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Can the Nigeria Solid Minerals Development Fund Deliver?

By George C. Lwanda

Established by the 2007 Mining Act and inaugurated in 2013, the Nigeria Solid Minerals Development Fund (SMDF) has struggled to take off, despite its noble intentions. The government’s goal is for the solid minerals sector to contribute 3 percent of GDP by 2025—but it currently contributes less than half a percent.

The fund has five objectives: the development of human and physical capital; geo-scientific data gathering, storage, and retrieval; the purchase of equipment by state-owned mining institutions; the provision of infrastructure; and the provision of extension services to small-scale and artisanal mining operations. Its intention is to catalyze the growth of the minerals sector mainly by providing access to financial resources and training, and by formalizing the status of artisanal miners. This activity is envisaged as a way to reach the 3-percent target. The first solid minerals roadmap, developed in 2015, had the objective of raising the sector’s contribution to GDP to 5 percent by 2015, and 10 percent by 2020. Unfortunately, this target proved to be unattainable, and it was lowered to 3 percent by 2025.      

In order to achieve this, the annual allocation of funds for the SMDF will need to be directed toward productive expenditure aimed at increasing the sector’s value addition. A few key problems must be addressed in order to accelerate growth. Chief among them is the lack of geological data, which has restrained private sector investment. The fund must address this deficit, and favor investment-related activities above others to partly offset the initial high cost of compiling geological data.  

The other major challenge is the fact that mining in Nigeria is largely carried out by artisanal miners—a group that often operates informally or illegally. As much as 75 percent of the mining in Nigeria is estimated to be taking place illegally. Still, artisanal mining is important as a source of livelihoods; in addition to directly employing four other miners, each artisanal miner induces the creation of two additional jobs. The artisanal mining sector therefore exhibits latent transformative potential. But miners first have to be formalized and trained in safer and more efficient mining practices. Among other benefits, this will increase state revenue as miners start to pay taxes, expanding the government’s ability to finance growth. In response to this need, the fund seeks to assist in the formalization and training of artisanal and small-scale miners.

One implication is that the budget allocation would have to be biased toward capital allocations (longer-term investment spending) as opposed to recurrent allocations (operational costs). The SMDF budget allocations between 2014 and 2017 consisted of 46 budget lines separated into capital and recurrent expenditure. Of these, only four directly link to the fund’s objectives, contributing to research and development, training for miners, travel costs related to training, and infrastructure.

Based on the SMDF’s budgetary funding plan between 2014 and 2017, there is cause for concern regarding the efficacy of the budgetary allocations, and in turn, the likelihood of reaching the roadmap target. Annual allocations toward recurrent expenditure averaged around 82 percent per year, ranging between 51 percent of the total budget in 2017 and 100 percent in 2015. This high proportion of recurrent allocations means that the fund is spending far more on operating costs than it is on achieving its growth objectives. These numbers, however, mask some trends in the annual data and water down the extent to which recurrent expenditure dwarfs capital allocations. For example, the purchase of computers, software, printers, photocopying machines, and furniture are all classified as capital expenditure. This is misleading, as these are recurrent costs contributing to general operations. In certain periods of 2015 and 2016, the only funds allocated to core service were for travel and transport for the training of miners, as well as the training itself. In the three years between 2014 and 2016, progressively fewer funds were allocated to capital expenditure. Public investment in the sector was progressively declining at a time when it should have been rising, while the fund’s budget was almost exclusively used for operating costs.

In a similar trend, the rate of growth of the allocations toward travel expenses related to training has risen by at least 24 percent between 2015 and 2017 relative to allocations toward the actual training. This suggests that training is being delivered in an inefficient manner; all training is conducted in-country, so travel costs should not exceed the costs of training programs.

The high provision of funds to recurrent expenditure coupled with a clearly misinformed classification of capital provisions will likely lead to insufficient government investment in the solid minerals sector. This casts doubt on the feasibility of the target set in the solid minerals roadmap. In fact, simulations show that unless substantive and appropriate investments lead to over 200 percent of the average annual growth rate of the sector, the roadmap target will remain unattainable, and the fund will not have achieved its purpose.

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George Lwanda is an extractives policy adviser at the UNDP Africa Regional Service Centre. Interactive data and visualizations related to this blog can be accessed here.

[Photo courtesy of Caitlin Childs]

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