies employ aggressive tax planning strategies – complex borderline tax dodging practices by multinational companies in addition to outright tax evasion.
What is due in the world of planning rarely happens in practice. The German Development Institute reckons that resource rich countries together could have obtained additional $70 billion revenues from the extractive sector if their effective tax rate for the sector was the same as that of Australia, a comparable resource rich. The actual tax collected over the period by Australia was in fact, 35 percent of the overall sales of mineral products, while in Zambia it was less than 2 percent. The Mbeki Panel estimates that over $50 billion leaves the continent annually in the form illicit financial outflows including transfer mispricing and mis-inviocing.
Corruption further accelerates the bleeding too. Price Waters and Coopers, an accounting firm, reckons that the economy of resource-rich Nigeria could have been 22 percent bigger if it level of corruption was cut down to just a little similar to next door Ghana, even though equally corrupt but to a lesser extent.
Gaps in capacity along the entire value chain equally contribute to drive a deep wedge between what is actually collected and what could have been raised. Most often countries are unable to properly assess and value their minerals. For example, the African Progress Panel report estimates the foregone revenue from the undersale of mining assets in Congo, DRC compared to independent assessments of their value to be about $1.36 billion, double the government’s budget for education and health. Africa invest very little to map the quantity, quality and value of its subsoil assets— below $5 per kilometer square against over $65 in comparable mining regions like Australia and Canada.
A balanced approach to design and implement tax instruments remains critical. Capacity demanding but efficient and profit-based fiscal instruments is underused. Corporate income contributions to economies of mineral-rich Africa through taxes have remained flat even against increases in commodity prices. The average corporate income tax rate in Africa, which applies to the mining sector approximates 32%, higher than the world average. But governments have often decreased the rate at which profits are taxed as well as granted excessive revenue sacrificing tax exemptions to mining companies.
Besides, managing the revenues mobilized remains a weak link, too. Tax revenues from natural resources offer one of the best chances to improve development outcomes. The African Development Bank estimates that income from newly discovered resources could contribute up to 31 percent of additional government revenues in some very desperately poor countries, over the first 10 year of exploration. In Mozambique, projected new revenues streams from natural resources could fund at least half of the country’s financing in health in the next decade.
How well the revenues are spent remains even more critical. While progress has been made, there’s still much room to improve public finance management in the continent. According to the Mio Ibrahim Governance index, the quality of fiscal institutions fell over the period 2011 to 2014. Overall revenue management in resource rich African countries is poor, with a median score of 40 on the Natural Resource Governance Index. The median corruption perception index is slightly lower in resource rich than resource poor countries, suggesting higher incidence of corruption and mismanagement of public funds.
Priorities for spending revenues and critical development outcomes are often misaligned. Public expenditure on education (4.5%) as a share of GDP in resource rich countries remains relatively lower than the African average(4.8). In general, resource rich countries rank low on the human development index, with relatively low educational and health outcomes. Natural resource revenues as proportion of spending on basic human assets for tomorrow such as health and education, remains less than 20%.
Striking a right balance between spending and saving tax revenues is equally central to sound public finance management. Most resource rich countries have created Sovereign Wealth Funds and many more in the process of finalizing theirs. Primary motivation remains to park, stabilize and save for the future, highly volatile streams of revenues.
Yet the role of the SWFs and their usefulness in the African context are not straight forward as well as their expected outcomes. It remains unclear how to balance between saving and investing to solve pressing development priorities. Most funds in the continent are modeled along the Norwegian experience-- of saving resource revenues generated abroad for future generations. However, given the huge amount of investment needs in countries, this highly saving-oriented approach seems not to be the best way of using scarce revenues. New research shows that the SWF would contribute better in converting the natural resource wealth into meaningful changes in peoples’ lives, if revenues are directed instead towards productive domestic investment through a focus on stabilizing and parking the funds inside countries, instead. For example, the infrastructure gap in the continent is estimated at $93 billion a year, while the SWFs in the continent amount to $112 billion.
Transparency remains overwhelming, too. Establishing SWFs may offer an opportunity to channel temporal revenues into permanent income streams through investment in productive assets. However, on their own, they remain no substitutes for governance. Management of SWFs in the continent is very weak, with a median score of 24/100 on the recent Natural Resource Governance Index.
African governments will need to mind critical gaps in capacity. A clear vision and strategies to harness capacities remains critical to design and implement real world tax systems that fits countries development aspirations. Governments will need to balance the competing interests of all stakeholders including their citizens and mining companies against their long term development goals to transform the structures of their economies.
Fortunately, there are already workable strategies, tools and practices. For example, the Africa Mining Vision, an endorsed continental framework for the broad-based and inclusive development of the mineral sector. There are also emerging opportunities to build capacity too – including the sustainable development goals , international tax agenda, implementation of the OECD/G20 Base Erosion and Profit Shifting action plan. The upturn in the commodity markets, provide an opportunity to reform and build credible institution. What is much needed now is the walk the talk, so that the continent can be cleansed from the ‘curse of riches’
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