Resource revenues are an opportunity for governments to increase their capacity to undertake public spending, and to increase the capacity of the economy to absorb further investment. These efforts can clear the way for further investments that deliver high returns for the country, and allow for equitable enjoyment of these returns.

Manage spending policies to avoid economic deterioration

In countries with weak public spending bureaucracies and small economies, effective investment can be challenging. First, government bureaucracy may be too small to manage larger budgets, requiring more project selection and assessment. Second, high expenditure of resource revenues can affect the wider economy, causing inflationary pressures, and thus may reduce the value of the revenues. Third, resource extraction may increase inequality: leading to public calls for reform or, at the extreme, conflict. Finally, poor transparency and accountability can lead to high rates of leakage throughout the spending process.

Without active management, the inflow of revenues can harm rather than help a country. Fortunately, while resource revenues are a threat in this regard, they can also provide the opportunity to move countries out of a state of weak bureaucratic capability and build the absorptive capacity of the economy.

Improve public spending management

Improvement in public spending management can take the form of both an increase in the capacity to choose appropriate spending plans, and incentives for institutions to make decisions without political interference. In countries with low institutional capacity it may be politically easier to introduce improved, stricter management rules for new spending projects than to reform existing spending. Governments should aim for the following in their public financial management systems.

• Public, multi-year plans that allow coordination of spending projects, and greater certainty for the private sector
• Competitive, public and transparent procurement (if there is sufficient interest from bidders)
• Oversight and internal controls
• Pre-approval measurement of the costs of major expenditures against their likely social and economic benefits
• Public, independent audits of spending projects, for both oversight and to help government improve its spending processes
• Expenditures made on-budget rather than through savings funds or equivalent institutions, to ensure the official checks are applied
• Invest in public investment processes and in eliminating supply bottlenecks in the economy to reduce the cost of investment projects.

Resource extraction, and the investment and spending it generates, can often have the indirect effect of driving up the costs of public investment to levels higher than global norms. Proactive public policy can reduce these costs and improve the economy’s capacity to absorb increased investment.

For more information about implementing the principles of the Natural Resource Charter precepts, click here.