The effectiveness and efficiency of a country’s public sector is vital to the success of development activities in that country. To achieve a well oiled and functioning public sector one thing is critical, decisions made need to be driven more by analysis and quantification of intended impact and less by gambles and political agenda. At InVhestia we are proud to be a pioneer in supporting Governments and parastatals improve the quality of their decision making through financial modelling. While the majority of our work is private facing, we have realized that it can also inform the public sector. Financial modelling which sits at the core of what we do develops tools that can be used to remove the gamble from complex decisions, be they business choices or public policy. Over the last couple of years we have been involved in a number of assignments which show how modellling can support the public sector to improve effectiveness and efficiency.
Support for the Government of Zambia in Fiscal Regime Review and Setting
Zambia is highly dependent on mining as its major productive industry contributing to 68% of the countrys foreign exchange earnings, anything that affects their extractive sector significantly affects the countrys economy. Since 2018, through the Zambia Extractives Industries Transparency Initiative, InVhestia has been offering support to the Government of Zambia through capacity building in financial modelling focused on fiscal regime setting and in consultancy services. The consulting services have been geared towards reviewing the impact of changes in fiscal regime on Zambia’s earnings from the extractives sector and the impact on company returns. Whenever a Government is thinking about changing its taxes in the extractives sector, two factors need to be balanced, how the government take (total earning to the state) will change compared to company returns (these can be measured using the Net Present Value, Internal Rate of Return etc).
Through this work, we have seen improved skills in model build and review and in better engagement between the Government of Zambia and mining companies.
Benchmarking of Kenyan Mineral Royalty Rates with Peer Economies
According to the economic survey, the mining sector in Kenya contributes 0.8% to the country’s GDP. The State Department for Mining is mandated to provide regulatory oversight through the implementation of the Mining Act, 2016. In 2017 InVhestia was enaged to offer financial modelling support in seeking to establish whether royalties charged for gold, coal and titanium under the Act and accompanying regulations and gazette notices were adequate. Our report, as commissioned by the Extractives Hub and written in conjunction with Open Oil was presented to the then Cabinet Minister, Ministry of Mining. The high-level benchmarking exercise showed that Kenya’s fiscal regime falls broadly within norms observed in peer countries.
In preparation of the report we modelled out sample mines for the three resources under the Kenyan fiscal regime and compared the earnings to the Government to what other leading countries were charging and earning from similar resources.
Turkana Oil, should Kenyans be excited?
In 2018, InVhestia published an analysis on one of the oil blocks in Turkana which you can download here. In the report we sought to answer questions such as, how much Kenya will earn from exploiting the resource, how this will be split between the National and County Government and the community, the returns to the Contractor on the project among others.
The report and the accompanying model had critical analysis which at the time was useful in the debate around what formula should have been used to split the earnings from Oil. It also shed light on the feasibility of the project under different price scenarios.
The public sector requires financial models to inform strategic decisions. This is an effort that is also supported by the African Development Bank (AfDB) who launched a project on strengthening domestic resource mobilization through financial modelling for the extractive sector in transitional countries. One key objective is to enhance the capacity of state agencies to forecast and monitor revenues from projects and investments. While it would appear that the focus is largely in the mining sector, public policy in oil and gas, energy, transport and infrastructure, health, housing, planning, industrialization among other sectors can also benefit from the analysis of data through financial modelling.
More and more, financial modelling is proving useful to contribute to pertinent debates which in most cases, have a bearing on livelihoods of millions of persons. Johnny West from Open Oil put it well when he said, “Models can be great ‘rumour killers’, they may show that a country’s offshore sector is not going to save the entire economy, public finances, or end poverty. Or, they may demonstrate that a deal was actually OK.”
We are pleased to be pioneers in this space. We plan to share an update on our Turkana Report before the end of year. To join the mailing list, fill the form on our website.
Stephen Gugu, David Ndungu, Nyambura Ngumba