WATCH NATURAL RESOURCE SIERRA LEONE AT A GLANCE. US$ billion REPORT ON: FEBRUARY 2014

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1 NATURAL RESOURCE REPORT ON: SIERRA LEONE FEBRUARY 214 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 22, 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 23 to almost US$ 3.8 billion in However, Sierra Leone is still one of the world s poorest countries and was ranked 177 out of 187 on UNDP s 213 Human Development Index. Life expectancy is only 48 years, and over 5% of the population lives in extreme poverty. This stands in glaring contrast to the country s vast natural resources. According to official numbers, from 29 to 212 Sierra Leone exported over US$ 1.2 billion 2 in natural resources, comprising around 7% 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. SIERRA LEONE AT A GLANCE Total value of mineral exports : US$ billion The mining sector s average annual contribution to GDP : 8.3 % Government revenue from natural resource exports in 211: 11% Sources: Ministry of Finance and Economic Development, Statistics Sierra Leone and SLEITI 1

2 NATURAL RESOURCE 1 VALUE OF MINERAL EXPORTS FROM SIERRA LEONE DIAMONDS BAUXITE RUTILE IRON ORE Source: Statistics Sierra Leone and Bank of Sierra Leone 3 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 193s. However, since iron ore production began in 211, it is clear that the extraction of this resource will add substantial value to the Sierra Leonean economy. In 212, 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 2% 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 216, when iron ore production alone would account for 4.8 percentage points of this growth. 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 21: US$ 1,57 million Total projected income from royalties in 216: US$ million The increasing importance of iron ore is illustrated in Figure 2. It demonstrates that royalties from diamond and gold are expected to double from , 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

3 DISTRIBUTION OF GOVERNMENT REVENUE 2 FROM THE EXTRACTIVE INDUSTRY IN DIAMONDS AND GOLD IRON ORE Source: Sierra Leone Government budget profile and reflects actual income, 213 is an estimate, and are projections. 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 217, 6 but there is uncertainty about the size of the oil resources and whether extraction is financially viable. Early estimates range from 5 to 7 million barrels 7 of oil and preliminary drilling indicates that the oil is of high quality 8. 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 countries 9. GOVERNMENT REVENUE FROM THE EXTRACTIVE SECTOR According to the third report from SLEITI (Sierra Leone Extractive Industries Transparency Initiative) for 211, revenue from the extractive sector earned by the government of Sierra Leone in 211 was US$ 27.6 million 1, 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 26 to 21 was 4.22%). However, as analysed in the next section, more than 5% of the revenue comes from the signing of new oil exploration licenses and is not recurrent government revenue. 3

4 NATURAL RESOURCE GOVERNMENT REVENUE 3 FROM THE EXTRACTIVE SECTOR Source: Third SLEITI reconciliation report p.7 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 211 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. 4 DISTRIBUTION OF GOVERNMENT REVENUE FROM THE EXTRACTIVE INDUSTRY IN 211 EXPORT DUTIES 11,45% ROYALTY 11,14% MINING LEASE 7,38% EXPLORATION LICENCE 6,5% CORPORATE TAX 2,8% SIGNATURE BONUS PAYMENT(OIL) 5,32% OTHER 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 country 11. Figure 5 illustrates that tax exemptions granted in 211 almost matched the total domestic government revenue collected, and was significantly higher than total development aid to Sierra Leone. GST AND CUSTOMS EXEMPTIONS From 21 to 212, tax exemptions on Goods and Services Tax (value-added tax) and customs duties for the big mining companies cost the Sierra Leonean state US$ million, or 57.7 % of total domestic revenue collected or 14% of international aid to Sierra Leone in the same period. 4

5 GST AND CUSTOMS EXEMPTIONS TO 5 THE BIG MINING COMPANIES GST AND CUSTOMS EXEMTIONS GOVERNMENT TOTAL DOMESTIC REVENUE (EXCL ALD) INTERNATIONAL ALD TO SIERRA LEONE Source: Calculation from Budget Advocacy Network and government budget profiles 212 and 213 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 3%. African Minerals is the company with the largest turnover in the country 12, and has a fixed corporate tax rate of 25%. London Mining paid only 6% in corporate tax until 213, but their contract was renegotiated and they will now pay 25% up to 22. 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$ 24 million annually in potential government revenues in future years 13. 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 212 corresponded to more than 8 times the current health budget, and nearly seven times the education budget. 5

6 NATURAL RESOURCE 6 GOVERNMENT SPENDING ON SERVICES COMPARED TO GST AND CUSTOMS EXEMPTIONS TO MINING COMPANIES IN AGRICULTURE EDUCATION HEALTH ROADS GST AND CUSTOMS TAX EXEMPTIONS Source: Budget Advocacy Network (214) and government budget profile 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. Second, the tax collection system should include stronger institutional organisation. According to the report from the Sierra Leone Auditor General in 211, there are significant weaknesses in the management of revenue in most if not all of the revenue generating entities 14. Moreover, in February 213, 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 collection 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 Surveys from Transparency International indicate that challenges regarding corruption are significant and have improved little since the end of the civil war in 22 (see Figure 7). 7 TRANSPARENCY INTERNATIONAL CPI-SCORE FOR SIERRA LEONE Source: Transparency International Corruption Perception Index = much corruption, 1 = no corruption. 6

7 RECOMMENDATIONS ENDNOTES THE GOVERNMENT OF SIERRA LEONE SHOULD: 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. 1 World Bank: Sierra Leone country webpage - worldbank.org/en/country/sierraleone 2 Bank of Sierra Leone Statistics Sierra Leone: Foreign Trade Statistics Bulletin 211 pp 1 Bank of Sierra Leone: External sector data: Trade Annex Statistics Sierra Leone only has numbers up until 211. 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 4 Statistics Sierra Leone: GDP production tables 212 table 5 5 Published on the website of the Sierra Leonean Ministry of Finance and Economic Development (MoFED). Available at 6 Dr. Richard Conteh, the President s chief of staff, in his keynote speech at the INDABA conference in Freetown, 2/7/213 7 The US State Department on their website: state.gov/e/eb/rls/othr/ics/212/ htm 8 Sierra Leone State House press release 21/ cle/34-news-articles/75-press-release- 9 Macartan Humphreys, Jeffrey D. Sachs, and Joseph E. Stiglitz (27) What Is the Problem with Natural Resource Wealth? 1 Sierra Leone Extractive Industries Transparency Initiative (SLEITI): 211 Reconciliation Report, p Budget Advocacy Network (214) 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 (214) Losing Out Sierra Leone s Massive Revenue Losses From Tax Incentives. 14 Sierra Leone Auditor General s Report 211 p SLEITI Third reconciliation report p World Bank (213) Political economy of the extractives sector in Sierra Leone, p. 5. 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. 7

8 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 ABOUT IBIS AND NATURAL RESOURCE 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. DESIGN: EGGS LIBRIS // SARA H. MORTENSEN PHOTOS: LOTTE ÆRSØE IBIS SIERRA LEONE IBISSL@IBISWESTAFRI- CA.COM IBISSIERRALEONE.ORG IBIS DENMARK IBIS@IBIS.DK NATURAL RESOURCE 8