Professional Documents
Culture Documents
Resource
Charter
Second Edition
Natural Resource Charter
Second Edition
The Natural Resource Charter Decision Chain
DOMESTIC INTERNATIONAL
Discovery and Investing for FOUNDATIONS
FOUNDATIONS Getting a Managing
FOR RESOURCE deciding to sustainable FOR RESOURCE
good deal revenues
GOVERNANCE extract development GOVERNANCE
PRECEPT 6
Nationally owned
resource
companies
Countries with non-renewable resource wealth The previous record of resource management
face both an opportunity and a challenge. When is poor but some countries have nevertheless
used well, these resources can create greater prosperity performed well. From 1970 to 1998, of 65 resource-
for current and future generations; used poorly, rich developing countries only four managed to
or squandered, they can cause economic instability, achieve long-term investment exceeding 25 percent
social conflict, and lasting environmental damage. of GDP and an average GDP growth exceeding four
per cent, namely Botswana, Indonesia, Malaysia and
The Natural Resource Charter offers policy Thailand.
options and practical advice for governments, societies Thorvaldur Gylfason, 2001
and the international community on how best to
manage resource wealth. Such guidance can ensure
that resource-rich countries are not alone in facing Ensuring that government action in each area is
these challenges, but rather that they can draw on coordinated and effective requires addressing two
accumulated experience to learn from history and overarching issues, the subjects of the first two precepts
avoid the mistakes of the past. The charter is not a of the charter. First, the charter advocates establishing a
precise prescription, but instead explores approaches strategy and guiding policies that cover all the necessary
that successful countries have used, in different processes of resource management, along with a
contexts and combinations, to realize the development comprehensive framework of rules and institutions
potential of natural resource wealth. directed by this strategy. This is the concern of Precept 1.
Second, there is no guarantee that rules will be followed
For countries to benefit from resource wealth, or capable institutions will work for the country’s
citizens and their governments must make a broad benefit. Therefore strong accountability is required.
range of decisions. Each decision requires governments This is often problematic in resource extraction
to consider complex options and trade-offs and situations, where actions are easily concealed. Failure
devise strategies to implement these policy choices. to hold those within government to account is too often
To help governments make decisions, the charter the missing link in otherwise well-organized systems
contains 12 precepts. The first 10 precepts elaborate of resource management. Precept 2 considers this.
guidance on how a country and its government
might manage natural resources. The last two precepts After addressing these overarching issues, the charter
speak to international actors—extractive companies turns to the question of extraction and use of revenues
and those responsible for international governance. for sustainable development. Precepts 3 to 10 each
address a key decision area for a country. They are
The charter includes all 12 precepts because trans- organized into the “economic decision chain,” a
forming extractive wealth into sustained prosperity series of decisions that the government must make
involves the government making and implementing a to ensure value from extractive resource wealth is
chain of good policy decisions with support and over- transformed into sustained prosperity for citizens.
sight from citizens and the international community. They are presented in a linear fashion beginning with
All the links in this chain need to be strong if a coun- exploration and discovery; then getting a good deal
try is to truly benefit from extracted resource wealth. for the country from extraction; followed by managing
revenues; and ending with sustainable investment of
revenue for the long term. However, the issues in each
The structure of the charter
precept should be thought of with respect to all of them,
The precepts of the charter are separated into taking account of the challenges of sequencing, trade-
three groups: domestic foundations for resource offs and other relationships across each of these policy
governance; the chain of economic decisions areas. To guide the reader through these linkages, there
required to manage resources for prosperity; and the are italicized signposts to other relevant parts of the
international foundations for resource governance. charter document.
Addressing only extractive sector issues is not enough, The Natural Resource Charter was written by an
however, since sustainable economic development independent group of practitioners and academics,
cannot come of merely extracting a resource. Authorities under the governance of an oversight board
must invest revenues so that current and future composed of distinguished international figures
generations enjoy the bounty. Further, the government with first-hand experience of the challenges faced
should protect against volatile flows of revenue that can by resource-rich countries. The charter does
damage the economy and lead to wasteful spending. not represent any institution or special interest.
The charter calls this challenge “managing revenue” It was created in the belief that natural resource
and addresses it in Precepts 7 and 8. wealth can be a powerful tool for social and economic
advancement, but only if countries are able to tackle
the challenges. It aims to offer advice that is useful
Botswana has managed much of the decision and clearly expressed.
chain well. Its GDP per person has increased from
US$3,500 in 1980 to US$12,500 in 2010 (in constant
2005 dollars). However Botswana is also one of the
most unequal countries in the world and suffers
from one of the highest HIV/AIDS prevalence rates,
while its economy is still left undiversified. Resource
management challenges remain.
International Monetary Fund, 2012
INTRODUCTION / 5
Domestic foundations
for resource governance
Resource-rich countries have a great opportunity to sector businesses in general. These groups provide the
harness their natural wealth for transformative and necessary understanding of issues that must be addressed
sustained prosperity. But if mismanaged, resource in the planning process.
extraction can impose severe costs on a country. As
stewards of their extractive resources, it is typically Because the extraction process can last many generations,
the responsibility of governments to manage those decisions made in the present must be robust to the cycles
resources for current and future generations. of governments. This calls for building understanding and
consensus from a critical mass of informed citizens. Actors
Effective and sustainable resource management outside the executive, including legislators, journalists, and
requires an inclusive and comprehensive national civil society groups are guardians of the strategy, playing
strategy. To achieve this, the government must make a a scrutinizing role by holding decision-makers to account.
series of key decisions that will affect different groups {See also Precept 2 on the role of civil society in holding
and set choices extending far into the future. To avoid government to account.}
making decisions in a piecemeal fashion and to build
a shared sense of direction, governments should, in
Ensure strategy is comprehensive
dialogue with stakeholders, use a national strategy
process to guide extractive resource management Taking a comprehensive approach provides
decisions. governments with a framework to understand and
better implement initiatives in the extractive sector.
This should involve linking upstream and downstream
Consider the long term
industry decisions, environmental and community
The national strategy should take a long-term approach, issues, the management of government revenues,
recognizing the fact that the transformation from wealth and wider economic concerns.
in the ground to wider societal benefits can take many
years, and present many challenges and surprises along Within the government this requires coordination
the way. If citizens are concerned about the welfare and an authorizing environment across ministries of
of their children and future generations, they should mines, energy, finance, planning and beyond. Given
recognize that these future generations have a right to the intrinsically linked and overlapping challenges,
benefit from resource extraction and to be shielded from inter-ministerial coordination is necessary. Strategic
its inevitable impacts. direction may best come straight from the executive
office; alternatively, an overarching body representing
each ministry may be useful in coordination and
Include the public
implementation.
A national strategy is more likely to be successful if it
is the product of inclusive processes that are open and Good governance is required across the entire decision
participatory. A plan debated in public will expose policy chain. Angola has managed the first parts well,
conflicts and inconsistencies sooner, constrain self- capturing substantial revenues from extraction. But
dealing and corruption, and render inevitable course these revenues have not been managed effectively or
corrections less disruptive. Decision makers should seek equitably. Between 2007 and 2010, US$32 billion of
to incorporate the inputs of other stakeholders, ranging revenues in Angola had been reported as missing—
from government departments, parliament, and citizens equivalent to a quarter of Angola’s GDP.
directly affected by extraction, to civil society more International Monetary Fund, 2011
broadly, as well as the extractive companies and private
Where resource wealth is managed on behalf of citizens, Authorities should make available data and reports
it can lead to sustained prosperity only if the government on licenses, geological surveys, cadastres and reserves,
is publicly accountable. Ongoing scrutiny of behavior as well as economic, environmental and social impact
provides a strong deterrent against corruption and an assessments. Critically, authorities should also publish
incentive for improved performance across all levels contracts and make them readily available online.
of government. Furthermore, a national strategy of
managing resource wealth will remain effective into Disclosing information that allows for national
the future only if this scrutiny ties present and future accounting and monitoring of sector management,
governments to the objectives they set themselves. revenue management and expenditures is also necessary.
This information can be compared against any fiscal
rule the government sets itself. Further, savings funds
Provide transparency of information along the
must have high levels of disclosure requirements,
entire chain of decisions
particularly considering the potential for off-budget
Unlike many forms of economic activity, resource activity. In particular, fund management ought to
extraction and the management of revenues is often publish information on the balance sheet and cash
distant from the lives of the majority of citizens. The flows, recipients of payments, and audits.
chain of decisions can be difficult to monitor, providing
opportunities for corruption and a screen for poor The government should disclose not only payments and
management. spending, but also the relevant rules across the whole
decision chain. In many cases, governments write large
An essential prerequisite for accountability is parts of these rules into complex contracts hidden from
transparency. However, piecemeal information public inquiry. As far as possible, governments should
is not sufficient. The government should disclose write terms within legislation, which observers can
information about the whole chain of decisions, scrutinize more easily than a contract. Any remaining
with a complete, complementary set of information. concessions given in contracts which depart from
For instance, revenue data might be accompanied by standard legislated terms should be submitted to and
information on the applicable tax rates and taxable approved by the legislature. Above all, confidentiality
income. Such information should be disclosed at an clauses in contracts should be avoided and contracts
appropriate level of disaggregation such as location, should be made public.
project and product type. In addition, “machine-
readable data” (data combined with descriptions The public’s right to information is enshrined in
of these data to enable automatic use by computers), many national and international conventions, and
with mutually agreed inter-operable standards can an increasing number of countries have freedom
facilitate monitoring efforts. Further, publishing of information laws stipulating that all government
the names of companies operating, bidding for and information is public unless disclosure is specifically
investing in extractive assets, as well as the identities proscribed by law. Governments should adopt such
of their beneficial owners, can facilitate monitoring rules to mitigate the risk of rights over resource
and enforcement of the applicable fiscal regime. extraction being signed away before members of the
public can scrutinize agreements that affect them.
The operations of nationally owned resource companies
should be subject to at least the same level of disclosure Government and business can also benefit from greater
as private companies. National resource companies transparency. Disclosure requirements create the
should also be transparent in their strategies and incentive to maintain effective systems of information
spending outlook, and public interest may even management, which lowers the cost of collecting and
demand higher levels of openness. maintaining good data and improves their accuracy.
The government’s challenge is to ensure exploration geological understanding, which will serve to
and production operations are carried out efficiently strengthen its negotiating position with investors
within a comprehensive national strategy and to and better enable it to optimize the licensing regime.
establish a legal and regulatory framework as far in To this end, the government should ensure that
advance as possible. { See also Precept 1 on forming investors provide all technical information in an
the national resource strategy, legal and regulatory understandable format.
framework.}
Secure property rights and decide on areas
Verify jurisdiction over areas to be licensed to open for exploration
for exploration
Before licensing exploration activity, the government
The national government should verify that it has should establish property rights under national law
uncontested jurisdiction over the areas it intends to for both the resources to be extracted and the surface
open for exploration. This applies both domestically resources such as pasture land and water in areas
and with neighboring countries including provisions to be opened for exploration. {See also Precept 5
for joint development of discoveries that straddle on environmental analysis and ongoing regulation.}
national borders.
Authorities should carefully consider the size and
boundaries of exploration licenses, taking into
Build and maintain a good understanding
account the underlying geology and size and location
of the resource base
of potential exploitable deposits. At the early stages
Government officials must build a thorough of exploration, licenses are usually very large as the
understanding of their country’s resource base— location of prospective geology is not well defined.
both the quantum of resource and its geographic The license regime needs to allow for the reduction
distribution. The quantum of the resource base in the size of licenses as exploration progresses in order
informs key decisions on the rate of exploitation to prevent too much of the resource base being located
and potential future revenues. Information on the in any one license. Licensing authorities must take
geographic location guides the establishment of care with regards to the sequencing of license awards
property rights and exploration licenses within the to ensure that the government can benefit from land
country and future social and environmental impacts. value increases resulting from discoveries.
Pre-licensing investment in geological and Finally, the government should consider whether
geophysical surveys, funded by the government the environmental risks, from pollution, for example,
or external donors, can provide a high return on are worth the potential reward. The government
investment for the government if the resulting should either decide to prevent exploration in
information increases the attractiveness of the
geology to investors, thereby attracting higher bids.
However, more knowledge can also make the geology Recent discoveries are potentially transformational.
appear less attractive if it demonstrates the geology The Simandou iron ore project in Guinea and iron
is less favorable for discoveries. ore and petroleum projects in Liberia could generate
average annual revenues of US$1.6 billion in each
The government has a duty to collect, store and analyze country, respectively representing 31 percent and
technical information arising from all exploration 147 percent of 2011 GDP.
operations carried out under its jurisdiction. This Africa Progress Panel, 2013
information is key to building the government’s
Well-designed auctions are preferable since Fourth, the government should try to ensure there is
competitive bidding should secure greater value no need to negotiate terms after companies have bid.
for the country and auctions can also help overcome This is helped by clear and transparent bid terms, and
information deficits that the government may model contracts.
have relative to international companies. Auctions
are also inherently more transparent than direct Finally, the government should undertake careful
negotiations, helping to mitigate the risk of assessments of the value of services or infrastructure
inappropriate companies or individuals receiving given as part of barter deals in exchange for extraction
exploration and extraction rights. rights. Where there is significant uncertainty, the
government should consider avoiding such deals.
Auctions’ success typically depends on a minimum Barter deals are often inherently opaque and may
of three bidders. Without sufficient interest provide opportunities for corruption.
from bidders, opting for a competitive allocation
process is not likely to be a suitable choice by
Ensure development plans conform to
the government. This may be the case if there is
government objectives and approve them
insufficient geological information—more likely
in a timely manner
in mineral than petroleum licensing. Where
there is insufficient competition for auctions, After commercial discovery and appraisal work,
the government should use a licensing round license holders will draw up development plans
with strict minimum technical criteria instead. for the exploitation of the discovery for approval by
the government and its agencies, and in some cases,
Regardless of the method used, there are a number the legislature. The government should ensure that
of principles that can strengthen the position of development plans are cost effective, consistent
the government in the allocation process. The with its policy objectives regarding resource
government should disclose information on depletion; use of infrastructure, health, safety and
allocation procedures; the contracts awarded, environment; and local content and employment
including fiscal and tax terms; the beneficial provisions. In addition, plans should provide for the
ownership of all license holders; the agreed work eventual abandonment of the project site, including
program; and financial commitments and any fiscal clean-up and restoration.
terms particular to the license.
The government should review plans thoroughly,
The government should pre-qualify bidding in a manner that is timely and consistent with any
companies to ensure that potential license-holders contractual obligations. This requires sufficient
have sufficient technical and financial capacity technical expertise at the right time, and an efficient
to execute a resource development program, and approval process characterized by coordination
sufficient experience in managing the environmental between the relevant ministries and agencies.
Natural resource development may provide exhibit the following two basic components: a royalty
employment and other returns, but its principal or other production-based charge that provides
benefit is the generation of government revenue to a minimum flow of revenue to the state whenever
support development and the wellbeing of citizens. production occurs; and a mechanism for capturing
Realizing these revenues requires a well-designed fiscal a share of profits and remaining rents.
system that takes into account the nature of extractive
resources, the considerable uncertainties inherent in While fiscal regimes may vary in terminology and
their exploitation, and the capacities of the government. legal form, most include these two elements. In
“tax-and-royalty” systems used in both mining and
Important characteristics of the sector include: petroleum, the investor makes a royalty payment to the
government based on output and is subject to ordinary
• The existence of substantial “rents,” which are income taxation on its profits. Under “production-
returns beyond those which would be required sharing” arrangements—principally used in petroleum
to recover costs and to give an investor the but potentially applicable to mining—a portion of
minimum rate of return required to invest the output is reserved for the investor or contractor
• Exhaustibility of resource deposits for recovery of its costs (“cost oil”) and the remainder
• Asymmetry of information between the (“profit oil”) is split between the investor and the
government and potential investors government. Service contracts are a further alternative
• High upfront costs and significant periods of to tax-and-royalty and production-sharing systems.
exploitation, requiring a long-term investment Here governments may grant exploitation rights to
in the presence of significant market, geological, state-owned firms, which in turn may contract for
and political uncertainties services from third parties. Systems may also be mixed.
• Challenging accounting and audit environment
for fiscal control (regardless of whether investors Despite the various contract forms and nomenclature,
are private or state actors) each of these structures may incorporate profit- and
production-based elements, and each can be designed
Against this background, governments should to achieve similar returns. The government’s task is
design fiscal systems that provide strong returns for to therefore ensure that the risks and timing of revenue
their resources and a reasonable timeline for receipts, receipts are shared between the state and investor(s)
and take account of uncertainty and the trade-off of in a way that is consistent with the government’s
risk and reward—while at the same time attracting development strategy and maximizes overall value
the necessary capital and investment for development to citizens.
of the resource when such development is warranted.
In addition, countries must account for individual
Use royalties
legal traditions and constitutional constraints that may
dictate a particular pattern of ownership and taxation. A royalty, or its production-sharing equivalent, assures
the government of a revenue stream from the beginning
of production, and also ensures that the country
Consider the function, not the form, of the
receives some minimum payment for the resource
tax regime
and to cover the social costs of extracting it. If a project
These imperatives suggest that the development of cannot sustain a reasonable royalty to cover these costs,
a good fiscal regime in developing countries should it is highly unlikely that the project is a good deal as the
Royalties require accurate measurement of output, Profits may include a significant amount of rent in
well-defined timing rules, and good measures of a high-value project. The government may consider
market value. Royalties that allow production cost a supplemental rent tax, or a tax surcharge on cash
deductions are profit taxes by another name. The flow, that transfers a higher share of profits to the
measurement of market value is greatly facilitated by government than the ordinary income tax when
tying the royalty to some international and publicly profit rates are high. The government can design a
quoted price when such prices are available, rather production-sharing system to provide the same result
than more traditional computations which “net back” by increasing the government’s share of profit oil based
the value to the point of production. on some measure of the project’s overall profitability.
Resource projects can incur significant environmental ownership rights to sub-soil wealth, and assign the
and social costs that are often borne disproportionately rights to subsequent revenues. While sub-soil wealth
by those in the vicinity of the extraction. However, is usually, but not always, owned by the state on behalf
extractive projects also have the potential to generate of all the citizens of a country, local communities
benefits for local communities through employment may own, or at least rely upon, land, water and other
and the demand for goods and services, at least while natural assets affected by extraction. This includes
operations continue. communities that are not necessarily local to the
project site but that rely on affected natural settings
Resource management requires minimizing the such as rivers and coastlines. The government should
costs for affected communities, while enhancing the appropriately remediate impacted areas in a swift,
benefits. Where these costs cannot be eliminated, the credible and transparent manner compatible with
government should arrange adequate compensation accepted human rights standards.
for those affected. As a general rule, the aim of
compensation should be to improve the livelihoods Government failure to provide reasonable
of those most adversely affected by extraction. compensation as well as equitable participation in
national benefits can give rise to citizens’ frustration,
disruption of extractive projects, or even conflict. It
Involve the local community in decision making
can also increase budgetary costs in the form of later
and assessment
welfare support for vulnerable people within affected
Local communities, local governments and the wider communities. However, the government should avoid
public should be involved in project processes prior awarding a greater proportion of state revenues (beyond
to project development. Efforts taken to inform and that required to compensate for adverse impacts) to
involve the public in decisions about the overall vision resource-rich regions than to other regions, unless there
for a nation’s resources must be presented objectively are specific national legacy commitments such as those
by independent researchers. Involving members of to indigenous peoples or historically neglected areas.
the public helps them to understand how they will be {See also Precept 7 on revenue allocation.}
affected, plan for the pending changes, and contribute
local knowledge to the design of mitigation and
Measure and mitigate the negative effects
enhancement strategies. Not doing so risks antagonism
of extraction
and possible conflict.
The government should identify potential negative
However, it is important to recognize that there effects before granting specific extraction rights, so as
may be differences between the interests of the to ascertain whether the country will get a good deal
local population and the country as a whole. Where from extraction. In some cases it may be appropriate
a decision is made to realize greater benefits for to defer operations until governance or technology
the rest of the country to the detriment of local improves, or until the impact can be better assessed.
groups, government should ensure these groups {See also Precept 1 on public participation in decision
are remediated. {See also Precept 1 on making the making, and Precept 3 on allocating rights.}
decision to extract part of the national strategy.}
If the government does grant rights, it should plan to
mitigate the adverse consequences of extraction. In
Establish and define ownership rights
particular, the government should require companies
The government, in agreement with citizens at both to present, and obtain approval for, contingency plans
the local and national levels, should clearly establish in cases of emergency. These contingencies should
The government is responsible for setting and enforcing Mining projects in particular present potential training
environmental standards (preferably in compliance and direct employment opportunities for local workers.
with international standards such as the Equator Even in cases in which the local labor force lacks the
Principles), while the extractive company is usually in skills to effectively participate directly, there is likely
the best position to mitigate environmental damage. to be demand from extractive industry workers for
Companies may have only weak incentives to consider local goods and services, particularly in catering, hotels
the environmental consequences of operations, unless and other service industries. The government should
the government makes it a condition of awarding the consider how to support local efforts and encourage
concession, with penalties attached. The government extractive companies to use such services.
should ensure that either it or the company sets
aside funds for remediation, as the company may Extraction projects may also require substantial
leave or sell to another party when projects become infrastructure which can provide significant benefits in
unprofitable, which may be long before the official regions where the infrastructure is built. To enhance these
project period ends. Independent contractors, acquired benefits, the government, in discussion with companies,
on a competitive basis, can be hired to undertake should consider making infrastructure open to multiple
environmental operations such as reclamation. users. It is important, however, to make this decision
before the design stage, and with the participation of
The security arrangements around projects can the private sector. {See also Precept 9 on infrastructure
give rise to human rights concerns when private or development.}
state security forces use excessive force. Operations
should include strong safeguards and legal recourse
Communicate with members of local
mechanisms in cases of human rights violations.
government and strengthen their capacity
Artisanal mining has a poor reputation for health Local governments often play an important role in
and safety, and for the impact it has on the local managing the impacts of the extractive industries. Weak
environment. However, the informal industry also local government can be a bottleneck to service provision
generates income for those living in poverty. The and the mitigation of damaged from extractive projects.
government should seek to formalize and regulate the If communities are poorly served by their governments
industry, to mitigate the negatives of artisanal mining this may create tensions which threaten resource projects.
while preserving or improving the poverty-alleviating
benefits. To achieve this, the government may consider Enhancing the capacity of local government is a useful
cooperatives and other community-based solutions, way for companies (as well as donors and civil society)
while also encouraging the overall diversification of to promote engagement with local communities,
the economy in order create larger opportunities for understand the vision communities have for their future,
poverty reduction. and deliver projects that are mindful of this vision. In
cases where capacity is particularly poor, provision of
Finally, the government should separately and explicitly services by companies may be warranted in the short-
identify and factor into the decision-making process the to-medium term. {See also Precept 1 on assigning roles
social impact of extraction on vulnerable or marginalized to government institutions including local government,
groups of resource extraction since these groups are often and see Precepts 7 and 8 on impact of resource revenues
omitted from broader consideration. on local government.}
The creation of nationally owned resource companies companies facing shareholder and/or competitive
can be a key component in a country’s strategy pressures. If the government aspires to build national
to harness the development potential of its sub- capability, partnerships with foreign companies can
soil assets. Such entities may appeal for a number enable knowledge transfer.
of reasons: to capture rent for the state in cases
where taxation of private companies is considered Many of the benefits of private sector involvement
insufficient; to facilitate transfer of technology and rest on the assumption that the state can reasonably
business practices to local companies; and to influence tax profits and regulate the behavior of private
operational decision-making, such as support to companies. If this is not the case, national companies
the development of domestic linkages between may help enhance government expertise, acting
the extractive sector and other industries. Each as “windows to the industry.” A national company
of these objectives can be appropriate in different can channel technical insight and information to
country contexts—but not necessarily at the same government agencies, and foster talent to supply
time—and may involve trade-offs. Furthermore, these governance functions. {See also Precept 4
the appropriate roles for a national resource company on taxation.}
may change as the extractive sector and government
institutions develop. National companies can also support the growth
of domestic industry. Private and foreign extractive
Despite these opportunities, national companies companies may benefit the national economy by
can pose a risk to a country if assigned inappropriate sourcing local content and managing local social
roles and governed poorly. At the extreme these demands, but their operational decisions are based on
companies can destroy rather than create value for their underlying profit motive—in this way, they may
citizens, a phenomenon of which there are many ignore the wider non-tax benefits (and costs) of extraction
historical examples. for the country. Regulation can address this by requiring
private companies to promote local content, for instance.
However, the government can direct a national company
Decide on an operational role for the
to promote these wider economic goals, by fostering
national company
domestic supply chains and pools of local talent, although
Creating a national company to undertake these such strategies may reduce the commercial efficiency
operational roles (such as exploration, development of the nationally owned company. In the long run, the
and production either by itself or within a joint government should support and require the global
venture partnership) can be beneficial if there is competitiveness of local suppliers over time. Otherwise,
sufficient capability and good governance within a low efficiency will reduce available revenues for the
country. However, where either of these is lacking, government.
national companies, through inefficiency or the
self-interest of executives, may limit or even drain
Consider the governance roles of the
government revenues. Furthermore, there are
national company
opportunity costs when investing state capital in a
national company, at the expense of other national As with operational roles, the government must assign
objectives such as economic diversification. {See the governance roles of policymaking and regulation,
also Precept 1 on structuring rules and institutions.} such as tax collection, assignment of operating rights,
monitoring, and the management of cadastres. {See also
In cases where a national company cannot offer Precept 1 on assigning roles to government institutions.}
sufficient risk capital and expertise for certain
roles, authorities should consider foreign extractive
The government must decide how to allocate the large increase in domestic investment in the short term,
revenues from resource extraction. Possibilities causing inflation. Finally, conflict may arise if citizens
include but are not limited to: allocate revenues perceive that the benefits of resource extraction are
directly into national or sub-national budgets; use not distributed fairly. {See also Precept 8 on revenue
them for tax reductions, or transfer payments, such as volatility, and Precept 9 on enhancing the absorptive
welfare payments, subsidies or “resource dividends”; capacity of the economy.}
contribute to pension funds or natural resource funds;
capitalize lending institutions; or retain/allocate
Ensure equitable allocation for future
revenues to a national company.
generations
In making these choices, the government should To achieve the first objective, promotion of equity, the
consider two overriding objectives: promotion of government should decide how much of the revenue
equity, both between generations, and across society; should benefit citizens in the present, and how much
and efficient use of revenues to maximize welfare. to invest for future generations. This decision rests on
reasonable estimation of how much resource revenue
The nature of resource revenues complicates this will be available to spend or save, and on the growth
problem in four ways. First, non-renewable resource prospects of the country. If high growth takes place,
extraction is intrinsically unsustainable. The country present-day citizens are likely to be much poorer vis-
must plan for a time when commercial reserves are à-vis future generations; some immediate spending
depleted, or at least when the available revenue streams to improve the welfare of present-day citizens is
decline. This running down of a natural asset requires required. However, government should weigh this
actions to accumulate equivalent productive assets, consideration against the capacity of the economy
typically physical or human capital. Second, resource to absorb potentially large increases in spending.
revenues typically exhibit large booms as extraction In countries with slower expected rates of income
projects produce at full capacity, followed by long growth, there will likely to be a smaller gap between
declines as the reserve is depleted; so the government the incomes of current and future generations. In such
must make decisions about large amounts of money, cases, government should ensure that less revenue
relative to the overall size of the economy, in a short is consumed in the present, and more is invested to
span of time. This means that in most years the amount maintain equity between generations.
that the government should consume should be less
than it earns, so some form of saving is required. Third, In addition to more equitable distribution over
commodity prices and therefore resource revenues are time, some current expenditure of revenues may be
typically volatile on a year-to-year basis. This requires important to demonstrate effective public spending
policy instruments that ensure that short-term revenue and to cement public support for governments’
fluctuations do not translate into disruptive government long-term resource management plans. The advent
spending fluctuations. Fourth, revenue flowing into of resource wealth carries the danger that public
the economy can produce adverse macroeconomic expectations will become too high, and competing
responses. Large flows of money into the economy interest groups demand shares of the proceeds.
alongside a higher demand for non-tradable goods and Managing these expectations through open and
services can cause a deterioration of businesses that inclusive national planning, and communication of
produce goods for potential export, a phenomenon the facts, can limit the demands and subsequent over-
called “Dutch disease.” Also, a build-up of assets or spending. While some consumption may be warranted
expectations of future revenue streams can cause credit in poorer countries, often the default response from
bubbles and similar financial issues. In addition, the any political system is to consume as much of the
economy may lack the absorptive capacity to handle a revenues as possible: countries must protect the
MANAGING REVENUES / 25
rights of younger and future generations to benefit funds effectively, otherwise misappropriation can
from the country’s wealth. {See also Precept 3 on the occur. Furthermore, cash transfers may conflict with
importance of understanding the resource base, resource government objectives to use resource revenues to
depletion and ensuring revenue stream to inform this invest if citizens do not invest the cash themselves,
savings decision.} while in addition cash transfers reduce the funds
available for public sector projects. Further, authorities
An explicit fiscal rule dictating the amounts spent and ought to pay close attention to the absorptive capacity
saved each year by government can guide the long- of the economy. If businesses cannot suitably respond
term decision to save. To protect against government’s to additional demand created by cash transfers, the
temptation to renege on this rule, it is important that the transfers will merely cause domestic price inflation.
rule itself and the amounts spent and saved each year are
made public. Together with strong oversight from civil Subsidies are typically the least desirable method to
society and independent authorities, these governance distribute revenues, despite their widespread use
structures can help keep government to its decision. and popularity. Fuel subsidies in particular may be
demanded by members of the public as their right as
citizens of a resource-rich country. However, subsidies
Consider equity amongst today’s citizens
can spur wasteful consumption, smuggling, and the
In allocating revenues, the government should also development of parallel markets. When the domestic
consider equity amongst today’s citizens. This may commodity price is subsidized, high world prices
necessitate careful consideration (and intervention) mean a loss of export earnings and a high burden on
to balance the distributional equity of benefits government finances, undoing the benefits of higher
according to social group, gender and income level. resource revenues.
The government may wish to use resource revenues The central government should consider the social
to support those living in relative or absolute poverty. returns on regional investments, which may
The government can do so through a variety of necessitate a focus on specific regions, such as cities
channels (see below) and may need to balance the as engines of job creation and growth. Furthermore,
trade-offs between more efficient channels and those the central government should link revenue
that reach a greater number of targeted groups. distribution to the expenditure responsibilities of
local governments, and be pro-active in building
Since unconditional lump-sum transfers would benefit the capacity of local governments to manage these
the poor more relative to the rich, there may be some responsibilities.
justification for these direct transfers in countries with
high levels of poverty and credit constraints. Direct cash In some cases the government may consider distributing
transfers to people can help relieve household spending more revenues to communities near to extraction sites
bottlenecks, capacity constraints and individual credit than communities elsewhere in the country. Where
constraints. They may also generate public interest in groups disproportionately bear the costs of extraction—
how revenue is spent, thereby strengthening the desire to such as environmental damage or social disruption—
hold government to account. the government should actively seek to prevent or
MANAGING REVENUES / 27
PRECEPT 8
The government should smooth domestic spending
of revenues to account for revenue volatility.
Revenue volatility is often a leading concern more protection than corporate or excess profit taxes,
for countries dependent on extractive industries. for example. However, this protection is limited and
As future revenues are uncertain, government may come at a cost of lower revenues on average.
investment planning is difficult, with the risk of {See also Precept 4 on taxation.}
over-spending on poorly planned projects in boom
times and harsh spending cuts when prices or
Consider using hedging contracts
production fall. Further, the resulting volatility of
exchange rates, inflation, and government spending In some cases, governments may be able to insure
can cause businesses to spend in a manner that against downturns in revenues in the form of financial
exacerbates the volatility problem. contracts that allow governments to insure themselves
against commodity price uncertainty; these are called
The most reliable, long-term solution is to reduce “hedging contracts.” While this may be appropriate
revenue dependence on resource extraction. for insuring for short periods, longer-term protection
Diversifying the economy, particularly the tax base, can be expensive. There is a significant outlay
away from the extractive sector can ensure a supply of associated with even short-term hedging that yields
government revenues that is not tied to the fortunes a return only in the event of falling prices. This may
of one industry. Diversification is a long and difficult prove economically and politically costly for lower-
path that requires short-term stability. To manage income, resource-rich countries. Hedging, where
this interim process, governments have a range of used, is best deployed as part of a mixed portfolio
tools including the design of the extractive industry of other strategies.
tax regime, managing the flow of revenues in and out
of the budget, and decisions about which types of
Consider accumulating foreign assets, and
expenditure are more volatile than others. A suitable
borrowing in the short-term
strategy may involve a combination of these, along
with improvement in underlying institutions to ensure A third strategy is to form a fund with surplus
that the tools are effective in controlling government revenues to accumulate foreign assets in boom times,
spending, and shield the economy from macro and liquidate those assets (or borrow if these are
disturbances. insufficient) when revenues fall. The use of funds
for stabilization differs conceptually from savings
The government’s decisions are hampered by the funds with longer-term goals of storing wealth for
difficulty of knowing whether a change of commodity future generations, which may be a lower priority for
prices signals a temporary or enduring shift. If a price developing countries. In practice, a single fund may
change is temporary, government application of one perform both functions. {See also Precept 7 on long-
of these tools to manage volatility is suitable. If a price term savings objectives.}
change is more permanent, the government should
instead consider making an adjustment to its long-term Funds for stabilization should hold foreign assets
spending plan. This is no easy task, and government such as foreign government treasury bills, rather
decision makers should be cognizant of this uncertainty. than domestic assets such as shares in domestic
businesses, for three reasons. First, the funds should
insulate the country from the harmful effects of
Consider how the extractive industry tax regime
volatile expenditure. Investing them in the domestic
affects volatility
economy merely shifts expenditure off-budget,
To some extent, the design of the tax regime can thus failing to reduce overall expenditure volatility
influence how price volatility affects revenue volatility. in the country. Second, undertaking domestic
The use of fees and royalties provides somewhat expenditure from funds off-budget may lack the
MANAGING REVENUES / 29
Investing in sustainable
development
Using resource revenues to grow the domestic Small, low-income countries are often characterized
economy depends crucially on significant increases by small markets dominated by monopolies and
in private sector investment—from large-scale cartels, which can systematically elevate the price
infrastructure to smallholder farms yet, encouraging of capital and equipment, deterring investment.
sustained growth beyond resource extraction has Active policies to encourage new entrants can help to
been a problem for many resource-rich countries. dismantle these cartels. These policies might simplify
the process by which businesses are established,
First, without countervailing government action, or enlarge the market by integrating regionally and
large capital inflows may lead to an appreciation in the removing non-tariff impediments to region-wide
domestic currency, resulting in reduced competitiveness marketing of imported equipment.
and a deterioration of domestic manufacturing and
export sectors—a phenomenon known as “Dutch Two sectors merit special attention: construction
disease.” If such consequences are left unaddressed, and finance. In the construction sector, buildings
private investment in these export sectors may shrink. and other structures are likely to be an important
Furthermore, the cost of investing in other domestic investment for urbanizing countries. However,
sectors may rise. This can weaken economic growth and importing bulky construction materials such as
leave the economy more exposed to commodity price cement is prohibitively expensive, so businesses
volatility since the extractive industry becomes an even will be eager to source from domestic suppliers where
greater share of the economy. {See also Precepts 7 and 8 available. Small economies with previously low
on the impact of large revenue flows into an economy.} investment often have high unit costs of construction,
and a sharp increase in a demand for construction can
Second, to increase the growth impact of resource result in these costs rising further. Working through
revenues, public investment must respond to private the construction sector value chain and addressing
sector needs. This creates a key role for government bottlenecks, and dismantling cartels and monopolies
to increase the domestic economy’s capacity to in construction, can help to reduce these costs.
absorb resource revenues and leverage private sector
investment. Working in partnership with the private For those construction goods that cannot reasonably
sector is essential to the provision of complementary be produced domestically and must be imported,
economic inputs: for example, government spending a reduction of specific tariffs can be helpful. While
on schools and hospitals provides a more productive this may lead to a loss of customs revenue and
supply of workers for companies. protection for domestic suppliers, decision makers
should weigh this against the benefits of higher public
and private infrastructure investment.
Establish an enabling environment for private
investment
A progressive financial sector is also important.
The government should provide an enabling business As firms grow and look to increase their investment
environment without targeting any specific industry. in the domestic economy, they will encounter two
This includes reforms to improve the regulation financial constraints. First, investment requires upfront
of capital, land and labor markets; the provision of capital. Second, as a firm grows, planned output for
infrastructure and public goods; and social policies the year ahead will be higher than the sales achieved in
to raise the productivity of workers. In particular, the previous year, resulting in a shortfall in the funds
reducing bottlenecks in the economy can lower required to produce future output. Therefore, firms
private investment costs and improve the capacity will also require greater working capital financing.
of the economy to absorb further investment. For both of these reasons, demands for funds (and the
associated services) from the domestic financial sector
Private sector companies in extractive industry projects is appropriate in the country, governments may work
should take steps that go beyond minimum legal with companies to provide the long-term commitments
requirements to respect the highest environmental, social necessary to spur investment in local industry. Company
and human rights standards; avoid corruption; contribute cooperation may also come in the form of training
to sustainable development outcomes; and make public and and employment initiatives to improve the quality of
accessible relevant project information. local suppliers. Such partnerships are vital for reducing
discord and strengthening capacity. {See also Precept 10
Companies should commit to preventing, reducing on economic development from local content. }
and remediating any potential negative environmental,
social or human rights impacts of their activities; and Where companies provide ancillary goods or
they should be accountable to the host government services such as rail or road infrastructure, which
for these commitments. They should also require their are not directly related to the extractive activity
partners, contractors and subcontractors make similar or to mitigating its impacts, they should do so in a
commitments. These include the assessment and manner consistent with the operating standards of
management of potential local and regional impacts of the extractive project and ensure the maintenance
the project, including impacts uniquely experienced by or responsible handover of such goods and services
people of various races, ethnicities, genders, ages or other beyond the life cycle of the project.
such traits. Both governments and companies should fully
account for the rights of indigenous peoples in particular. With respect to contractual stability, government
Where free, prior and informed consent to extraction is assurances to companies should be limited to non-
required by law, companies must obtain consent ahead discriminatory treatment clauses. Companies should
of any work taking place on indigenous lands, and should not ask for, expect, or accept provisions for exemptions
furthermore meaningfully engage and consult with or compensation for changes in the statutory or
local communities that may be significantly affected by regulatory framework related to human rights,
extractive operations. Companies should ensure that funds environmental controls, health and safety, and labor.
are available for these commitments throughout the life
cycle of the project, planning ahead for periods of low or
Provide relevant project information
no revenue, such as a when the extraction project closes.
Companies should support and comply with public
disclosure requirements. These include the contracts
Abstain from corrupt practices
between government and companies, which
Multinational companies should act in accordance with should clearly state the financial terms in an easily
national law, and international agreements and norms, understandable manner. The only justifiable exception
which increasingly recognize bribery of government for time-bound confidentiality relates to businesses’
officials as a crime. Companies should have clear internal proprietary information, which could directly affect
policies relating to corruption, including procedures and the position of one of the parties in a concurrent or
controls that prevent and punish corrupt practices by imminent negotiation. Companies should make readily
employees, contractors, subcontractors or their agents. available any reports regarding potential impacts on
{See also Precept 2 on accountability.} people, their internationally protected human rights,
or the environment, including relevant assessment
data, and prevention, mitigation and remediation plans.
Contribute to sustainable development
Governments and companies should work together
outcomes
to ensure that information is available in a timely,
Companies should support the host state’s efforts to accessible and usable manner. {See also Precept 2 on
maximize potential benefits arising from extractive transparency.}
activities. For example, if local content development
Governments and international organizations that Ensure that extractive industry projects comply
finance, or influence, the policies affecting extractive with internationally recognized human rights
industries play a vital role in supporting the decisions standards
made by resource-rich governments. In addition to
national regulators of countries in which extractive Governments should clearly set the expectation
companies are domiciled, such international that all companies in their jurisdiction respect
organizations include, but are not limited to the human rights—at a minimum those contained in
World Bank and International Monetary Fund the International Bill of Human Rights and the
(and their respective lending agencies); aid donor International Labour Organization’s Fundamental
governments; the Organization for Economic Principles and Rights at Work.
Co-operation and Development; United Nations
agencies; export credit agencies; organizations such as Under the UN Guiding Principles for Business and
the African Union, the European Union, G8 and G20; Human Rights (UNGPs), international organizations
and the global finance community. International civil should promote and support host states in fulfilling
society also plays a key role in maintaining pressure their duty to protect human rights and ensure company
on these actors to improve their policies as well as compliance with the obligation to respect human rights
in the monitoring of states and companies. {See also in the context of extractive industry projects.
Precept 2 on disclosure requirements.}
Actors that support the extractive sector financially
Following are the key areas in which the international or through guarantees should require due diligence
community can enhance the governance of resource procedures, consistent with the UNGPs that prevent
extraction around the world. potential and actual human rights abuses resulting from
extractive projects. They should pay special attention
to differential effects determined by gender, race, age
Promote, monitor and enforce
and other factors.
public disclosure requirements of the
extractive industry
Ensure that extractive projects comply with
Governments, international organizations and other
environmental and social standards
actors can improve transparency by establishing
and enforcing a set of international standards for The extractive industries can have significant negative
financial and accounting records, as well by disclosing impacts on both the living standards of local people
contractual terms. Public disclosure of information as well as on the local and global environment.
throughout an extractive project, from exploration International organizations should set, facilitate,
licensing to project clean-up, is a vital mechanism for incentivize or require appropriate project operating
helping citizens and investors to hold governments standards that limit such effects, including the
and companies to account. In addition to legislating assessment of impacts. Export credit agencies, as
for global mandatory reporting requirements, these well as public and private lenders, should require
organizations should support the implementation
of the Extractive Industries Transparency Initiative
in resource-rich developing countries as a Illicit financial flows are estimated to cost developing
complementary, voluntary standard that promotes countries over US$1 trillion annually—US$10 for every
dialogue among stakeholders at the national and US$1 received in aid.
international levels. Dev Kar and Devon Cartwright-Smith, 2009
Escribano, Alvaro, J. Luis Guasch, and Jorge Pena. “Assessing the impact
of infrastructure quality on firm productivity in Africa: cross-country
comparisons based on investment climate surveys from 1999 to 2005.”
World Bank Policy Research Working Paper Series, 2010.
Ernesto Zedillo (chair) Abdulatif Al-Hamad Luisa Diogo Mo Ibrahim Shengman Zhang
ADDITIONAL CONTRIBUTORS
Philip Daniel (International Jon Hobbs (World Wide Fund Staff and members of the
Monetary Fund) for Nature) International Council on Mining
Ana Maria Esteves (Centre for Social Valérie Marcel (Chatham House) and Metals
Responsibility in Mining) Martin Skancke (Skancke Consulting)
Martin Abregu (Ford Foundation) Sam Bickersteth (UK Department for Giulio Carini (Global Witness)
Chris Adam (Oxford Centre for the International Development) Chris Carrol (Johns Hopkins
Analysis of Resource Rich Economies Charles Bland (BG Group) University)
Ingilab Ahmadov (Khazar University) Kevin Bohrer (Hewlett Foundation) Almira Cemmell (Global Witness)
Jane Allen (Publish What You Pay) Bonn International Center Jean Pierre Chabot (Explorim)
Clive Armstrong (International for Conversion Albino Chol Thiik (Government
Finance Corporation) Vicky Bowman (Rio Tinto) of South Sudan)
Mahamudu Bawumia (African Lucas Bretschger (Center of Economic Aidan Davy (International Council
Development Bank) Research at ETH Zurich) on Mining and Metals)
Hany Besada (North-South Institute) Silvio Caccia Bava (Polis Institute)
Alex Bescoby (Critical Resource) Peter Cameron (University of Dundee)
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Shanta Devarajan (World Bank) Rosalind Kainyah (Tullow Oil) Geoffrey Peters (Freshfields Bruckhaus
Coumba Doucoure (African Kai Kaiser (World Bank) Deringer)
Development Bank) Massoud Karshenas (School of Russell Pickard (Open Society
Jamie Drummond (ONE) Oriental and African Studies) Foundation)
Sophie Durham (Critical Resource) Louis Kasekende (Bank of Uganda) Joseph Powell (ONE)
Andrew Edge (AusAid) William Kingsmill (Policy Practice) Eddie Rich (EITI)
Richard Efil Simplicio (Government Martina Kirchberger (University Belinda Richards (Government
of South Sudan) of Oxford) of Liberia)
Cyril Elbers (Deloitte) Amsara Klein (Sciences Po) Alan Roe (Oxford Policy
Wiesje Elfferich (Ministry of Foreign Lars Koch (Independent Bonn Management)
Affairs, Netherlands) International School, IBIS) Keith Ruddock (Shell)
Olivur Ellefsen (Simprentis) Gregory Kostyrsky (Foreign Affairs Ridwan Rusli (University of
Hugh Elliott (Anglo American) and International Trade Canada) Luxembourg)
Environmental Defence Council Cindy Kroon (World Bank) Radhika Sarin (Publish What You Pay)
Mark Essex (Oxford Policy Valeriy Kryukov (Higher School Paul Segal (University of Sussex)
Management) of Economics, Moscow) Minouche Shafik (UK Department
Rob Foulkes (Critical Resource) Per Kurowski (Petropolitan) For International Development)
Peter Frankental (Amnesty Andrew Lawson (Fiscus) Clare Short (Extractive Industries
International) Terje Lind (Government of Norway) Transparency Initiative)
Steven Fries (Shell) Daniel Litvin (Critical Resource) Bill Singleton (Canadian International
Nicholas Garett (Resource Consulting Sonya Maldar (Catholic Aid for Development Agency)
Service) Overseas Development) Ricardo Soares de Oliveira (University
Ian Gary (Oxfam) Adeel Malik (University of Oxford) of Oxford)
Christopher Goss (International Richard Manning (Centre for the Michael Stanley (World Bank)
Finance Corporation) Study of African Economies) John Strongman (World Bank)
Elodie Grant-Goodey (BP) John Metzger (Global Water James Suzman (De Beers)
Sachin Gupta (Oxford Policy Partnership) Sophia Swire (Global Witness)
Management) Jonas Moberg (Extractive Industries Martin Tisne (Transparency and
Thorvaldur Gylfason (University Transparency Initiative) Accountability Initiative)
of Iceland) Simon Moss (Global Poverty Project) Purevdorj Vaanchig (World Economic
Dan Haglund (Oxford Policy Hudson Mtegha (The University of the Forum)
Management) Witwatersrand) Justin Van Rhyn (Adam Smith
Alan Hall (Global Water Partnership) Geraldine Murphy (UK Department International)
James Hamilton (Duke University) for International Development) Marinke van Riet (Publish What
Shelly Han (US Commission on Auwal (Rafsanjani) Musa (Civil You Pay)
Security and Cooperation in Europe) Society Legislative Advocacy Centre) Katie Watson (Synergy Global
Sophia Harding (Publish What Fiona Napier (Global Witness) Consulting)
You Pay) Jacob Nell (Morgan Stanley) Viviane Weitzner (North-South
Ken Henshaw (Social Action) Steve Ngo (Ministry of Energy & Institute)
Richard Henwood (Secours Mineral Resources, Indonesia) Leif Wenar (Kings College London)
Catholique) Petter Nore (Norwegian Agency for John West (United Nations
Adrian Hewitt (Overseas Development Cooperation, NORAD) Development Programme
Development Institute) Nick Norton (Richmond Analytics) Shamil Yenikeyeff (University
Cesar Hidalgo (Harvard University) Norway Ministry of Finance of Oxford)
Trond Hjorungdal (Norwegian Agency Kirsty Nowlan (World Vision
for Development Cooperation) International)
Joe Ingram (North-South Institute) Chris Nurse (Hart Group)
Kareem Ismail (International Ed O’Keefe (Synergy Global
Monetary Fund) Consulting)
Michael Jarvis (World Bank) Daniel Painter (UK Department for
Claude Kabemba (Southern Africa International Development)
Resource Watch) Craig Pask (Wood Mackenzie)
ALL CURRENT AND FORMER NATURAL RESOURCE GOVERNANCE INSTITUTE STAFF
In particular:
WWW.RESOURCEGOVERNANCE.ORG
WWW.NATURALRESOURCECHARTER.ORG
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