Reinvesting in mining communities seems like a no-brainer. It’s not.

6 September 2016
Comment

Maps of the Brexit referendum result across different UK constituencies show fundamental differences in outlook between urban and provincial citizens.

Look closer, and you also see significant differences in the level of support for Brexit between different provincial areas. For example, there was greater support for Brexit – more than 55% – in areas where coal mines were shut down between 1980 and 2010 (see here and here for a comparison).

From the UK to Peru to Mongolia, national political outcomes have been influenced by disaffected mining communities unhappy with the impacts of under-investment.

Given the potential political ramifications of underinvestment in mining communities, why don't governments routinely reinvest revenues from extraction?


Three pitfalls of reinvesting mining revenues in producing areas
 

  1. Revenues from non-renewable resources are notoriously volatile. Reinvesting those revenues in producing areas can accentuate boom and bust cycles there, which can be difficult for governments to manage. And if investment only happens during the lifecycle of the mine, it can increase the shock when the industry declines.
     
  2. Poorly designed revenue-sharing regimes can actually exacerbate, rather than mitigate, these problems. For example, when commodity prices rose between 2005 and 2008, some local leaders in Peruvian mining regions tried to start violent protests in order to get more money from the national government and control over municipalities where mines were located.
     
  3. Social services provided by subnational governments do not necessarily improve when they receive more revenue. In Brazil, for example, municipalities that received large oil royalty windfalls suffered a significant decrease in the efficiency of social service provision.

 

So how can governments avoid the pitfalls described above?

Forthcoming research from the Natural Resource Governance Institute and UNDP found that revenue-sharing programmes have the greatest chance of success when national policy makers agree on what the programme’s objectives are, and ensure that the arrangements address these.

If the objective is increased social spending, it’s important to make sure that there is a public body with capacity to take on that responsibility. Take Bojonegoro in Indonesia. As a subnational authority governing a population of more than one million and assigned with health and education responsibilities, it’s better able to absorb an increase in revenues (or cope with a revenue decline) than a Kyrgyz aiyl aimak, a subnational government unit with a population of less than 10,000 people and few expenditure responsibilities.

If the aim is decentralising revenue collection to subnational governments, this also has to be done carefully. Calculation, collection and monitoring of property taxes and license fees require less expertise and time at the subnational level than the management of profit taxes. Zambia’s system of collecting property taxes based on the land area of the extraction sites at the district level, for example, is easier to calculate and track than the equity profits that subnational governments can elect to receive in Indonesia.

We’ll be discussing these issues and more at an event this Friday on the governance of extractives at the local level – sign up to attend or watch online, or follow on Twitter via the hashtag #extractives.

 

Thanks to Varsha Venogopal for her contributions to this blog.