Technical Assistance and Capacity Building to Support Minerals and Extractive Revenues Governance


Overview

  • Reference: P-SL-KF0-008
  • Approval date: 20/12/2013
  • Start date: 19/11/2014
  • Appraisal Date: 01/07/2013
  • Status: OngoingOnGo
  • Implementing Agency: Ministry of Finance and Economic Develop
  • Location: MINISTRY OF FINANCE & ECON DEVELOPMNT

Description

The overall goal of the project is to strengthen the institutional capacities of the National Revenue Authority (NRA), the National Minerals Agency (NMA), the Ministry of Mines and Mineral Resources (MMR), and the Ministry of Finance and Economic Development (MoFED) for enhanced natural resources governance and revenue collection. It seeks to enhance the administration of revenue from extractive industries to improve transparency and accountability in the extractive industries i ons. The project will also assist Sierra Leone and the other Mano River Union (MRU) Member States (Liberia, Guinea and Cote D'Ivoire) to deepen their knowledge of regional dynamics of the extractive industries through a study on regional fiscal harmonisation of mineral taxation regimes. The study will identify ways of increasing common benefits of revenues from minerals. It will also identify the means of reducing the smuggling of precious minerals and controlling minerals-related illegal activities that have in the past fuelled conflicts and instability in the region. The economies of the four member states of the Mano River Union (MRU) are predominantly based on natural resources which contribute to a region wide average of 54% of national exports and about 25% of GNP.

Sierra Leone has significant mineral and other natural resources which are being extracted widely. However, the IMF estimates that these resources contributed only about 24% of total revenue in 2012 and that improved tax collection and governance of minerals and other extractive industries can increase this contribution to about 70% by 2016. The country is also seriously lagging behind in its revenue effort. Its revenue to GDP ratio (excluding grants) is 12% which is well below the Sub -Saharan African regional average of 26.5% and even below the fragile states average of 22.2%. Liberia's revenue to GDP ratio is 26% while Guinea's is 20% and these MRU countries are Sierra Leone's neighbours. This suggests that there is high potential for the country to increase its revenue from minerals. In this regard, it has been projected that by 2020, the country's revenues from the extractive sector alone are expected to account for 17% of GDP hence the importance of strengthening the administration and management of revenue from extractive industries. Potential revenue from minerals is lost due to

(i) weak mineral and other extractive industries revenue collection capacity at the NRA;

(ii) weak mineral and extractive industries revenue policy analysis at MoFED;

(iii) weak capacities to monitor compliance with mining contracts and verify production amounts, exports, and global prices at the NMA; and

(iv) lack of an effective extractive industries governance structure to promote transparency, accountability, and responsibility in the management of extractive industries. The project seeks to address these challenges through the activities detailed in Section 3.3.

The proposed project is a stand-alone operation that will benefit from the FSF grant operation funded from the Targeted Support Window for TCB (Pillar III). The project will have four interrelated components which are as follows:

Component 1 - Establishment of an Extractive Industry Revenue Unit (EIRU): This component is aimed at providing technical assistance for the establishment of an Extractive Industries Revenue Unit (EIRU) within the NRA. The establishment of this unit will enhance the institutional capacity of the NRA to collect adequate revenue from the extractive industries for the planned increased public investment to enable the country to become a middle income one by the year 2035. The objective of the component is to provide technical support for the NRA to establish an Extractive Industries Revenue Unit and build its capacity once it is established. The main activities that will be undertaken under the component are

(i) recruitment of technical assistant (s) or consultant(s) to assist with the establishment of the Unit;

(ii) preparation of an organogram and job descriptions for the Unit;

(iii) establishment of procedures and systems to administer extractive industries revenue including an assessment and audit strategy;

(iv) advise on organisational arrangements, conduct training needs assessment and provide on the job mentoring to technical staff;

(v) facilitating the sharing of experience among technical staff through study tours; and

(vi) creating a data base of all companies and other entities in the extractive industries for taxation purposes. The project will also provide the NRA with support for a consultant to assist with the monitoring and evaluation of project activities, travel, communication, printing costs, and other operating costs related to project implementation.

Component 2- Establishment of a Natural Resource Charter (NRC) Benchmarking Framework for Sierra Leone: The component aims at supporting the Government of Sierra Leone to conduct a comprehensive and inclusive benchmarking exercise that will promote the good governance of and accountability for natural resources. The component will support the GoSL's work with the NRC International Secretariat to operationalize the NRC benchmarking process in Sierra Leone. The charter identifies key areas of weakness and opportunities in how natural resources are used and managed. It is a tool for providing evidence-based recommendations for improving natural resource management at the local, national and international levels. Sierra Leone's 'Agenda for Prosperity' recommends that the NRC be used to benchmark good governance in the extractive sector. The Government of Sierra Leone has been working with NEPAD and the NRC to develop this benchmarking framework. By supporting the introduction of this framework in the country, the project is expected to assist the government to harness extractive resource wealth for development through improvements in the governance of the extractive industries. It is also expected to guide the government and other stakeholders on the chain of complex economic decisions that have to be made to effectively transform extractive wealth beneath the ground into development above the ground. Key outputs include a national mining vision outlining how the country intends to use extractive resources for development and a government owned action plan for effective management of extractive resources including deliverables and timescales for action. The main activities under the component will be

(i) facilitating the technical work of the Panel of Experts that will be tasked to oversee the implementation of all research, public engagement activities, benchmark assessment and policy deliverables as indicated in the planning process;

(ii) formation and enhancement of the Research Team responsible for drafting research and policy documents as specified by the Experts Panel; and

(iii) the establishment of the Sierra Leone NRC Secretariat to provide the support required for stakeholders consultations and communication. In terms of scope, the 12 precepts of the Charter fully cover the nine programmatic clusters of the African Mining Vision (AMV). The NRC has integrated the AMV principles into the framework tool so that the benchmarking process can be used to identify whether a country is compliant with the AMV. The NRC secretariat is expected to be anchored in the Ministry of Mines and Mineral Resources.

Component 3- Study on the Harmonisation of Mineral Taxation Regimes in the Mano River Union (MRU): This component aims at assisting the MRU Member States to harmonise their mineral taxation and licences regimes at the artisanal and industrial levels. This will be done through a study that will assess the different mining fiscal regimes of the four MRU Member States and simulate win-win situations for those states. The expected major outcome of this is a reduction in the incentives for smuggling precious stones and metals across member countries in the sub-region and improved coordination and harmonisation of mineral taxation measures and rates. The key activities will be:

(i) the recruitment of a consultant to undertake the study in all the MRU Member States;

(ii) production and validation of the study report;

(iii) the preparation of simulation models for use by the MRU Secretariat and in each of the Member States;

(iv) a workshop to validate recommendations for minerals taxation regimes harmonisation (mining and investment codes) for each country and for all MRU Member States to implement; and

(v) capacity building and experience sharing workshop for mining and tax experts in the four member countries to discuss common problems and challenges faced with the differences in tax regimes.

Component 4- Support for Ministry of Finance and Economic Development Revenue Enhancement Activities: This component will support the Ministry of Finance and Economic Development (MoFED) to conduct a study on Sierra Leone's Domestic Revenue Mobilisation and to coordinate the implementation of the whole project. The Domestic Resource Mobilisation Study will assist MoFED to identify various ways and means of expanding the country's sources of revenue so as to increase the local resources available for service delivery and infrastructural development. The main activities under the study will be

(i) the recruitment of a consultant to undertake the study;

(ii) a technical workshop to validate the consultant's report of the study; and

(iii) a stakeholders' workshop to disseminate the findings of the study and adopt study recommendations. The component will also support MoFED to coordinate the implementation of the project efficiently and effectively. In this regard, it will support MoFED's project management costs in relation to

(i) the monitoring, evaluation and supervision of consultants;

(ii) vehicle hiring and running costs;

(iii) photocopying, printing and communication costs; and

(iv) audit of the project.


Rationale

The MRU sub-region has the potential to mobilize substantial financial resources or revenue through a harmonized approach to the taxation of minerals, especially among artisanal miners, and other natural resources. In the recent past, this mineral wealth financed civil wars which contributed to political instability at the national, sub-regional and regional levels. Cross-border smuggling of precious stones and minerals has resulted in huge inflows of precious stones into the country that had the lowest tax rates. This has provoked a "race-to-the-bottom" in national export tax rates for precious stones and minerals, which MRU countries participate in to keep respective national taxation levels regionally competitive. In this situation, all the MRU countries lose out but they can increase their revenue with a higher and harmonized tax rate. It is in this regard that the MRU Secretariat and the four Member States would like a study to be conducted on options for a regional approach to harmonising fiscal regimes applied to the mineral sector. This is expected to create win-win situations for all MRU Member States by reducing incentives for smuggling artisanal minerals thus increasing revenue from the minerals. The study is also expected to identify other ways and means of harmonising mineral resources management with an MRU sub-regional perspective since some of the challenges faced cannot be addressed meaningfully using country-specific approaches.

Sierra Leone has significant mineral and other natural resources which are being extracted widely. However, the IMF estimates that these resources contributed only about 24% of total revenue in 2012 and that improved tax collection and governance of minerals and other extractive industries can increase this contribution to about 70% by 2016. The country is also seriously lagging behind in its revenue effort. Its revenue to GDP ratio (excluding grants) is 12% which is well below the Sub -Saharan African regional average of 26.5% and even below the fragile states average of 22.2%. Liberia's revenue to GDP ratio is 26% while Guinea's is 20% and these MRU countries are Sierra Leone's neighbours. This suggests that there is high potential for the country to increase its revenue from minerals. In this regard, it has been projected that by 2020, the country's revenues from the extractive sector alone are expected to account for 17% of GDP hence the importance of strengthening the administration and management of revenue from extractive industries which is what the proposed project seeks to support.

One of the key aspects of the project is the support for the establishment of effective institutional structures for sound governance of the extractive industries in Sierra Leone. The project will do this by supporting the establishment of the Natural Resources Charter Benchmarking Framework. The country lacks an effective institutional structure for the extractive industries governance and this can lead to significant revenue losses through corruption and embezzlement of extractive industries potential revenue for government.

The country acceded to the Extractive Industries Transparency Initiative in 2008 but it remains to be recognized by the EITI as managing its extractive industries satisfactorily. It is in recognition of this deficiency that Pillar 1 Sub-Pillar 2 of the Bank's CSP 2013-2017 seeks to support the country in enhancing its natural resources governance so as to contribute to enhanced domestic revenue mobilization. In this regard, the project will support measures to enhance transparency, accountability and responsibility in the generation and spending of revenues from extractive industries through the broadening of the extractive industries governance stakeholder base using the NRC Benchmarking Framework. This framework will be used in a research activity to benchmark good governance in the extractive industries in Sierra Leone. Some of the critical outputs of the NRC benchmarking process include

(i) traffic scores for each of the 12 NRC precepts;

(ii) a detailed peer reviewed research project that will contain answers to questions in the framework;

(iii) a national mining vision that will outline how the country will manage and use its natural resources, and

(iv) a government-owned action plan for efficient management of natural resources in the country. It will also support a study to identify ways and means of enhancing domestic revenue mobilization efforts in relation to extractive industries and other sector so as to reduce the country's dependence on donor support and domestic borrowing in financing it budget.


Benefits

The principal beneficiaries of this project are the Government of Sierra Leone and governments of other three member MRU states that will gain some knowledge of the benefits of harmonising their tax regimes. In addition, the MRU Secretariat will acquire some expertise that will enable them to coordinate the harmonisation of MRU member countries' minerals taxation regimes. Its other key direct and indirect beneficiaries will be the NRA, the NMA, and MoFED. Other government departments, the private sector (including companies operating in the extractive industries, artisanal miners), civil society organisations, and citizens of the member states will also benefit from improved natural resources governance and improved revenue collection. Similarly, the study on domestic revenue mobilisation will benefit the whole country by identifying various ways of increasing domestic revenue for infrastructural development and service delivery. The study will thus benefit all sectors of the Sierra Leonean economy and various socioeconomic groups. Identifying additional ways of mobilising domestic resources will also obviate the need for government to borrow domestically for the same purpose thereby reducing a domestic debt burden. This will also strengthen the macroeconomic environment by making it more conducive to private sector investment and sustainable economic growth than would be the case with high levels of domestic borrowing. In view of these expected outcomes of the project, the primary beneficiaries of the project will be all Sierra Leoneans at the national and decentralized levels of development management and service delivery. These benefits will arise from the expected improvements in natural resources governance and revenue collection.

In addition, the project will make a positive impact on gender while conducting research activities and sensitization meetings on extractive industries. Specific gender disaggregated data will be collected during the data collection process of the research activities. Gender related constraints on natural resources will be clearly articulated and discussions on extractive industries issues will involve participation of women. The process will enhance contribution of women to economic and social development and management of natural resources. In addition, the harmonisation of minerals taxation regimes would be expected to result in a reduction in the smuggling of precious minerals which facilitates the trafficking of women and children. In this regard, the project would be expected to have a positive gender impact in terms of contributing to reduction in the trafficking of women and children in the MRU sub-region.


Key contacts

BANGURA Ibrahim Ansu - OSGE1


Costs

Finance source Amount
Co-financierUAC 1,200,000
TotalUAC 1,200,000