## Executive Summary — Managing Natural Resource Wealth Trust Fund (MNRW-TF) Phase 1 Report (FY17) ## Source details **Canonical URL:** [Executive Summary — Managing Natural Resource Wealth Trust Fund (MNRW-TF) Phase 1 Report (FY17)](https://www.imf.org/-/media/files/capacity-developement/mnrw/mnrw2017ar.pdf) ## Other formats - [Markdown version](/-/media/files/capacity-developement/mnrw/mnrw2017ar.pdf.md) - [Structured JSON version](/-/media/files/capacity-developement/mnrw/mnrw2017ar.pdf.json) --- ### Scope and timing - The report covers fiscal year 2017 (FY17). IMF fiscal year 2017 (FY17) was May 2016 – April 2017. - The report is the sixth and final annual report of the MNRW-TF Phase 1 and focuses primarily on implementation during November 2016–April 2017, with financial data for the full fiscal year. ### Implementation progress and overall assessment - Implementation generally progressed well during the last year of Phase 1. - The trust fund is expected to show a surplus of about US$3.8 million, reflecting mainly carry-over from previous years. - Against the initial program allocation, actual spending was higher than programmed in modules 1 and 3, partially offsetting underspending in modules 2, 4 and 5. - During FY17, total actual spending was broadly in line with the planned budget. - Some planned activities were not carried out in a few cases due to country-specific challenges including related to security or the electoral cycle. ### Financial position and Phase 1 funding - Signed contribution agreements for Phase 1 amount to US$24.7 million, out of which US$24.5 million has been received. - As of April 30, the subaccount has received inflows of US$24.6 million (including interest). - The cash balance as of end-FY17 is estimated at US$3.9 million. - The total budget for the Phase 1 work plan, as of April 30, 2017, stood at approximately US$24.5 million. - Total expenditures for Phase 1 amounted to approximately US$20.7 million, which is 84.5 percent of the endorsed budget. - Any residual funds under Phase 1 will be transferred to Phase 2 or returned on a pro rata basis to partners, depending on partners’ preferences. ### Fundraising and Phase 2 outlook - Fund raising for MNRW-TF Phase 2 progressed during FY17 but remained slightly below the targeted program envelope. - Total donor commitments amount to about US$26 million against a program budget of US$30 million. - A total of US$16.6 million reflects signed LOUs. (Document later indicates donors committed almost US$26 million, of which US$18.3 million has been reflected in signed Letters of Understanding (LOU).) - There remains a funding shortfall of about US$4 million compared to the MNRW program budget of US$30 million. - Based on signed commitments, the projected cashflow position in MNRW-TF Phase 2 is described as satisfactory; however, finalizing negotiations for all donor commitments is important to ensure uninterrupted delivery beyond FY20. ### Activity volumes and geographic focus - The current work plan endorsed by the Steering Committee includes: - 28 active country projects (covering 14 countries and 3 regional projects), - 6 research projects, - 2 training projects, and - 2 workshops. - Around 90 percent of TF activities focus on the fiscal area (module 1, 2 or 3). - About two-thirds of MNRW’s activities are implemented in sub-Saharan Africa. - Nearly three-quarters of activities are provided to low-income countries. - In FY17 there were 21 HQ-led missions and 28 short-term expert (STX) visits in 17 different countries (FY16 had 25 HQ-led missions and 23 STX visits). ### Key results and examples (FY17) - Cameroon (module 1): A new mining code incorporating some IMF recommendations was adopted in December 2016. - Ghana (module 1): Authorities are gradually starting to apply the FARI revenue forecasting model tailored for Ghana through training. - Kenya (module 1): Project completed with a final workshop that trained officials to use the FARI model. - Kenya (module 3): A new Sovereign Wealth Fund Bill is being prepared, with drafts consistent with international good practice. - Liberia (module 2): A technical assistance plan to build staff capacity on EI risk management has been developed. - Madagascar (module 3): A medium-term budget framework (MTBF) for 2017-19, incorporating IMF recommendations, was adopted by Parliament in December 2016. - Mongolia (module 3): A Public Investment Management Assessment recommended reforms; technical assistance on updating accounting policies to International Public Sector Accounting Standards identified major gaps. - Sierra Leone (module 3): Draft PFM legislation has been enacted into law. - Tanzania (module 1): Amendments to the Income Tax Act (ITA) setting out a mining and petroleum tax regime were adopted in July 2016. - Research #2 (Mining Tax Administration): A workshop on EI tax administration was held in Mauritius with 32 participants from 12 sub-Saharan MNRW-eligible countries. - Research #5 (Progressivity in Natural Resource Taxation): A draft analytical paper on progressivity in natural resource taxation was prepared; the paper will be issued as an IMF Working Paper and key findings are expected to be incorporated into the FARI model fiscal regime analysis. - Workshop #2 (Cross-border issues in resource taxation): Proceedings were published in a new book on International Taxation and the Extractive Industries. - Scoping missions: Missions to Kenya (EI tax administration) and the Central African Republic supported preparation of new project proposals. ### Training, capacity building, and methodological advances - Training was delivered in revenue-forecasting (FARI) in Ghana and Kenya. - A successful workshop on EI tax administration brought together tax officials from multiple countries to build capacity on industry-specific tax administration issues. - Module 2 (Tax Administration) emphasized risk-based compliance strategies, specialized industry teams, resource project fiscal modeling (FARI), formalized cooperation and data sharing, centralized databases, and development of coordinated compliance strategies. - Lessons from Phase 1 include: - Base-level processes and knowledge must be addressed before specialized EI skills (e.g., Excel skills, audit techniques). - Fiscal modeling is an effective methodology to develop technical EI knowledge in addition to risk assessment. - Effective fiscal modeling and risk assessment require coordinated approaches across government agencies and models adapted to specific needs and capacities. ### Research and publications - The flagship publication International Taxation and the Extractive Industries was published by Routledge and launched during the IMF/World Bank Annual Meetings in October 2016. - The research project on progressivity in natural resource taxation produced a draft working paper on Progressive Taxation of Natural Resources as Second-Best Optimal Policy. - Preparation of a new Guide on Resource Revenue Transparency for pillar IV in the Fiscal Transparency Code made substantive progress but is expected to extend into Phase 2 (FY18) due to logistical delays. ### Operational observations and risks - Demand for capacity building on managing natural resource wealth remains high and is transitioning into Phase 2. - For country-level projects, more preparatory work (e.g., scoping visits) has been used to ensure strong commitment by authorities. - Funding shortfall of about US$4 million for Phase 2 emphasizes the need to continue fundraising during the first year of Phase 2 to ensure uninterrupted delivery beyond FY20. - In a few country projects, planned activities were not implemented because of security or electoral-cycle related constraints. *Source: Managing Natural Resource Wealth Trust Fund (MNRW-TF) Phase 1 — Executive Summary, Annual Report covering FY17 (May 2016 – April 2017).* ### Box 2. Progressivity in Natural Resource Taxation ### Project overview and objectives - The analytical project was led by Professor Jean-Francois Wen from the University of Calgary, supported by the MNRW-TF. - The project aimed to provide applied policy guidance on the desired degree of progressivity in natural resource fiscal regimes. - During a visit to the IMF in April 2017, Professor Wen prepared a final draft of the paper for issue as an IMF Working Paper, presented it at a seminar, and worked with IMF tax experts to refine fiscal regime analysis in the FARI tool. ### Definition and measurement of progressivity - Progressivity is loosely defined as the extent to which the average government take (as a share of project net cash flow) increases with realized profitability. - With a progressive fiscal regime, the government take is relatively higher for more profitable investments and lower for less profitable ones. - The paper emphasizes measuring marginal tax rate progression in profit- or rent-sensitive fiscal instruments rather than overall government take from a given resource project. ### Main analytical findings - Regressive taxes, by their very nature, tend to be distortionary taxes, and vice versa. - Marginal tax rate progressivity of rent-based or profit-sensitive fiscal instruments is desirable in the presence of distortionary taxes, such as royalties, in order to capture the remaining rent for the government as the resource owner. - Emphasis should be placed on marginal tax rate progression in the direct taxation of profit or rent, rather than progressivity in the overall government take. - These observations are illustrated with a simple analytical model in which a second-best optimal tax on profit is derived in the presence of other tax distortions. ### Practical implications for fiscal regime assessment and tools - The paper’s insights informed options for refining fiscal regime analysis in the FARI tool to benefit from the research. - Policy focus should prioritize designing marginal-rate progression in direct profit/rent taxes when other distortionary instruments (e.g., royalties) are present. - The second-best optimal tax derivation highlights trade-offs when other tax distortions cannot be eliminated. ### Results-Based Management (RBM) and project performance (selected metrics and findings) - RBM scoring for MNRW projects uses a standardized 4-point rating: (1) not achieved; (2) partially achieved; (3) largely achieved; and (4) fully achieved. - New project proposals have been approved incorporating an RBM matrix with standardized objectives, outcomes and verifiable indicators. - Project-level RBM scoring is based on the targeted outcomes defined for each project when initiated. - Across the project portfolio: - More than two thirds (23 out of 33) of the targeted module outcomes have already been fully achieved or largely achieved. - One-third (10 out of 33) of the targeted country-module outcomes have been partially achieved and out of which 5 projects have been proposed to be rolled to MNRW phase 2. - Over one quarter (8 out of 28) of the targeted country-module outcomes in revenue administration have already been fully achieved or largely achieved. - Over one-half (17 out of 28) of the targeted country-module outcomes in revenue administration have been partially achieved, out of which 2 projects are being proposed for roll over. - About 42 percent (11 out of 26) of the targeted country-module outcomes in PFM have already been largely achieved. - Almost another 46 percent (12 out of 26) of the targeted country-module outcomes in PFM have been partially achieved. - Portfolio indicators: - Percentage of endorsed work plan budget expended is greater than 84.5 percent (as at April 2017). - 93 percent of country modules rated as “on track” in annual/mid-year SC reports (excluding projects not started). - 48 percent of outcomes achieved. - 45 percent of outcomes largely or partially achieved. ### Policy and operational lessons for Phase 2 design - Key lessons from Phase 1 informed Phase 2 project design, including the need to secure stronger upfront country ownership and to be attentive to domestic implementation capacity constraints. - Phase 2 portfolio highlights (selected): - Module 1 (fiscal regime): Continuation of projects with Ghana, Liberia, Mozambique, Sierra Leone and Uganda; a new project with Nigeria. All include FARI modeling capacity building. - Module 2 (revenue administration): Continuation with Mozambique and Sierra Leone; a new project with Kenya. The FARI tool will be used to strengthen risk assessment. - Module 3 (PFM): Continuation with Mongolia focusing on medium term budget framework reforms and a shorter project with the Democratic Republic of Congo. - Module 4 (exchange rate and macro-prudential policies): Formulation of a new multi-country project underway. - Module 5 (statistics): New projects approved on compiling statistics on natural resource revenue and macroeconomic aggregates for natural resources. - Training: Development of an online course on macroeconomic management in resource-rich countries. - Research and analytical tools: Further development of the FARI tool for fiscal regime analysis, tax gap and risk assessment, and revenue forecasting; creation of a public library on fiscal regimes for the extractive sector. *Source: R5. Progressivity in Natural Resource Taxation (MNRW-TF research project) and related MNRW-TF reporting.* ### Executive Summary ...................................................................................................... ### Executive Summary — Managing Natural Resource Wealth Trust Fund (MNRW-TF) Phase 1 Report (FY17) ### Scope and timing - The report covers fiscal year 2017 (FY17). IMF fiscal year 2017 (FY17) was May 2016 – April 2017. - The report is the sixth and final annual report of the MNRW-TF Phase 1 and focuses primarily on implementation during November 2016–April 2017, with financial data for the full fiscal year. ### Implementation progress and overall assessment - Implementation generally progressed well during the last year of Phase 1. - The trust fund is expected to show a surplus of about US$3.8 million, reflecting mainly carry-over from previous years. - Against the initial program allocation, actual spending was higher than programmed in modules 1 and 3, partially offsetting underspending in modules 2, 4 and 5. - During FY17, total actual spending was broadly in line with the planned budget. - Some planned activities were not carried out in a few cases due to country-specific challenges including related to security or the electoral cycle. ### Financial position and Phase 1 funding - Signed contribution agreements for Phase 1 amount to US$24.7 million, out of which US$24.5 million has been received. - As of April 30, the subaccount has received inflows of US$24.6 million (including interest). - The cash balance as of end-FY17 is estimated at US$3.9 million. - The total budget for the Phase 1 work plan, as of April 30, 2017, stood at approximately US$24.5 million. - Total expenditures for Phase 1 amounted to approximately US$20.7 million, which is 84.5 percent of the endorsed budget. - Any residual funds under Phase 1 will be transferred to Phase 2 or returned on a pro rata basis to partners, depending on partners’ preferences. ### Fundraising and Phase 2 outlook - Fund raising for MNRW-TF Phase 2 progressed during FY17 but remained slightly below the targeted program envelope. - Total donor commitments amount to about US$26 million against a program budget of US$30 million. - A total of US$16.6 million reflects signed LOUs. (Document later indicates donors committed almost US$26 million, of which US$18.3 million has been reflected in signed Letters of Understanding (LOU).) - There remains a funding shortfall of about US$4 million compared to the MNRW program budget of US$30 million. - Based on signed commitments, the projected cashflow position in MNRW-TF Phase 2 is described as satisfactory; however, finalizing negotiations for all donor commitments is important to ensure uninterrupted delivery beyond FY20. ### Activity volumes and geographic focus - The current work plan endorsed by the Steering Committee includes: - 28 active country projects (covering 14 countries and 3 regional projects), - 6 research projects, - 2 training projects, and - 2 workshops. - Around 90 percent of TF activities focus on the fiscal area (module 1, 2 or 3). - About two-thirds of MNRW’s activities are implemented in sub-Saharan Africa. - Nearly three-quarters of activities are provided to low-income countries. - In FY17 there were 21 HQ-led missions and 28 short-term expert (STX) visits in 17 different countries (FY16 had 25 HQ-led missions and 23 STX visits). ### Key results and examples (FY17) - Cameroon (module 1): A new mining code incorporating some IMF recommendations was adopted in December 2016. - Ghana (module 1): Authorities are gradually starting to apply the FARI revenue forecasting model tailored for Ghana through training. - Kenya (module 1): Project completed with a final workshop that trained officials to use the FARI model. - Kenya (module 3): A new Sovereign Wealth Fund Bill is being prepared, with drafts consistent with international good practice. - Liberia (module 2): A technical assistance plan to build staff capacity on EI risk management has been developed. - Madagascar (module 3): A medium-term budget framework (MTBF) for 2017-19, incorporating IMF recommendations, was adopted by Parliament in December 2016. - Mongolia (module 3): A Public Investment Management Assessment recommended reforms; technical assistance on updating accounting policies to International Public Sector Accounting Standards identified major gaps. - Sierra Leone (module 3): Draft PFM legislation has been enacted into law. - Tanzania (module 1): Amendments to the Income Tax Act (ITA) setting out a mining and petroleum tax regime were adopted in July 2016. - Research #2 (Mining Tax Administration): A workshop on EI tax administration was held in Mauritius with 32 participants from 12 sub-Saharan MNRW-eligible countries. - Research #5 (Progressivity in Natural Resource Taxation): A draft analytical paper on progressivity in natural resource taxation was prepared; the paper will be issued as an IMF Working Paper and key findings are expected to be incorporated into the FARI model fiscal regime analysis. - Workshop #2 (Cross-border issues in resource taxation): Proceedings were published in a new book on International Taxation and the Extractive Industries. - Scoping missions: Missions to Kenya (EI tax administration) and the Central African Republic supported preparation of new project proposals. ### Training, capacity building, and methodological advances - Training was delivered in revenue-forecasting (FARI) in Ghana and Kenya. - A successful workshop on EI tax administration brought together tax officials from multiple countries to build capacity on industry-specific tax administration issues. - Module 2 (Tax Administration) emphasized risk-based compliance strategies, specialized industry teams, resource project fiscal modeling (FARI), formalized cooperation and data sharing, centralized databases, and development of coordinated compliance strategies. - Lessons from Phase 1 include: - Base-level processes and knowledge must be addressed before specialized EI skills (e.g., Excel skills, audit techniques). - Fiscal modeling is an effective methodology to develop technical EI knowledge in addition to risk assessment. - Effective fiscal modeling and risk assessment require coordinated approaches across government agencies and models adapted to specific needs and capacities. ### Research and publications - The flagship publication International Taxation and the Extractive Industries was published by Routledge and launched during the IMF/World Bank Annual Meetings in October 2016. - The research project on progressivity in natural resource taxation produced a draft working paper on Progressive Taxation of Natural Resources as Second-Best Optimal Policy. - Preparation of a new Guide on Resource Revenue Transparency for pillar IV in the Fiscal Transparency Code made substantive progress but is expected to extend into Phase 2 (FY18) due to logistical delays. ### Operational observations and risks - Demand for capacity building on managing natural resource wealth remains high and is transitioning into Phase 2. - For country-level projects, more preparatory work (e.g., scoping visits) has been used to ensure strong commitment by authorities. - Funding shortfall of about US$4 million for Phase 2 emphasizes the need to continue fundraising during the first year of Phase 2 to ensure uninterrupted delivery beyond FY20. - In a few country projects, planned activities were not implemented because of security or electoral-cycle related constraints. *Source: Managing Natural Resource Wealth Trust Fund (MNRW-TF) Phase 1 — Executive Summary, Annual Report covering FY17 (May 2016 – April 2017).* ### Box 2. Progressivity in Natural Resource Taxation ### Box 2. Progressivity in Natural Resource Taxation ### Project overview and objectives - The analytical project was led by Professor Jean-Francois Wen from the University of Calgary, supported by the MNRW-TF. - The project aimed to provide applied policy guidance on the desired degree of progressivity in natural resource fiscal regimes. - During a visit to the IMF in April 2017, Professor Wen prepared a final draft of the paper for issue as an IMF Working Paper, presented it at a seminar, and worked with IMF tax experts to refine fiscal regime analysis in the FARI tool. ### Definition and measurement of progressivity - Progressivity is loosely defined as the extent to which the average government take (as a share of project net cash flow) increases with realized profitability. - With a progressive fiscal regime, the government take is relatively higher for more profitable investments and lower for less profitable ones. - The paper emphasizes measuring marginal tax rate progression in profit- or rent-sensitive fiscal instruments rather than overall government take from a given resource project. ### Main analytical findings - Regressive taxes, by their very nature, tend to be distortionary taxes, and vice versa. - Marginal tax rate progressivity of rent-based or profit-sensitive fiscal instruments is desirable in the presence of distortionary taxes, such as royalties, in order to capture the remaining rent for the government as the resource owner. - Emphasis should be placed on marginal tax rate progression in the direct taxation of profit or rent, rather than progressivity in the overall government take. - These observations are illustrated with a simple analytical model in which a second-best optimal tax on profit is derived in the presence of other tax distortions. ### Practical implications for fiscal regime assessment and tools - The paper’s insights informed options for refining fiscal regime analysis in the FARI tool to benefit from the research. - Policy focus should prioritize designing marginal-rate progression in direct profit/rent taxes when other distortionary instruments (e.g., royalties) are present. - The second-best optimal tax derivation highlights trade-offs when other tax distortions cannot be eliminated. ### Results-Based Management (RBM) and project performance (selected metrics and findings) - RBM scoring for MNRW projects uses a standardized 4-point rating: (1) not achieved; (2) partially achieved; (3) largely achieved; and (4) fully achieved. - New project proposals have been approved incorporating an RBM matrix with standardized objectives, outcomes and verifiable indicators. - Project-level RBM scoring is based on the targeted outcomes defined for each project when initiated. - Across the project portfolio: - More than two thirds (23 out of 33) of the targeted module outcomes have already been fully achieved or largely achieved. - One-third (10 out of 33) of the targeted country-module outcomes have been partially achieved and out of which 5 projects have been proposed to be rolled to MNRW phase 2. - Over one quarter (8 out of 28) of the targeted country-module outcomes in revenue administration have already been fully achieved or largely achieved. - Over one-half (17 out of 28) of the targeted country-module outcomes in revenue administration have been partially achieved, out of which 2 projects are being proposed for roll over. - About 42 percent (11 out of 26) of the targeted country-module outcomes in PFM have already been largely achieved. - Almost another 46 percent (12 out of 26) of the targeted country-module outcomes in PFM have been partially achieved. - Portfolio indicators: - Percentage of endorsed work plan budget expended is greater than 84.5 percent (as at April 2017). - 93 percent of country modules rated as “on track” in annual/mid-year SC reports (excluding projects not started). - 48 percent of outcomes achieved. - 45 percent of outcomes largely or partially achieved. ### Policy and operational lessons for Phase 2 design - Key lessons from Phase 1 informed Phase 2 project design, including the need to secure stronger upfront country ownership and to be attentive to domestic implementation capacity constraints. - Phase 2 portfolio highlights (selected): - Module 1 (fiscal regime): Continuation of projects with Ghana, Liberia, Mozambique, Sierra Leone and Uganda; a new project with Nigeria. All include FARI modeling capacity building. - Module 2 (revenue administration): Continuation with Mozambique and Sierra Leone; a new project with Kenya. The FARI tool will be used to strengthen risk assessment. - Module 3 (PFM): Continuation with Mongolia focusing on medium term budget framework reforms and a shorter project with the Democratic Republic of Congo. - Module 4 (exchange rate and macro-prudential policies): Formulation of a new multi-country project underway. - Module 5 (statistics): New projects approved on compiling statistics on natural resource revenue and macroeconomic aggregates for natural resources. - Training: Development of an online course on macroeconomic management in resource-rich countries. - Research and analytical tools: Further development of the FARI tool for fiscal regime analysis, tax gap and risk assessment, and revenue forecasting; creation of a public library on fiscal regimes for the extractive sector. --- _Source: https://www.imf.org/-/media/files/capacity-developement/mnrw/mnrw2017ar.pdf_