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Mineral resource revenues are special because they are finite, volatile and if they are large enough, they can easily impact other industries and paralyse them. They also generate large economic rents and are location-specific, which can lead to conflicts over their control in other areas. As a result, they may need to be managed and distributed differently from other types of government revenue.  There are various techniques that governments can employ to respond to the special challenges of natural resource revenues in a country like Malawi. These among others include;

• state-owned enterprises.
•  subnational jurisdictions.
• distributing revenues to natural resource funds.
• the national budget, or directly to citizens in the form of cash. Each of these institutions requires a unique management strategy.

Natural Resource Revenue

Many countries do not see their expected returns of social and economic development when they discover mineral resources. This challenge is in part linked to how the countries manage the natural resource revenues, or the money received by the government because of the extraction or sale of natural resources. The reader must understand that mineral resources are unique and to understand the uniqueness there are characteristics that make them to be in such a state and belong to a special way  as compared to other natural resources for a country. Below are some of the selected few  properties that make mineral resources uniquely identified;

1. Mineral Resources are volatile.

 Prices of natural resources like minerals, fluctuate with respect to market forces. When government revenues are tied to natural resources, their revenues will fluctuate accordingly. In this case,volatility is amplified by  production cycles of mining and unexpected stoppages. This makes the mine planning or the countrys development planning difficult and may lead to company’s/countries go into debt when revenues decline in order to maintain the same standard of living as before the downturn. Volatility can create problems because it means public expenditure becomes less effective than it was before so countries must try to put in place mechanisms that can minimise this kind of risk because the end result to this  is poor investment decisions and higher probability of debt crises.

2. Mineral Resources are Non Renewable ( Finite).

Each mining project cycle has a life span called the Life of Mine(LOM) upon reaching the Goodbye Cut. This is usually so many years but mostly less than 50 . While new technology or exploration generates new discoveries, ultimately mineral resources are finite because they cannot be renewed once and for all. Some countries have experienced large economic booms during their peak production phase of the mineral resources both in areas of operation and the country as a whole but ultimately, only to fall into poverty as soon as the resources are fully exhausted. An example in Malawi is the mining town of Karonga from Kayelekera Uranium Mine  in the north where there was an economic boom but later phased out slowly due to its temporary closure (under Care and Maintenance) and also the phosphate exploited and entirely depleted in the tiny Island of Nauru in Oceania.

3. Mineral Resources can damage other industries.

When mineral resources are discovered, they can represent a large percentage of the country’s GDP and government revenues. If the economy does not have the absorptive capacity to make efficient use of these revenues, the result can be inflation or exchange rate appreciation. This increases the cost of domestically produced goods in foreign markets, especially manufactured goods, harming exporters. Also, the large revenues in the private sector often attract skilled workers to extractive industries like mining. When the number of skilled workers in a country is small, this can make it more difficult for other sectors to find expertise. Together these trends can make it more difficult for other industries to successfully operate and can make a country more dependant on natural resources like minerals. Together, these effects are often referred to as Dutch disease. In other words, Dutch disease leads to accumulation of wealth from resources like minerals and the consumption that comes from that wealth leads to a demand for a lot of non-traded goods and this pulls resources away from other internationally traded goods that would be competitive.

Politically a Dutch Disease is a highly valued resource that acts as a natural rent which is just as income that is free. It’s a massive wealth that can sometimes lead to internal conflicts of a country.

4. Mineral resources can be large and geographically concentrated.

Mining revenues can be enormous relative to the size of an economy, yet, as a capital-intensive rather than labour-intensive industry, they tend to employ only a very small portion of the population. This is often misaligned with the expectations of the communities that surround the extraction point. Furthermore, the profits can be captured by a selected few or be exported to foreign investors. This can cause frustration and unnecessary expectations among locals, leading to conflict, especially in the region where the mines are located. The large amount of profits from a single source is vulnerable to state capture or government mismanagement unless oversight mechanisms are in place.

Some selected institution for management and distribution of revenue in mineral resources

Revenue distribution refers to the manner in which a government allocates, or distributes, natural resource revenues to different levels of government, institutions, or directly to citizens. Some of the decisions of where to allocate revenues are fundamentally political. Economic efficiency criteria consider questions of the absorptive capacity of different levels of government, whether individual citizens have access to the ability to save transfers, and how costs differ over different locations or sectors. Combining the economics with the political analysis can be challenging, particularly when trying to respond to the special qualities of natural resource revenues realised from extractive sector like mining. For instance, allocating an appropriate percentage of revenues, determined by an economic formula, to a long-term savings fund can help mitigate Dutch disease and improve national spending efficiency, though it can also starve the government of much-needed development financing. Allocating some revenues to subnational governments may also improve local service delivery. However in allocating resource revenues directly to citizens, it may reduce poverty and improve natural resource revenue accountability. Therefore governments, with input from citizens, must decide how to manage risks and opportunities in the sector. Allocation of revenues is only part of a bigger picture and mining related/natural resource revenue institutions should have established procedures or principles to plan, organize staff and control their operations. These activities are referred to as revenue management, as opposed to revenue distribution, which simply refers to the allocation of revenues. Some key institutions that manage resource revenues are:

(a) Natural resource funds.

Governments can establish special extra budgetary funds—outside the regular budget process—to manage natural resource revenues such as from mining of a mineral resource. When these funds are used to invest at least partly in foreign assets, they are referred to as sovereign wealth funds or natural resource funds. Ideally, the government dictates how much to deposit and withdraw from these funds by fiscal rules. Sometimes governments that are dictatorial ones, manage these natural resource funds willy nilly without clear rules or objectives.

How successful are natural resource funds

• When they  are established with clear objectives
•  Strong fiscal and investment rules
•  Division of responsibilities between actors.
•  Sufficient disclosure for proper oversight.

(b) State-owned enterprises

 State-owned enterprises are companies that are more than 50 percent owned and operated by the government. In mining, state owned enterprises can play an important role in revenue management, as natural resource revenues often pass through them on their way to the budget, or there are large budget allocations of mineral revenue to these. Countries often find them attractive, as  national mining companies can generate revenues for the state and serve other functions, such as training domestic workers and improving sector control e.g. Botswana. However, there is a risk that State Owned Enterprises can act as a drain on government finances or become a financial risk and thus they can divert scarce government revenues away from public investments in other sectors. They are also responsible for non-fiscal expenditures that can be an inefficient use of public resources, such as Corporate Social Responsibility (CSR) projects. If a government clearly establishes the fiscal relationship between these state owned enterprises  and the budget, it can work better to avoid  problems.

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