International Growth Centre,
February 2012
3. Public Expenditure
In spending revenues it is important to recognize that much of the future increases in revenue will come from the extraction of natural resources. As the country’s natural wealth is run down, it is essential that a reasonable proportion of this revenue is ploughed back into other public assets, otherwise higher spending is liable to be unsustainable.
Action point: the budget should show clearly how government revenues are divided between those from natural resource depletion and those from other sources. From this basic distinction, it should then show how the revenues from resource depletion are being used as between public consumption and public investment, so that it is clearly stated what proportion of revenues from depleting resources are being ploughed back into assets of one form or another.
Those revenues ploughed back into assets then need to be well-managed. I recommend establishing a dedicated institution, namely a Sovereign Development Fund. Such a Fund would lock away revenues, defended by a constitutional provision that required them to be used only for investments of various types, whether domestic or as foreign financial assets. The Fund would require due process for all domestic investments, such as proper cost-benefit analysis prior to project selection, and competitive tendering during implementation. Given the country’s massive needs, it would be highly appropriate for donors to route some of their development assistance through this Fund; conversely, the Fund could adopt donor good practices not just on its donor-funded projects but on all of its projects.
Part of the revenues should of course be used to finance the provision of core public services. The economy faces acute needs for these services, but it is important to be realistic about the administrative and managerial capacity of the government to meet them even if finance is available. Sierra Leone has never managed to build effective public service delivery through the state even prior to the civil war. The legacy of war has not made this task any easier, on the contrary it will be harder than it was. While it is sensible to try to improve the accountability of publicly provided services, it is also wise not to rely exclusively on an approach that did not work even in easier circumstances.
Hence, the old model of public spending undertaken only by line ministries should be supplemented by a more modern approach. Even in developed countries where this model has worked reasonably well governments are now moving away from it. In Sierra Leone, where the old model has never worked, it may be better to leapfrog to the new style of more decentralized and competitive delivery of public services. The key ingredients of this new model would be the separation of the function of setting policy from the function of implementing service delivery. Policy is inevitably the direct responsibility of ministers and ministries, but implementation could be decentralized to quasi-independent public agencies, operating under clear rules and public scrutiny, which in turn contract with multiple types of suppliers of services: local governments, churches, NGOs, and private firms. Analogous to the creation of the National Revenue Authority to raise revenue, there is scope for a National Public Service Authority to manage parts of the public spending process. In collaboration with the World Bank and DFID, the International Growth Centre has just produced a survey of international experience with the public finance of non-government social provision and this provides a number of possible models.
Possible Action Point: consider allocating some revenues and aid through dedicated public agencies that contract with non-state providers of services and monitor their performance.
4. Regulation of Private Activity
A legacy of conflict is a high degree of opportunistic behaviour, with its corollary of a low degree of trust in doing business. Some government regulation is being abused as part of this opportunism, and so should be pulled back. In other areas more effective government regulation is urgently needed.
One useful metric of the business environment is the Doing Business rating of the World Bank. While some progress has been realized in recent years, Sierra Leone is still only 143 out of 183 countries in 2011on this rating, so there is still a long way to go as reflected in its ranking in areas like transfer of property (169), obtaining a building permit (166) and payment of taxes and duties (149).
Sierra Leone needs private commercial investment. The major opportunities are natural resource extraction, large-scale agriculture, and a wide variety of urban commercial activities. Each of these requires appropriate regulation.
Natural Resource Extraction
Investment in resource extraction needs a considerable amount of regulation since the underlying natural assets belong to the state. Central to socially advantageous investment is a transparent and competitive process by which contracts are awarded, such as auctions. To attract investors while ensuring that the state captures the rents from resource extraction, the tax code needs to be well-designed. In particular, the code should incorporate fiscal responses to changing world prices, so that it does not need frequent renegotiation.
Commercial Agriculture
Investment in commercial agriculture also needs specific regulation. Although there is currently plenty of investor interest in land acquisition, it is important to distinguish between pioneer investors, and speculators (Collier and Venables, 2011). Pioneer investors take a considerable risk by attempting to grow crops and market them in new locations. If successful not only will their enterprises generate jobs and tax revenues, they will be copied by other investors. This copying effect is a beneficial externality for Sierra Leone, and so such investors are socially valuable beyond the private returns they may make. Speculators, in contrast, wish to acquire large tracts of land on long leases that will be left idle unless future changes in world prices make cultivation valuable. In economic terms, acquiring a long lease on land which is then left idle has an ‘option value’. However, the circumstances in which the option becomes valuable to the speculator are those in which the government loses out because it has parted with the land at a low price. Hence, speculators who acquire idle land at a negligible price are gaining a valuable asset (the option value of land) at the expense of the country. The temporary price spikes of 2008 in food and fuel triggered a wave of such speculative land acquisition in Africa. The implication is that the Government should regulate commercial land acquisitions, to encourage pioneer investors while discouraging speculators.
Possible Action Point: The Government could establish a code for investment in commercial agriculture, requiring investors to invest in and cultivate a reasonable proportion of their land area within three years of acquisition. For regulation to be credible the government would need to build a capacity to monitor investor behaviour.
Urban Investment
Urban commercial investment needs to be able to acquire secure rights to urban land. Currently, urban land rights are confused, with no clear register and multiple claimants and hence no proper market. This may explain why there has been relatively little reconstruction in Freetown, despite the evident need.
There is also huge scope for mass housing, which in addition to directly raising living standards would generate jobs for young men. But without clear legal title housing cannot get started.
Possible Action Points: Establish a legal process for swift resolution of urban land rights (as done by Uganda in the early 1990s. Develop a strategy for mass urban housing. The IGC has a research program on mass housing which could provide assistance.
5. Macroeconomic Management
As revenues from natural resource extraction become more important, the inherent volatility of these revenues will become an increasing problem. To cope with unanticipated shocks to resource revenues it is important to build policy rules and institutions that smooth spending. Smoothing can be done both by insurance, in the form of hedging, and the accumulation of liquidity through saving when revenues are judged to be atypically high. These strategies can potentially be combined in a single institution tasked with achieving the resilience of spending in the face of revenue shocks: a Sovereign Resilience Fund. Chile has successfully operated a fund along these lines.
Possible Policy Action: Investigate whether a Sovereign Resilience Fund would be appropriate for Sierra Leone. The IGC could assist with this work.
6. Norms and Identity
Government, and in particular leadership, has the opportunity to set norms and redefine identities. After periods of internal conflict people tend to have little trust in each other and to have fractured and dysfunctional identities. Trust and identity cannot be changed overnight, but a consistent message from government can gradually adjust them. As in all post-conflict societies, in Sierra Leone these actions are crucially important.
Economists now recognize that both the degree of inter-personal trust and people’s sense of identity have significant economic consequences. The degree of trust affects the cost of transactions. The identities that people adopt can matter at various levels. In respect of attitudes to work, Nobel laureate George Akerlof argues that effective organizations encourage their workforce to self-identify with functional role models that induce correspondingly more useful behaviour. In respect of social cooperation, research has clearly established that strong and differentiated sub-national identities weak the capacity to cooperate at the national level.
In respect of trust and the norm of honesty the Government can target corruption which, as reflected in the Corruption Perception Index, is a major problem. The essential core of any fight against corruption is transparency and due process. The money trail should be transparent; procurement processes should adopt best-practice. . Given the centrality of natural resources in government revenue, transparency here is critical: commitment and adherence to the Extractive Industries Transparency Initiative (EITI) offers a high-profile fast-track to demonstrating commitment. Beyond the EITI, endorsement of the Natural Resource Charter, a new flagship program of NEPAD, would generate a high-profile signal that the government intended to well-manage the entire chain of decisions involved in harnessing natural resources for prosperity.
In respect of identity, an example of how over time rhetoric and decisions shape identities is the contrast between Kenya and Tanzania. Both societies have a similar number of ethnic groups, but whereas in Kenya politics has exacerbated ethnic divisions, in Tanzania there has been a sustained attempt, initiated by President Nyerere, to reduce the salience of ethnic differences. There is clear evidence that in Tanzania cooperation across ethnic groups is now normal, whereas in Kenya it remains extremely difficult.
The best opportunity to reset identities is evidently to influence young people, before their identities are set in stone. A National Youth Service, tasked with helping to build the nation, would provide the opportunity for common action across ethnic lines, so that young people would learn to cooperate, and the symbolism of national purpose.
Possible Action Points: adopt the EITI and the Natural Resource Charter; introduce a National Youth Service.
By Paul Collier
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