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FEATURE STORY

The Tricky Business of Administering Natural Resource Revenues

August 7, 2014

STORY HIGHLIGHTS
  • Handbook brings attention to the unique complexities of Natural Resource Revenue Administration
  • Focus on natural resource revenue administration, rather than fiscal regimes, is much needed given the lack of research in this area
  • Jointly developed by the International Monetary Fund and the World Bank Group

The International Monetary Fund and the World Bank recently released a first of its kind joint publication that focuses much needed attention on the administration of revenues from natural resources.  The publication entitled Administering Fiscal Regimes for the Extractive Industries: A Handbook fills a void that previously was neglected.  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. 

“This joint 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.

The publication focuses attention on effectively administering revenues from natural resources. It provides policymakers and officials in developing and emerging market countries with practical guidelines to establish a robust institutional framework, organization and procedures for administering natural resource revenue. It also 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. Lastly, it provides recommendations on how developing countries can strengthen their managerial and technical capacity to administer these revenues.

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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. Close Quotes

Charles Feinstein
Director, Energy and Extractives Global Practice, World Bank Group

The Handbook 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.  To overcome resource obstacles, the Handbook also recommends tactics such as training, performance management and recruitment practices that can help the government retain the professionals needed.

The organization 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 centralization 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 centralization 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 others factors.  This long list of challenges and the vast revenues that the extractive industries generate give rise to major governance challenges, especially in a context of weak institutional capacities.  

The complexities and perceived difficulties of extractive industries revenue administration mean they can get less attention than they deserve. Tax-related administrative reforms and technical assistance to date have focused more on general rather than extractive industries-specific administration—even where EI resources often provide the higher proportion of government revenue. For example, in countries like Nigeria where 75% of total government revenues are hydrocarbon related, extra attention to the complexities of hydrocarbon tax administration is necessary for improved internal revenue mobilization.

“Improved administration of revenue is a key component of effective governance of the extractive industries,” said Charles 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.”