Green Economy in a Blue World-Full Report

Stabilization refers to the need to protect against mineral-resource price fluctuations and require that incremental revenues be set aside in a Fund when the commodity prices are high and taken out when the prices drop, so that governments have a stable revenue stream. Sterilization involves keeping a large part of the revenue collected out of the local economy to avoid Dutch disease and excessive inflationary pressure. Saving for future generations: since the resources are limited and will eventually be exhausted, some of the revenues should be saved in view of intergenerational equity. Examples of savings funds include Norway and more recently Timor-Leste Safeguarding revenue: protecting saved revenue is not always easy. It is necessary to have a separate funding vehicle for savings which is governed by non-discretionary rules, so that Governments are less tempted to spend these savings. although revenue should be set aside for future generations, long-term investments in infrastructure and socio-economic projects should be made while mining is going on. Making good investments in health, education, roads, technology, etc. is also investing in future generations One of the main challenges for Governments receiving substantial additional revenues from mining activity is how to properly manage a significant increase in budget and to avoid waste. Public demands may put government under pressure to increase expenditure in various areas. Although some socio-economic projects may have long-term benefits, spending and investment decisions can become highly politicized. In this climate, short-term benefit projects, rather than long-lasting ones, can often become the norm. One common mistake is to underestimate the long-term financial and human resource requirements for maintaining newprojects, such as upkeep and repair costs for infrastructure, schools or hospitals, or budgetary provisions to cover the salaries of teachers, nurses and doctors. Too often governments have spent considerable sums of money on ambitious projects which have rapidly become ‘white elephants’ because of the high, unaccounted- for costs of operation and maintenance (Dumas, 2010). Socio-economic development:

specific and the longevity of the effect of such activity is unclear. 2.5 Economic Challenges Too often mining appears to increase a country’s poverty (Sachs & Warner, 1997). In contrast to sectors such as agriculture where economic gains are often well distributed among a wide percentage of the population, the economic benefits of mining activity tend to be concentrated in the hands of a ‘lucky few’. Moreover a few individuals are often vested with decision-making power over projects which can represent tens to hundreds of millions of dollars. This may explain the seemingly high positive correlation in several countries between mining activity and socio-political instability – though it should be recognized which the discovery of oil, gas and minerals per se may not lead to instability, but could worsen existing social tensions, particularly in the absence of strong governance systems. Fulfilling the potential of natural-resources wealth is neither assured nor automatic. With sudden inflows of natural-resources revenues, governments face a number of questions: How to deal with the variability of tax income related to fluctuating commodity prices? How to address the issue of Dutch disease and domestic inflationary pressures? How to ensure that a portion of the revenues are saved for future generations and that governments will not be tempted to access the accumulated savings in the future? How to balance these savings with the immediate needs for socio- economic development and investment in health, education and infrastructure and how to resist political pressures to use natural-resources revenues for non-priority elements? The truth is that too often mining revenues have been used not for positive social transformation but for short-term or narrowly focussed political agendas. Sound revenue management will ensure that the correct balance is struck between saving revenue for future generations, and spending current mining revenue on projects with long-term benefits. In order to better guide governments in the most appropriate way to collect, manage and disburse natural-resources revenues, five issues are of particular importance and need to be taken into account to ensure sound revenue management. These issues are stabilization; sterilization; savings; socio-economic growth; and safety. The five S’s of natural-resources revenue management

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