‘How to manage revenues from natural resources’

For better management of revenues from natural resource, governments across the globe need to choose appropriate streams and fiscal tools, keep expenditure responsibilities in mind and insist on clear objectives.

The Natural Resource Governance Institute (NGR), gave these recommendations in its latest publication tagged: “Natural Resource Revenue Sharing”, which it compiled in collaboration with United Nations Development Programme.

NGR said that nearly every country, resource revenue sharing has encouraged rebel groups or secessionist movements in Bolivia, Brazil, Canada, the DRC, Indonesia, Nigeria, Papua New Guinea and the Philippines, to engage in technocratic discussions over the formula and fiscal transfers rather than resort exclusively to violence.

“A critical part of Nigerian politics—petroleum revenue sharing—has historically created tensions between producing areas in the Niger Delta and the federal government. In a context of fiscal federalism, the oil-producing regions in Nigeria continue to demand more revenue from the centre, although transparency and accountability of these revenues, especially at the subnational level, are largely absent,” it said.

NGR noted that although total oil and gas revenue has increased over the years in Nigeria, the share accruing to the producing states through the derivation principle has decreased from 50 per cent of total budgeted oil revenue in 1967 to the 13 per cent share established by the 1999 Constitution and continuing today.

It stated that oil-producing states also receive a share of money in the Excess Crude Account, a sovereign wealth fund that occasionally saves a portion of Nigeria’s oil and gas revenues.

The international watchdog said, subnational governments receive public funds through a combination of direct tax collection and transfers from the national government.

NGR said however, that in more than 30 countries, most of them resource-rich, natural resource revenues is governed by a set of rules that are distinct from those governing distribution of general revenues.It therefore prescribed ways for better management of revenues from natural resources across Africa.

According to NGR, in assigning or transferring natural resource revenues to subnational authorities, governments should consider how easy it is to calculate, collect and verify particular revenue streams.

It noted that royalties, for instance, are generally simpler to calculate, collect and verify than corporate income taxes. In added that, political considerations must also play a role in determining which revenue streams to share and choosing between intergovernmental transfers or direct tax collection of resource revenues by subnational authorities.

NGR said that decentralisation of fiscal revenues should be largely aligned with the costs of public service delivery given subnational expenditure assignments.It stated: “Alignment prevents unsustainable public sector wage increases, local inflation and wasteful infrastructure spending when revenues greatly exceed the cost of local expenditure responsibilities. It also helps avoid under-provision of essential public services when revenues are inadequate for meeting local spending requirements. This is equally true of decentralisation of revenues derived from natural resources.

“Resource revenue sharing systems are often established without agreement on why they are being created. As a result, their design often fails to meet any specific objective, be it compensation for extractive activities, sharing benefits with producing regions, or prevention or mitigation of conflicts. It is also difficult to build consensus on a formula when the objectives have not been clarified. A regime need not have a single objective, but the objectives ought to be made clear in policy or legislation,” it added.

The report believed that large and unpredictable transfers of natural resource revenues could destabilise a local economy. cycles of boom and burst also harm economic growth, as governments are likely to spend on ostentatious projects during booms and not plan appropriately for downturns. It stressed the need for the central governments to either provide a predictable and smooth source of financing to local governments, or provide them with the tools to cope with resource revenue volatility. This can mean smoothing intergovernmental transfers to local governments or allowing them to address resource revenue volatility autonomously through debt management or saving a portion of their revenues in a sovereign wealth fund.

“Any revenue transfer formula must be simple enough for local government authorities or civil society groups to verify compliance, even if they lack the tools to carry out sophisticated economic calculations. The ability to verify subnational entitlements and actual sums transferred builds trust between different levels of government and between governments and their citizens. Simplicity also helps prevent corruption since transfers are more easily verified under a simple system. In practice, this means setting a maximum of two objectives for any resource revenue transfer regime and including just a few variables in any resource revenue sharing formula,” it said.

It emphasized the need for any revenue sharing formula to be codified in legislation or regulations. Codification improves predictability and forces authorities to discuss the objectives of any revenue sharing formula.