Tax, governance reform needed to tap Africa’s oil wealth – World Bank

African countries need to reform their governance and fiscal systems to maximise revenue from their natural resources, the World Bank has said in a new report on how the continent can adapt to energy transition.

The report, titled ‘Africa’s Pulse: An Analysis of Issues Shaping Africa’s Economic Future’, said learning from past boom-bust cycles and adopting the right policies can help African countries harness their natural resource wealth to improve fiscal and debt sustainability, during the low carbon transition.

Avoiding the “presource” curse, in which countries can find themselves in debt distress or facing low growth even before the production of resources begins, means tempering the pressure to borrow and spend ahead of revenues, it said.

The report said: “Discoveries have been found to unleash powerful forces that can shape policy but leave countries exposed if they are not prepared for declining prices.”

“Maximizing the government revenues captured from oil, gas, and mining offers the potential for a double dividend for people and the planet, by increasing fiscal space and removing implicit production subsidies.”

The World Bank said a significant untapped opportunity exists to mobilise inward investment and generate additional government revenues.

“On average, the rents generated by natural resources exceed government resource revenues by 2.6 times. This implies that governments could capture more of this rent with the right fiscal policies and reforms,” it said.

“Governance reforms and investments in fiscal administration can support higher levels of rent capture. Capturing the full share of rents would also yield a double dividend: for people and the planet.”

According to the report, in failing to capture the full value of resource extraction, the government provides an implicit production subsidy, generating more carbon emissions from an undertaxed petroleum sector.

Similarly, in mining, failing to capture a fair share of revenues for the country risks short-changing citizens and underpricing social and environmental externalities caused by extraction.

“Natural resources (oil, gas, and minerals) offer a huge economic opportunity for African economies during the low carbon transition. Global decarbonisation creates significant uncertainty but opens up new ways to leverage countries’ resource wealth to spur economic transformation,” it said.

“On the one hand, the global low-carbon transition will eventually lead to significant declines in demand for Africa’s oil, gas, and coal resources. The timing and scale remain uncertain, however. Such a major shift from oil and gas may take years or even decades.”

However, there may be a marked increase in the demand for the minerals required for the clean energy transition, such as lithium, cobalt, copper, platinum, and manganese, many of which are abundant across Africa and used for batteries, electric vehicles, and other technologies.

The World Bank said regional integration and the implementation of a continental free trade area hold huge potential to spur economic transformation across Sub-Saharan Africa.

“The African Continental Free Trade Area unlocks the potential to promote mineral value addition and beneficiation on the continent, increasing sectoral productivity and the overall value of exports,” it said.

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According to the World Bank, the value chain — from the manufacturing of intermediate inputs such as machinery (backward linkages) to the actual extraction of minerals, to the processing phase (forward linkages) — can rarely be accomplished by a single country because of scale, skills, infrastructure, and capital constraints, among others.

“By shifting from a national approach to value addition, such as via reforming export restrictions, local content policies, and local equity participation to be regionally and continentally defined, rather than nationally, countries can unlock regional comparative advantages and value chains,” it said.

“Industrial policies can then be better configured to leverage regional and continental capacities, the varied resource base, larger capital and consumer markets, and regional or country-specific specialisations.”

The report added that prioritising inward investments in newly discovered and underdeveloped natural gas reserves can mobilize export revenues and spur domestic energy production and access.

“Exploiting natural gas reserves requires substantial investments. Given these investments’ capital-intensive and long-term nature, countries must develop and maintain clear and stable fiscal policies supporting exports and domestic consumption and capturing the maximum fiscal take,” it said.

“There are significant opportunities for gas domestically and internationally as a transition fuel, particularly where it is deployed alongside renewable energy technologies.”

1. It also said that leveraging investment in effective taxation of other natural resources can unlock fiscal space for much-needed investments in domestic energy infrastructure, including renewable and mini-grid rural systems. Creating valuable anchor clients for the grid can help boost utilities’ finances.

“Good governance is an important determinant of positive economic outcomes from resource wealth. Policymakers need to ensure high levels of government accountability and public scrutiny of resource taxation and investment to ensure maximum development impact,” it said.

“Steps like contract disclosure, adherence to the Extractive Industries Transparency Initiative, and supporting and protecting civic space, can all support better resource governance.”

The World Bank added that a just transition for Africa will depend on successfully harnessing the economic benefits from oil, gas, and mineral resources, including good governance and sound macro-fiscal management of resource revenues while preparing for a low-carbon future.