Turning “wealth in the ground” into “human wealth”, not by taxes alone

13Jan2016
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by Pietro Toigo

In previous blog posts, I wrote about the revenues that are likely to materialise from new projects coming online in West Africa; the macroeconomic choices to ensure that these revenues do not have negative macroeconomic impacts and are enjoyed by future generations; and how those revenues can help to bridge the funding gap in health and education.

In this last blog of the series, I would like to focus on the bigger picture: How can governments convert “wealth in the ground” into “human wealth”? How can the extractive sector as a whole contribute to the tangible development outcomes that citizens expect? What can really be achieved, and how? The issue, I argue, is not to focus exclusively on revenues and how to spend them. While on a positive improvement trend over the past decade, West African countries have still weak budget systems, so it is important not to put all eggs into the “tax and spend” basket, but look at what I will call the “non-fiscal” channels.

The figure below provides a useful framework to think about the issue.

Source: AfDB and BMGF

The first two channels, falling under the “Public spending” umbrella, require the mechanisms discussed previously: tax collection by the national treasuries and decisions on public spending, either directly in the social sectors, or in growth-enhancing investments that foster human development indirectly.

The second two channels (“Industry activities”) are about harnessing the human development impact of the expenditure directly undertaken by extractive companies when running their operations. To underscore the point, the chart below shows the split of expenditures of mining, and oil and gas companies in the six countries studied in the report.

Source: AfDB and BMGF

The figure shows that taxes paid by extractive companies are an important, but by no means the largest category of expenditure. Spending on salaries, procurement of goods and building of infrastructures take the lion’s share of expenditure, especially in the mining sector. Given the sheer size of some of these projects (an estimated $20 billion in the Simandou South iron ore project in Guinea, $3 billion in the Western range project in Liberia, nearly $10 billion in the Jubilee oil project in Ghana) this means that if West African countries can capture an increasing proportion of this spending into their domestic economies, significant finance can be leveraged to foster local small and medium enterprises, skills development, and transfer of technologies, even during the early phases of an extractive project when tax revenues are not yet flowing.

The key to this is to create the right incentives for multinational extractive companies (which by nature have global supply chains) to design their spending plans in a way that maximises human development impact at the local level. These can range from coordinated and planned investments in skills, as was done in Chile, or ensuring that infrastructure investment are planned for “dual use” to maximise the benefits for the non-extractive domestic economy.

Most extractives companies also undertake social investments in the local areas in which they operate, often with an aim to buy a “social licence” to operate. Fostering good relations with the local community is also good for business. As seen in the figure above, these are but a small percentage of overall industry spending, but they can be used as pilot for innovative approaches with a potential to be rolled out nationally and generate impact beyond their size.

A good example is the how Newmont Mining put in place systems to ensure that the social investments made at its Ahafo mine in Ghana are aligned with the district’s administration medium-term development plans. The local linkages programme implemented at the same mine also provides a good model to ensure a contribution to the performance and competitiveness of micro and small enterprises. Similarly, AngloGold Ashanti Malaria Control programme in Ghana has seen a gradual scale up from a focus exclusively on the immediate area around its Obuasi mine to developing and implementation of a programme covering the whole municipality, in close coordination with the national health authorities. The programme achieved significant results in terms of reduction of malaria incidence, although as the mine’s economic life is nearing its end, the issue of its long-term sustainability.

In sum, for West Africa to get full benefits from its extractive resources, especially in a time of lower commodity prices, a balanced mix of spending though the national budget and “non-fiscal” channels should be sought, building linkages between the extractive industries and the domestic economy as a basis for industrialisation.

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, has outlined the report’s key implications for the West African region.

 


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