Revenues generated from the extraction of minerals need to be managed with great care for the full social and economic benefits of mining to be realised, and the so-called ‘resource curse’ avoided.
Revenue management is one of the main areas covered by ICMM’s Mining partnerships for development: toolkit, which highlights the importance of partnerships to enhance the positive contribution of mining.
Government revenues from mineral resources are unlike those from other industries. Minerals are a finite resource; and almost all governments claim ownership of sub-surface resources for the benefit of their citizens. Once they have been fully exploited the economic benefits also end, unless revenues havebeen appropriately transformed through investments in human resources, infrastructure and diversified forms of productive economic activities. Commodity prices can also fluctuate dramatically, so if a state relies too heavily on its mineral revenues, a short-term drop in mineral prices can result in a highly damaging budget shortfall.
Another concern for mineral-rich countries is the phenomenon whereby large inflows of foreign currency from the export of minerals, without careful management, causes an appreciation of the local currency. This weakens other domestic industries by making them less competitively priced. This is known as ‘Dutch Disease’.
Mines are often located in remote areas of a country where they can represent by far the biggest investment in the region. Where a portion of the revenues are allocated to producing regions or municipalities, the sudden increase in revenues at the local level can be harmful if local administrators don't have the capacity to manage this increase effectively for broader social and economic benefit. A combination of such factors can lead to disillusionment, community mistrust and even provoke conflict.
While the risks associated with mineral revenues are very real, they can be managed if a comprehensive plan is in place. Some of the important decisions that governments need to make when mineral revenues start to flow into the treasury include:
- whether to invest the mineral revenues inside the country or abroad
- whether to invest the revenues in long-term projects that will benefit future generations or short-term ones to address existing issues
- whether the revenues should be evenly distributed throughout the country, or whether the producing region should receive a greater share
- whether the revenues should be reinvested into the mining industry and its supply chain or whether the country should diversify its economy
- whether a natural resource fund should be created
- whether a state-owned enterprise should take a stake in the mine.
Management of risk is also dependent on the quality of collaboration between government, companies, development partners and civil society organisations. At the sub-national level, for example, the promise of greater economic opportunity and equitable social development depends on whether local institutions have the capacity to drive change. If not, they will not be able to plan and implement large-scale investment programmes and projects.
What is ICMM doing?
ICMM member’s commitment to enhanced revenue management is evidenced by their long-standing commitment to mineral revenue transparency, through support for the Extractive Industries Transparency Initiative (EITI). While ICMM has supported revenue management through our sustained work on Mining partnerships for development, and more recently our work to help realise more inclusive economic opportunities.