Delivering the promise (Part I): Managing natural resource expectations in Ghana, Sierra Leone and Liberia

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By Pietro Toigo

Extractive resources come with a heavy baggage and very high expectations – if history shows that abundance of natural resources does not necessarily improve a country’s citizens lives, announcements of new mineral riches often unleashes expectations of immediate gains for citizens. This is very much the dynamics triggered when, at the peak of the commodity prices cycle, new discoveries in a number of West African countries promised to deliver a game-changing boost to their economies.

Later on, the dip in global prices for main extractive resources since 2011 has dampened enthusiasm among investors – yet, very often, the high expectations for visible changes in standards of living among citizens remain. With less potential revenues available and the emerging challenge to keep these projects on track, it becomes even more important for West African countries to ensure that the right policies are in place to turn these investments into development outcomes.

First, it is important to understand the magnitude and timing of these expected resources. How much revenue can these projects generate? When are they likely to be available for investment in infrastructure and human development? How significant are these revenues in the wider context of these economies? A recent study prepared by the African Development Bank in collaboration with the Bill and Melinda Gates Foundation (BMGF) – “Delivering on the promise: Leveraging Natural Resources for Human Development in Africa”) – addresses some of these questions and provides estimates of the timing and magnitude of new revenues from the extractive industries for selected countries, including Ghana, Sierra Leone and Liberia.

Calculations considered estimates at the project level, looking at significantly sized new projects with enough information available, and then applied cost and production projections into the taxation framework (combining the national tax law with the specific mining or production sharing agreements for each project when known).

With all the due caveats about uncertainty and risk (commodity prices, force majeure such as the Ebola outbreak, changes in taxation, the fact that not all feasible projects could be included, etc.), a general picture of when and how much revenue will become available can be gathered. Generally, revenues tend to peak well after production starts, as the producer has to offset first the capital investment made to make the production available.

As seen in the chart above, all three West African countries in the study are likely to see revenues kick in relatively soon – although some allowances need to be made for delays in production in some of the Ebola-hit countries. (Sierra Leone, for instance, offers an interesting example of how project-based projections need to be handled with care.)

But what do these figures mean in the overall country context? In the central price scenario, over the next 30 years, these new revenues would provide some extra room for spending to governments: more than 20% over existing revenues in Liberia and Sierra Leone, and roughly 15% extra for Ghana.

What would it mean on a per-head basis? A significant, but not astonishing increase.

In the chart above, new resource revenue per capita are projected to be at US $52 in Ghana to just below $30 in Sierra Leone and Liberia. But this is very sensitive
to fluctuations in prices: in a low-price scenario, Sierra Leone’s revenue could
amount to nothing, but could rise to up to US $60 in the high-price scenario.

So what are the takeaway messages? First, new natural resource revenues in Ghana, Sierra Leone and Liberia will be meaningful, but not transformational; so governments will need to ensure they get the “best bang for their buck” and manage citizens’ expectations about what can be achieved.

Secondly, the benefits from new resource discoveries take time to materialize, especially once the challenges of restarting production and restructuring deals in a scenario of lower prices and (in some countries) post-Ebola aftermath.

Lastly, risk factors are many and need to be managed – prices and unforeseeable disasters like epidemics are only two of many.

So the opportunities are there. But what matter really is less how much revenues are collected, but how they are managed. Here a complex decision tree of choices faces policymakers: How to bridge the time gap between beginning of production and peak in revenues? How to spend these revenues, and on what? And how much to save for the future?

I hope to talk about some of these policy choices in my next blog post.

The AfDB’s African Natural Resource Center (ANRC) worked together with the Gates Foundation and produced a joint report to examine how revenues from extractives can be managed for greater human development impact. In a short series of blog posts, Pietro Toigo, Chief Macroeconomist at the ANRC, will outline the report’s key implications for the West African region.