From extractive resources to human development: Opportunities for health and education in West Africa

23Nov2015
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by Pietro Toigo

My previous posts discussed how much revenues West African countries can expect from new discoveries of extractive resources, and what are the choices facing policymakers in utilising these revenues. In this piece, I will try to focus on how these revenues can be used specifically for investments in health, education skills and other tangible development outcomes. What can really been achieved, and how?

The chart below gives a general picture of the opportunities in Sierra Leone, Ghana and Liberia in terms of health and education funding from natural resource revenues. The figure takes a discounted value of the estimated revenues from new discoveries over the first 30 years of production and overlays it with estimates of the financing needs in the health and education sectors*.

What the chart suggests is that the scale of revenues in Ghana is already very high in relation to the various measures of health needs and expenditures. New revenues from extractives in Ghana could help fill most of the funding gap in the education sector (if indeed all those resources are invested in education), while Liberia and Sierra Leone would still have some way to go.

The opportunities become even clearer when the estimated revenues are compared not with the ambitious health needs estimates, but with actual expenditures in health and education from the national budget and from the other available sources of financing such as external donors (“external sources”) and innovative financing mechanisms (e.g. impact bonds to finance health and expenditure delivery). The charts below map “raw” (i.e. as they become available to national treasuries) and “smoothed” (i.e. spread out over time) new natural resource revenues for Ghana, Sierra Leone and Liberia against estimates of resources available from donors, the national budget and innovative sources.

While projections of funding sources are necessarily best guesses, and subject to significant margins of error, it is striking how potential natural resource revenues (the brown and blue lines) are expected to vastly exceed donor funding (the red area) in all three countries. In particular, we see a crossover pattern with falling donor support and rising resource revenues, an important point in the context of a post-2015 Financing for Development agenda that is increasingly reliant on domestic resource mobilisation.

However, as appealingly straightforward as this picture might seem, simply pouring new resource revenues into health and education is not the silver bullet.

First, as seen in my first blog post, revenues will not come in as a straight line, but will build up slowly, peak and peter out over time. However, some of these health and education investments imply a commitment to running costs (salaries, maintenance costs) that will be constant and will need to be maintained. This is especially true when one considers that, in the long-term, resource revenues will slowly run out, while health and education needs will stay. The result is, of course, a fiscally unsustainable situation. This is why it is important for governments to use the full range of tools to smooth the profile of revenues over time, as discussed in my second blog post.

Secondly, it would be unrealistic to expect governments to ring-fence all new revenues to a specific sector. West African countries have a significant infrastructure gap, which in turn can have an indirect impact on human development (for example by increasing access to basic social services) or can play a role in supporting broader economic diversification to ensure that the economy is left on a solid footing once extractive resources are depleted. Ghana, for example, has made it clear that part of new revenues will be invested in economic infrastructures. This means that new resources available for health and education are necessarily below the level shown here, and will need to distributed according to national preferences.

Third, there are broader “political economy” issues in using natural respource revenues for funding health and education. A “contract with citizens” requires the state to deliver health services to the population and citizens to pay taxes for these services. Both practitioners and academia see this key element of state-building. When this mechanism is absent, as in the case of natural resource revenues that go straight into the treasury from resource companies, additional measures may be needed to ensure that resources are used effectively, transparently and
with adequate accountability. This in turn requires a high level of citizens’ awareness, or more realistically an independent, capable and well-informed civil society. None of this is built overnight, so when planning policies to build human development from extractives, it is important that policymakers take decisions that reflect the country context and society’s expectations.  

The AfDB’s African Natural Resource Center 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 African Natural Resource Center, will outline the report’s key implications for the West African region.


Comments

pietro - 26/11/2015 11:13
Hi John,

You are quite right - the first step is for Governments to receive their fair share of revenues, and putting in place the right fiscal framework is key. But as you might have seen from the projections in the first blog, even without tax holidays revenues will be back-loaded over time, because the mine will incur investment costs upfront well before production starts, and will amortize them against tax liabilities. So the point is that Governments need to plan long term, make sure revenues are shared fairly over the course of the project, and plan the expenditure choices to get the best bang for their buck.
John Daramy - Sierra Leone 24/11/2015 21:05
Successive governments have given so many concessions to mining company's that they have in effect subsidised them to to the detriment of the whole country. 5 year tax-free concessions are not unheard of.
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