Download sierra leone

NATURAL RESOURCE
REPORT ON:
WATCH
SIERRA LEONE
FEBRUARY 2014
INTRODUCTION
Many developing countries are endowed with abundant natural resources such as oil, gas and minerals. Extraction of these
non-renewable resources presents a unique opportunity for rapid
economic growth and poverty reduction, but few countries have actually managed to convert the endowment of natural resources into
sustained and inclusive growth.
The Natural Resource Watch series examines the policy and economic trends of the extractive sector in a number of natural resource rich developing countries. The purpose is to make data
from the extractive sector more accessible to all citizens, which is
a pre-requisite for open dialogue on how extraction of natural resources can contribute to an equitable development path.
SIERRA LEONE – OVERVIEW
From 1991 to 2002, a civil war raged in Sierra Leone, resulting in
tens of thousands of dead, several thousands dismembered, and
millions of refugees, both internal and those fleeing to neighbouring countries. Diamonds played a significant part in fuelling the
war, as they were used especially by the rebels to buy weapons –
hence the expression “blood diamonds”.
Since the war, Sierra Leone has been recovering, and the GDP has
risen from US$ 1.43 billion in 2003 to almost US$ 3.8 billion in 20121.
However, Sierra Leone is still one of the world’s poorest countries
and was ranked 177 out of 187 on UNDP’s 2013 Human Development Index. Life expectancy is only 48 years, and over 50% of the
population lives in extreme poverty.
This stands in glaring contrast to the country’s vast natural resources. According to official numbers, from 2009 to 2012 Sierra Leone exported over US$ 1.2 billion2 in natural resources, comprising
around 70% of the country’s total exports. In this same period, the
four main minerals exported were diamonds, iron ore, bauxite and
rutile, complemented by the export of smaller quantities of gold
and zircom. Moreover, potential oil and gas fields are currently
being explored, which could make the extractive sector even more
important to Sierra Leone’s economy and boost opportunities to
finance social development.
1
SIERRA
LEONE
AT A GLANCE
Total value of mineral exports
2009-2012:
US$ 1.283 billion
The mining sector’s average
annual contribution to GDP
2009-2012:
8.3 %
Government revenue from natural resource exports in 2011:
11%
Sources: Ministry of Finance and Economic
Development, Statistics Sierra Leone and SLEITI
NATURAL RESOURCE
WATCH
VALUE OF MINERAL EXPORTS
FROM SIERRA LEONE 2006-2012
400
350
300
MIO. US $
1
250
DIAMONDS
200
BAUXITE
150
RUTILE
100
IRON ORE
Source:
Statistics Sierra Leone
and Bank of Sierra Leone3
50
0
2006
2007
2008
2009
2010
2011
2012
THE INCREASING IMPORTANCE OF IRON ORE
The extractive sector in Sierra Leone is currently at a crossroads,
as large parts of the sector are moving from exploration to actual
extraction of minerals.
Diamonds have historically been the main natural resource export
in Sierra Leone since the first diamonds were extracted in the early
1930s. However, since iron ore production began in 2011, it is clear
that the extraction of this resource will add substantial value to the
Sierra Leonean economy.
In 2012, investments and production from the two multinational
companies African Minerals and London Mining – both extracting
iron ore – were main contributors to economic growth of almost
20%4. This was one of the highest growth rates in the world, and the
value of the iron ore exported in this year was over US$ 357 million –
almost half of the total value of all natural resource exports.
It is expected that iron ore production will continue to be a significant contributor to economic growth. The government expects GDP
to grow by an average annual rate of 11.3% until 2016, when iron ore
production alone would account for 4.8 percentage points of this
growth.
The increasing importance of iron ore is illustrated in Figure 2. It
demonstrates that royalties from diamond and gold are expected to
double from 2012-2016, whereas royalties from iron ore extraction
are estimated to increase by more than 4 times in the same period.
If this government projection is correct, it would mean that royalties
from iron ore generate over three times more revenues than gold
and diamonds combined.
2
INCOME
FROM
ROYALTIES
Royalties are a tax paid to the government by extractive companies,
based on the value of production.
Total income from royalties in
2010:
US$ 1,57 million
Total projected income from
royalties in 2016:
US$ 83.68 million
2
DISTRIBUTION OF GOVERNMENT REVENUE
FROM THE EXTRACTIVE INDUSTRY IN 2011-2016
70
60
50
40
DIAMONDS AND GOLD
IRON ORE
MIO. US $
30
20
Source: Sierra Leone Government budget profile
2011-2015 and 2012-20165.
2011-2012 reflects actual income, 2013 is an estimate,
and 2014-2016 are projections.
10
0
2011
2012
2013
2014
2015
2016
OIL PROSPECTS
Oil discoveries off the coast of Sierra Leone could boost the importance of the extractive sector and become an economic game
changer for Sierra Leone.
The government estimates that production could start in 2017,6 but
there is uncertainty about the size of the oil resources and whether
extraction is financially viable. Early estimates range from 500 to
700 million barrels7 of oil and preliminary drilling indicates that the
oil is of high quality8.
The prospects of rapid development in the extraction of oil and iron ore
in Sierra Leone may reduce the historical dependency on diamonds,
but would make the country even more dependent on the exporting
of natural resources. Though oil discoveries produce an outlook of
potential growth and social development, it should be emphasized
that the discovery of oil have tended to impede rather than further inclusive and sustained growth in many oil-rich developing countries9.
GOVERNMENT REVENUE FROM THE EXTRACTIVE SECTOR
According to the third report from SLEITI (Sierra Leone Extractive
Industries Transparency Initiative) for 2011, revenue from the extractive sector earned by the government of Sierra Leone in 2011 was
US$ 27.6 million10, corresponding to around 11% of total natural
resource exports.
Compared to previous years, the government is now capturing
more revenue and a higher percentage of the value of mineral exports than in previous years (where the average from 2006 to 2010
was 4.22%). However, as analysed in the next section, more than
50% of the revenue comes from the signing of new oil exploration
licenses and is not recurrent government revenue.
3
NATURAL RESOURCE
WATCH
3
GOVERNMENT REVENUE
FROM THE EXTRACTIVE SECTOR
30
20
20
15
MIO. US $
10
5
Source: Third SLEITI reconciliation report p.7
0
2006
2007
2008
2009
2010
2011
WHAT GENERATES GOVERNMENT REVENUES?
Examining total revenue from the extractive sector uncovers how
different taxes, duties, royalties and fees contribute to total government revenues from the extractive sector. Analysing revenue sources in 2011 demonstrates that the sudden revenue increase mainly
derives from the so-called “bonus signature payments” paid by oil
companies to the government when a license is granted, and not
from recurrent tax and royalty payments. Though these are oneoff payments, they illustrate how important the oil industry can become to the Sierra Leonean ecoomy in the future.
EXPORT DUTIES
ROYALTY
MINING LEASE
EXPLORATION LICENCE
CORPORATE TAX
SIGNATURE BONUS PAYMENT(OIL)
OTHER
4
DISTRIBUTION OF
GOVERNMENT REVENUE
FROM THE EXTRACTIVE
INDUSTRY IN 2011
11,45%
11,14%
7,38%
6,05%
2,08%
50,32%
11,13%
IMPLICATIONS OF TAX EXEMPTIONS
It seems reasonable to believe that the importance of the extractive sector will significantly increase in the years to come, especially
when the extraction of iron ore and potential oil drilling is considered. The extraction of oil and minerals could produce resources for
social development, but it will require adequate taxation institutions
and regimes to collect and redistribute taxes.
The report ‘Losing Out – Sierra Leone’s Massive Revenue Losses
From Tax Incentives’ illustrates that Sierra Leone has granted significant tax exemptions to the larger mining companies operating
in the country11.
Figure 5 illustrates that tax exemptions granted in 2011 almost
matched the total domestic government revenue collected, and
was significantly higher than total development aid to Sierra Leone.
4
GST AND
CUSTOMS
EXEMPTIONS
From 2010 to 2012, tax
exemptions on Goods and
Services Tax (value-added tax)
and customs duties for the big
mining companies cost the
Sierra Leonean state
US$ 597.6 million, or 57.7 %
of total domestic revenue
collected or 140% of international aid to Sierra Leone in
the same period.
GST AND CUSTOMS EXEMPTIONS TO
THE BIG MINING COMPANIES
500
450
400
350
300
GST AND CUSTOMS EXEMTIONS
250
200
GOVERNMENT TOTAL DOMESTIC
REVENUE (EXCL ALD)
150
MIO. US $
5
INTERNATIONAL ALD TO
SIERRA LEONE
100
50
Source: Calculation from Budget Advocacy Network
and government budget profiles 2012 and 2013
0
2010
2011
2012
The picture is much the same for corporate tax. Two of the big mining companies operating in Sierra Leone, African Minerals and London Mining, have been granted corporate tax reductions that exempt them from paying the statutory corporate tax of 30%. African
Minerals is the company with the largest turnover in the country12,
and has a fixed corporate tax rate of 25%. London Mining paid only
6% in corporate tax until 2013, but their contract was renegotiated
and they will now pay 25% up to 2020.
These tax exemptions influence the potential revenues that Sierra
Leone could receive from its minerals, and therefore it is important
to openly discuss whether these tax deductions are necessary to attract foreign direct investments. It is always difficult to negotiate oil
contracts, but for an emerging oil country it is even more challenging because policies are not in place, information on their resource
base is limited and they often have technical capacity constraints.
TAX EXEMPTIONS REDUCE RESOURCES FOR SOCIAL DEVELOPMENT
The consequence of the GST, customs and corporate tax exemptions
granted is that Sierra Leone is losing approximately US$ 240 million
annually in potential government revenues in future years13. This is
a significant sum in one of the world’s poorest countries, money
which could be used to increase spending on social development.
Tax exemptions (only for GST and duty exemptions) in 2012 corresponded to more than 8 times the current health budget, and nearly
seven times the education budget.
5
NATURAL RESOURCE
WATCH
6
GOVERNMENT SPENDING ON SERVICES COMPARED TO GST AND
CUSTOMS EXEMPTIONS TO MINING COMPANIES IN 2012
250
200
150
MIO. US $
100
50
Source: Budget Advocacy Network (2014)
and government budget profile 2011-2015
0
AGRICULTURE
EDUCATION
HEALTH
ROADS
GST AND CUSTOMS
TAX EXEMPTIONS
LACK OF TRANSPARENCY
Transparency in the extractive sector could be strengthened in the three ways. First, contracts with multinational mining companies should be made public.
Contracts between big mining companies and the
government are often not made publicly available, and
are negotiated behind closed doors with very limited
access for the public.
lection system in Sierra Leone is indispensable in order to
improve controls over extractive sector revenues, improve
transparency and traceability of income”15.
Third, the lack of transparency is worsened by the
government’s weak capacity to enforce laws and regulations. The latest Resource Governance Index from
Revenue Watch Institute (RWI) ranks Sierra Leone as
number 35 out of 58 natural resource extracting countries, which is characterized as “weak” governance by
RWI; and a recent World Bank report notes that several
of the government entities in the extractive sector have
“very limited technical and administrative capacity”.16
Second, the tax collection system should include
stronger institutional organisation. According to the
report from the Sierra Leone Auditor General in 2011,
there are “significant weaknesses in the management of
revenue in most if not all of the revenue generating entities”14. Moreover, in February 2013, Sierra Leone was
temporarily suspended from the process of becoming
an EITI-compliant country because the country failed
to adhere to the established standards of transparency
with revenue collected from the extractive sector. The
Third SLEITI report notes that “a review of the tax col-
7
Surveys from Transparency International indicate that
challenges regarding corruption are significant and
have improved little since the end of the civil war in
2002 (see Figure 7).
TRANSPARENCY INTERNATIONAL
CPI-SCORE FOR SIERRA LEONE
10
8
6
4
2
0
2003
2004
2005
2006
2007
2008
2009
6
2010
2011
Source: Transparency International Corruption
Perception Index 2003-2011. 0 = much corruption,
10 = no corruption.
RECOMMENDATIONS
ENDNOTES
THE GOVERNMENT OF
SIERRA LEONE SHOULD:
1 World Bank: Sierra Leone country webpage - http://www.
worldbank.org/en/country/sierraleone
2 Bank of Sierra Leone - http://www.bsl.gov.sl/externalsector_data.html
3 Statistics Sierra Leone: Foreign Trade Statistics Bulletin
2011 pp 10 – Bank of Sierra Leone: External sector data: Trade
Annex 2012 - http://www.bsl.gov.sl/externalsector_data.html
Statistics Sierra Leone only has numbers up until 2011. Official prices are mentioned in leones. To convert these into
dollars, the official midrate exchange rates for each year, as
published by the Bank of Sierra Leone, was used. Available at
http://www.bsl.gov.sl/externalsector_data.html
4 Statistics Sierra Leone: GDP production tables 2012 table 5
5 Published on the website of the Sierra Leonean Ministry
of Finance and Economic Development (MoFED). Available
at
http://www.mofed.gov.sl/index.php?option=com_content&task=blogcategory&id=42&Itemid=155
6 Dr. Richard Conteh, the President’s chief of staff, in his keynote speech at the INDABA conference in Freetown, 2/7/2013
7 The US State Department on their website: http://www.
state.gov/e/eb/rls/othr/ics/2012/191232.htm
8 Sierra Leone State House press release 21/10 2013 - http://
www.statehouse.gov.sl/index.php/component/content/article/34-news-articles/750-press-release9 Macartan Humphreys, Jeffrey D. Sachs, and Joseph E.
Stiglitz (2007) What Is the Problem with Natural Resource
Wealth?
10 Sierra Leone Extractive Industries Transparency Initiative
(SLEITI): 2011 Reconciliation Report, p. 5
11 Budget Advocacy Network (2014) ‘Losing Out – Sierra Leone’s Massive Revenue Losses From Tax Incentives’.
12 National Revenue Authority in an interview with the magazine Newday
13 Budget Advocacy Network (2014) ‘Losing Out – Sierra Leone’s Massive Revenue Losses From Tax Incentives’.
14 Sierra Leone Auditor General’ s Report 2011 p. 8
15 SLEITI Third reconciliation report p. 35
16 World Bank (2013) “Political economy of the extractives
sector in Sierra Leone”, p. 50. The quote in question refers to
the Ministry of Mines and Mineral Resources, but elsewhere
in the report, the weak capacity of especially parliament and
National Revenue Authority is mentioned.
Avoid contract secrecy in the extractive sector,
make all contracts publicly available and ensure
there is free, prior and informed consent with local communities before contracts are signed.
Make data on revenues from the extractive sector publicly available and increase transparency in
the redistribution of revenues to increase efficiency and openness in decision-making processes.
Increase institutional capacity and governance
systems to collect tax, enforce regulations and redistribute revenues efficiently.
Continue optimizing tax systems to increase
revenues from the extractive sector and avoid
granting unnecessary tax exemptions.
Diversify the economy of Sierra Leone to become less dependent on the extractive industries.
Revenue from the extractive sector should promote inclusive and sustained economic growth.
INTERNATIONALLY THE US, EU AND OTHER
HOST COUNTRIES TO MINING COMPANIES
SHOULD:
Implement country-by-country reporting for
mining companies that allows Sierra Leone to end
capital flight from the country’s mining sector.
This country-by-country reporting should include
information on the mining companies’ profits, tax
payments and trading with subsidiaries on a project evel.
7
SIERRA LEONE NATURAL RESOURCE MAP
SIERRA LEONE
ORE
ORE
ORE
LIBERIA
This report is part of a series called Natural Resource Watch. The brief
papers explore the importance of minerals, oil and gas in resource rich
developing countries and whether these countries are receiving a fair
share of profits from the extraction of these resources.
For further information on IBIS and Natural Resource Watch see www.ibis.dk.
ABOUT IBIS AND NATURAL RESOURCE WATCH
IBIS is a Danish member-based development organisation working at
the global, national and local levels to create equal access to education,
influence and resources for the poor and marginalised peoples in Africa and Latin America.
THE REPORT HAS BEEN WRITTEN BY:
NIKOLAJ THORBORG, CHRISTIAN HALLUM
AND MORTEN BLOMQVIST.
IBIS – SIERRA LEONE
[email protected]
IBISSIERRALEONE.ORG
DESIGN:
EGGS LIBRIS // SARA H. MORTENSEN
PHOTOS:
IBIS – DENMARK
[email protected]
WWW.IBIS.DK
LOTTE ÆRSØE
8
NATURAL RESOURCE
WATCH