Administering Fiscal Regimes For Extractive Industries… IMF, World Bank Provide Practical Guidelines

Mining PixThe International Monetary Fund (IMF) and the World Bank have provided policymakers and officials in developing and emerging market countries like Ghana with practical guidelines to establish a robust institutional framework, organisation and procedures for administering natural resource revenue.

In a recently released joint publication entitled Administering Fiscal Regimes for the Extractive Industries: A handbook, targeted at filling a void that previously was neglected, the two institutions said while ample research has been conducted on fiscal policies that best enable sustainable growth from its revenues, this is not the case for their administration.

This gap is significant since a fiscal regime is only as effective as the administrative capacity of the public institutions charged with its collection.

“The publication is one of the first of its kind to address the complex challenges of managing fiscal revenues from the extractive industries,” said Katherine Baer, Division Chief, Revenue Administration Division at the International Monetary Fund.

It highlights the importance of transparency in the face of ever-increasing demands from both domestic and international constituencies for clarity and accountability in the administration of public revenues from natural resources.

The handbook also provides recommendations on how developing countries can strengthen their managerial and technical capacity to administer these revenues.

Among others, it offers suggestions on very practical challenges that developing countries face when trying to retain adequate staff and capacity to handle the complex nature of natural resource revenue administration.

While government salaries rarely compete with those of the private sector, the handbook recommends that in resource-rich countries staff dedicated to revenue administration must have relatively competitive salaries in order to retain personnel. It also recommends tactics such as training, performance management and recruitment practices that can help the government retain the professionals needed.

The organisation of tax administration and inter-agency cooperation in governments is also highlighted as a key component of success. Integrated administration within a tax department is cited as an effective structure due to its simplification and centralisation of efforts into one government agency.

On the other hand, the handbook notes that there are many disadvantages of fragmented administration across different government agencies, such as duplication of work, lack of accountability and uncoordinated procedures, among others.

“Everyone wants a piece of the pie when it comes to revenue windfalls, so centralisation of natural resource revenue administration can be politically difficult, but it is key to ensuring quality control, transparency and capable staffing,” said Jack Calder, author of the handbook and former Deputy Director of the U.K. Oil Taxation Office.

Other challenges unique to natural resources that create special challenges for administration include the high uncertainty and risk inherent in the industry, huge variation in scale and profitability, substantial capital investment, complex commercial structures and long development periods, among many other factors.

According to the handbook, these challenges and the vast revenues that the extractive industries generate give rise to major governance challenges, especially in a context of weak institutional capacities.

“Improved administration of revenue is a key component of effective governance of the extractive industries,” said Mr. Feinstein, Director of the Energy and Extractives Global Practice of the World Bank Group.

“This publication makes an important contribution to knowledge on best practices that can help direct extractive industry revenues towards poverty alleviation and boosting shared prosperity.”

In Ghana, for example, the extractive sector accounted for 56 per cent of exports in 2011, up from 12 per cent in 2010 due to oil discoveries, making it a major foreign exchange earner.

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