Financing for development series: Increasing government revenues from the extractive sector in Sub-Saharan Africa

Stürmer, Martin
Briefing Paper 9/2008

Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

The extractive sector gives sub-Saharan African countries the opportunity to raise domestic funds to help achieve the Millennium Development Goals. However, generating government revenues from the mining and oil sectors is not easy, and revenues are highly volatile owing to changing world market prices.
Most sub-Saharan African countries are failing to tap the full potential for government revenues from the extractive sector because of a lack of transparency, widespread corruption and inadequate tax administration and collection. Agreements between governments
and private investors are often unsatisfactory with regard to the government revenues because of power imbalances. There is also a lack of revenue management and of good investment conditions, such as a functioning infrastructure.
Overall, the extractive sector could play an important role in generating domestic public revenues for achieving the MDGs, but short-term contributions should not be overestimated. Advanced mining countries, such as Canada and Australia, show that good public and corporate governance determine whether the extractive sector contributes to a country’s development or not. Sub-Saharan African countries need help with the generation of government revenues and the long-term development of the extractive sector. Transparency is one of the first cornerstones. Good investment conditions, sound taxation systems, effective
tax collection, better deals with private investors and optimised revenue management are necessary complements. Social and environmental standards must be further key elements if the sector is to be made part of the sustainable development of sub-Saharan African countries.