Procedure for Distribution of 5% Revenue of Natural Resources for Provincial Development

Investment in infrastructure and channeling the revenues for equal development and enabling economic factors that would precipitate long-lasting and sustaining economic growth is important for making the best use of natural resources.

Herat, Kleidermarkt

The discovery of hydrocarbon resources and minerals in Afghanistan provides the country with an opportunity to fast‐track the economic and social transformation process. However, these resources are finite and the associated revenues can be immense. If not well managed, these revenues have the potential to undermine the macroeconomic, budgetary and governance structures that have been built over the past years leading to waste. In order to sustain the economic and social transformation process beyond the extraction era and exploitation period, we will have to manage the natural resources revenues in manner that will encourage other sources of wealth creation.

Investment in infrastructure and channeling the revenues for equal development and enabling economic factors that would precipitate long-lasting and sustaining economic growth is important for making the best use of natural resources. As the Minerals Law provides for the sharing of 5% of the overall natural resources revenues with the areas where the natural resources are discovered and exploited, revenue sharing is an important factor ensuring social cohesion and mitigating the negative effects of mining on local communities and producing regions.

Natural resources revenue shared with local governments, if not well managed, can be a source of destabilization to local government financing, budgets and investments. In order to avoid the potential to undermine local government operations, natural resources revenues to be shared with the local governments ought to be pre‐specified in terms of projects based on defined criteria. In order to promote transparency and accountability, natural resources revenues will be shared with recognized local authority structures within the producing region.

Having in mind, the necessity to prevent horizontal conflicts, and to make sure that the communities in the mining areas and producing regions affected directly or indirectly by mining activities are protected and compensated, this procedure provides for a mechanism for the sharing of mining revenues with the local governments in each producing region, with a view of mitigating the overall impact of these revenues on the economy. This procedure requires the highest standards of transparency and accountability in the management of natural resources revenues and gives the institutional and governance structures to be used to achieve this.

Article 1:

According to the Article 9 of the Constitution, natural resources are the property of the state and shall be managed through related regulations. This procedure has been enacted pursuant to the article 84 of the Minerals Law (2014).

Article 2: Objectives

The objectives of this procedure are:

  1. To regulate the appropriate use of the 5% allocated portion of natural resources revenue;
  2. To regulate and manage the distribution of the allocated natural resources revenue for provincial development;
  3. The economic self-sustainability of Afghanistan through the development of its Minerals sector;
  4. To ensure that redistribution of natural resources revenues is managed according to the best international practices and experiences;
  5. To ensure that the communities in the producing provinces and areas directly/indirectly affected by mining activities benefit from revenues of extracted and exploited natural resources
  6. The sustainable development of infrastructure in mining areas;
  7. To ensure equal development across the country,  
  8. To promote peace and security through development of social and economic activities in the Mining local communities.

Article 2: Definition of terms

The following terms in this procedure shall bear the meaning as defined bellow:

1. “Mine” means any place where the existence of minerals has been proven and Mineral Activities or any related activity connected with Mining is carried on. All buildings, premises, installations and equipment related to Mineral Activities, above and below the ground levels, for the purposes of extraction, Processing and preparing minerals are included in this definition;

2. “Mining Operations” means the activities that are carried out during the course of Mineral Exploitation;
3. “Mineral Activities” means the Reconnaissance, Exploration and other pre-production activities, Exploitation, Processing, transformation, Ancillary Activities, transportation, export, marketing or sale of Minerals. Reclamation and Mine closure activities, whether on surface or sub-surface or in water courses, are also included in this definition;

4. "Exploitation" means operations and activities related to the technical and economically viable extraction of Minerals or continuing Exploration of Minerals;

5. “Mining” means the activities that are carried out for the purpose of Mineral extraction;

6. “Small-scale Mining” is Mining activities conducted for the purpose of extraction and Exploitation of industrial minerals (such as clay, lime stone, gypsum, salt, talc, gulnazyts, barite, fluorite, asbestos, graphic [graphite], kaolin, sulphur and carbonates) in an area not exceeding one square kilometer and sixty (60) meters in depth;

7. “Mineral Development Contract”: is a written agreement which is entered into by the State and a Legal Person for the purpose of Exploration and development of Minerals and Exploitation Activities, and in which the rights and obligations of each party are set forth in accordance with the provisions of this Law;

8. "License" means a written document which is granted to a Person for the purpose of conducting Reconnaissance, Exploration, Exploitation, Small-Scale and Artisanal Mining activities, of Minerals, pursuant to the provisions of this Law;

9. “License Holder” means the Person in whose name, the License of Mineral Activities is registered in accordance with the provisions of this Law;

10. “Area” means the surface or sub-surface of land where a License Holder can conduct Mineral Activities according to the provisions of this Law;

11. “Affected community” means those persons who are impacted, or can be reasonably expected to be impacted, by Mineral Activities;

12. “Surface Rent” refers to the amount that a License Holder pays to the owner or occupant of land on which the Holder intends to conduct Mineral Activities;

13. “Royalty” means a financial obligation payable by a License or Authorization Holder or contractor to the State, which is calculated as a specified percentage of the gross production or gross production revenue;

14. “Provincial Development Code” refers to the budget code that shall be created by the Ministry of Finance for the purpose of collecting the allocated 5% of the overall revenues of extraction, exploitation and exploration of natural resources.

Article Four:

The government shall allocate 5% of the revenues from natural resources extraction and exploitation for provincial development.

  1. The five percent shall be calculated and deducted from the overall revenues that arise from royalties, surface rents, taxes payment and fees, as specified in the Minerals Law and other related regulations.
  2. The 5% share of the revenue shall be transferred directly upon every deposit made by the license holders.
  3. All taxes charged and collected by the MoM and its directorates in the provinces and those collected and taxed by the MoF will be included to the overall revenue and hence subject to deduction of 5%.

Article Five: Establishing Special Fund Code

The 5% of the revenues shall be collected to a special fund code that will be created by the Ministry of Finance.

  1. From the overall revenues of natural resources, 5% shall be transferred to the special code immediately after it is deposited to the local accounts or accounts of the Ministry of Mining.
  2. The amount collected under this fund code cannot be transferred to another codes or utilized for another purposes (e.g. covering budget deficit, compensation of deficit in another budget codes, or dictation of emergency situations).
  3. This fund shall be utilized for provincial development as required by the Minerals Law through implementation of development projects.
  4. The amount to be allocated for every producing province shall be calculated based on the previous year’s revenues.
  5. No direct diffusions of cash can be made from this fund to provinces, municipalities, districts or local communities.

Article Six: Allocation of the fund for producing provinces

  1. Each producing province shall receive a percentage of the provincial development fund based on the population size and their share in the overall national income from the extraction and exploitation of natural resources without positive or negative discrimination in allocation of the fund.
  2. Taking into account fairness and equity principles, the formula for provincial allocation of the revenue from the Provincial Development Code (PDC) is a function of the sum of the weighted population share and the weighted production share as represented below:

LGRSi = R/2 * (Weighted LG population share + Weighted LG Production Share)
Where; LGRSi – Individual local government royalty revenue share,
LG – Local government
R Total local government royalty share
R/2 seeks to split the allocated fund into two halves, with one half to be shared on the basis of population distribution and the other half on the basis of the share of the producing province in the overall national income from the mining sector.

Article Seven: Local distribution of the allocated fund

In order to avoid concentration of projects funded from the Provincial Development Code within a specific area in the producing province, and to address the claims from the other parts of the producing province, based on the formula stated in the Article Six of this Procedure, the overall allocated fund for the producing province shall be shared in accordance with the following formula:

  1. 45% of the allocated fund from the PDC to the communities directly affected by mining activities and extraction/exploitation process and or areas where mines are located
  2. 5% to the affected citizens/individuals including the land owners whom their land/property has been occupied/used for the purpose of extraction or exploitation of the natural resources, provided that those properties under acquisition process is excluded
  3. 50% to other districts/areas of the producing province, provided that if the allocated budget is not sufficient for financing all prioritized projects proposed for the mentioned districts/areas, 1) level of priority, and general impact of the projects on the livelihoods of the communities should be considered. 2) Projects funded from PDC can be implemented in rotational bases.

Article Eight: Prioritization of development projects in producing provinces

Local government in consultation with local communities shall assess and identify the priority areas for development from amongst the requested projects (e.g. roads, bridges, canals, small electricity projects, agricultural machines, schools, etc.).

  1. Local communities within the geographical jurisdiction of the producing province shall submit their proposals for projects to be funded from the PDC to the local liable authority (e.g. district) during the third quarter of the fiscal year.
  2. The provincial government shall prioritize the received proposals in accordance with the principle of revenue sharing specified in the Article Seven of this Procedure, in close consultation with the Provincial Council through establishment of a joint committee.
  3. Focus groups and civil society will be also represented in Joint Committee consultation meetings for selection and prioritization process.
  4. The local government and the parties involved in the prioritization and selection process of the proposals for development projects have to consider the percentages stipulated in the Article Seven to ensure inclusion of the projects from all areas of the province based on the given formula.
  5. A list of such prioritized projects together with necessary specifications shall be submitted to the central government for fund allocation and further processing.

Environmental, social and economic factors should be considered in giving priority to the proposed projects. A proposed project with the utmost positive impact on social welfare, economic growth and development, sustainability of the local economy, mitigation or prevention of environmental effects of the mining activities should be given higher priority.

Article nine: Implementation of the Provincial Developments Projects (PDP)

All prioritized projects for PDP, after due consideration of the available funds in the PDC in accordance with the sharing formula specified in the Article Six of this procedure shall be implemented through Citizen Charter Priority Program (CCPP).

The planned projects of the producing provinces funded from the national budget should not be substituted with the projects funded from the PDC. However, the Ministry of Rural Rehabilitation and Development (MRRD) may avoid duplication of similar projects in the same areas.

The MRRD shall develop a communication mechanism with the local governments in the producing provinces to ensure local priorities are considered in a satisfactory manner to both the local communities and local authorities.

The MRRD also should communicate through a system of information sharing with the Ministry of Mining to make sure that the development projects included in the Community Development Agreements (CDAs) as part of the support documents for the award off the contract for extraction/exploitation are not duplicated in the same area.

Article Ten: Large-scale projects

If proposed development projects includes large-scale projects that,
-    In terms of costs and expenses, it exceeds the budget share of the allocated fund for a single fiscal year,
-    In terms of timeline and life-cycle, it exceeds the span of one fiscal year,
Since, the current financial system does not allow transfer of the allocated fund from one FY to the next FY, the Ministry of Finance shall transfer the remaining fund to other projects with budget deficit and shall compensate the project budget from the next FY budget.
In such cases, the total budget allocation of the project should be divided into the project timeline as required and provide for the necessary budget of each FY until the completion of the project.

Article Eleven: Monitoring and supervision

Technical supervision and quality control of the development projects shall be done by the MRRD similar to all other projects implemented under the CCPP.

Local community involvement in the monitoring and supervision of the projects implementation shall be guaranteed through Local/Village Councils in accordance with the technical specifications of the project.

The company shall acquire the satisfactory signature of the local council representatives upon completion of the project, reflecting the satisfactory quality of the project.

If the project entails handover of technical equipment, e.g. agricultural machinery, the receipt should bear the signature of direct beneficiaries (if they are individuals) and endorsed by the local council.

Article Twelve: Accountability Assurance

In order to ensure accountability and transparency of the processing of the proposals from local communities, selection, and implementation of the development projects funded through PDC, at the end of the FY, a financial report shall be shared with local governments and Provincial Councils with sufficient details that would enable them to judge and gage the accountability of the process and procedures for implementation of the Provincial Development Projects.  

Civil Society, local Focus Groups, and local communities should have access to all financial data related to the projects.