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Mineral wealth for human development: The Texas way

Patricio V. Marquez's picture
A student with University of Texas at Austin Tower in the background. © qingwa/iStock


As countries look to domestic resources to help meet the ambitious development agenda laid out in 2015, there is value in looking at international experiences where mineral wealth has become a dedicated revenue stream for financing development efforts, particularly for investing in human capital (via public health or education).

Why the emphasis on mineral wealth? The answer is simple. Many countries with large endowments of valuable natural resources, particularly in sub-Saharan Africa, do not fare better in terms of human development outcomes than less well-endowed countries, and in some cases  often do worse. 

Yet there are good international examples of spending mineral wealth in ways that benefit people, as in copper-mining Chile, diamond-rich Botswana, and oil-producing Malaysia and Norway.  There’s also one in the United States – Texas.

We share a deep connection to Texas and would like to highlight this state’s century-old experience as another good practice from which we have both benefited. While it is well-known that oil and natural gas contribute to almost half of the economic activity in Texas, not many acknowledge that dedicated revenue from oil and natural gas taxes and royalties have played a critical role in funding public education that reduces poverty not just in Texas but around the world.

As mandated by the Texas constitution, the Foundation School Fund, the primary mechanism for transferring state funds to more than 1,000 school districts, is largely financed by 25% of the state’s occupation tax revenues, which include oil and natural gas production taxes. In 2014, the state’s education system received over $1 billion in revenue from these taxes.

The Permanent School Fund, a state education endowment worth $34.5 billion in 2015 (the second-largest in the United States) that is capitalized with annual oil and natural gas royalties and investments managed by the State Lands Board, supports K-12 public schools. This Fund also helps secure AAA bond ratings for school districts, enabling them to pay lower interest rates.  It is estimated that the Permanent School Fund has contributed more than $23 billion to Texas schools since 1960, with about $1.7 billion being disbursed over 2014-2015. 

The Permanent University Fund (PUF) is a public endowment that supports 21 institutions of the University of Texas (UT) and the Texas A&M University systems that provide educational opportunities to close to 200,000 students across the state. PUF was established by the 1876 Constitution of the state of Texas through the appropriation of 2.1 million acres of land in West Texas. Since 1923, when oil began to be drilled on what was once cattle-grazing land, the principal of the PUF, which cannot be spent, has included proceeds from oil, gas, sulfur, and water royalties on this land, gains on investments in the financial markets, rentals of mineral leases, and the amounts received from the sale of university lands. The income generated by grazing leases on university lands and a portion of the earnings from the endowment are distributed across the two university systems (about $650 million in 2013 alone); the rest is added back into the principal.

The PUF is managed by the Board of Regents of the UT System, which contracts with a non-profit organization for its day-to-day investment management. It grew from $11.6 billion in 2010 to over $21.8 billion in 2015 — one of the largest educational endowments in the United States, with slightly more than Stanford ($21.6 billion) but a little less than Harvard and Yale.

To prevent political interference in the management of the PUF, specific provisions are included in the state constitution limiting how much money could be withdrawn and prohibiting spending on anything outside academics.

In addition to paying taxes and royalties, the oil and natural gas industry contributes funding for special training programs in local high schools and colleges, particularly focusing on science, technology, engineering, and math. This helps the state educational system meet the demand for a skilled workforce in the Texan energy industry and gives students skills to help them find jobs after graduation.

Overall, the experience in Texas shows the benefits of a strong legal framework, well-developed institutional and governance arrangements, sound financial management of mineral endowments, infrastructure development, and political and social commitment to human capital development. Dedicated funding streams from mineral taxes and royalties can help meet both the long-term requirements for economic growth when extractive revenues dwindle, as well as the immediate need to build human capital as a key contributing factor to diversified growth and social well-being over the medium and longer term. Trade-offs made for short-term benefit rarely provide the necessary investment required to ensure shared prosperity.

Mineral-rich countries would do well in applying lessons from the Texas experience in their local contexts, particularly for mobilizing domestic funding needed to support the education-for-all agenda and the progressive realization of universal health coverage. Learning from what has worked well and not so well across the world is perhaps the path to follow in order to overcome the “poverty of imagination” that prevents the creation of more just and prosperous societies.

As we say in Texas, “Hook ‘Em Horns…” 

Comments

Submitted by Christian on

Dear Patricio, thank you very much this nice article. I'm a DRC-based Lawyer involved in mining sector(best international practice) and I'm currently conducting research in South Africa on issues relating to governance issues in mining sector. Can you please share with source based on your articles and why are arguing that Norway and Malysia and Chile are good examples in term of governance. I would like to documentate such arguments as the aim of my research is to demonstrqte that the DRC and South Africa as Mineral-rich countries are able to contribute significantely to the development of human capital. I will be happy to hear from you. Christian Luksua, [email protected] +243825931990

Submitted by Patricio on

Christian--Many thanks for reading the blog. Please see the attached links for additional arguments on the topic and information on Chile, Botswana, Norway, and Malaysia:

Arellano, J-P. 2012. Copper Mining and its impact on Chile development. Nº35 // Volume 16 // July-December 2012 @journal.
Bitran, R., Escobar, L., and Gassibe, P. 2010. “After Chile’s Health Reform: Increase In Coverage And Access, Decline In Hospitalization
And Death Rates,” Health Affairs, vol. 29, No. 12, pp. 2161-2170.
Hong Teck Chua, H.T., and Cheah, J. H. C. 2011. “Financing Universal Coverage in Malaysia: a case study.” BMC Public Health 2012,
12(Suppl 1):S7. http://www.biomedcentral.com/1471-2458/12/S1/S7
IMF. 2007. Guide on Resource Revenue Transparency. Washington DC: IMF .
Lange, G-M., and M. Wright. 2004. “Sustainable development in mineral economies: the example of Botswana,” Environment and
Development Economics, vol. 9, No. 4, pp. 485–505.
Marquez, P. 2013. “Institutions and Systems Matter for Health and Social Development.” http://blogs.worldbank.org/health/
institutions-and-systems-matter-for-health-and-social-development
Marquez, P. 2012. “Ethics, Values and Health Systems.” http://blogs.worldbank.org/health/ethics-values-and-health-systems
Pineda, J. and F. Rodriguez. 2010. “Curse or blessing? Natural resources and human development,” Human Development Research
Paper 2010/04. New York: UNDP.
Tenth Malaysia Plan 2011-2015. Speech by the Prime Minister in the Dewan Rakyat on June 10, 2010.
UNDP. 2011. Managing Natural Resources for Human Development in Low-Income Countries. WP 2011-002. UNDP Regional
Bureau for Africa.
World Bank. 2006. Where is the Wealth of Nations - Measuring Capital for the 21st Century. Washington D.C: World Bank.
ON NORWAY OIL FUND
General website: http://www.regjeringen.no/en/dep/fin/Selected-topics/the-government-pension-fund/government-pensionfund-
global-gpfg.html?id=697027
Brief history and rationale: http://www.regjeringen.no/pages/7772/FactSheet_year-end2011.pdf
How the fund is managed: http://www.regjeringen.no/en/dep/fin/Documents-and-publications/propositions-and-reports/
Reports-to-the-Storting/2011-2012/meld-st-17-20112012-2.html?id=680515

The Case for Sharing Africa’s New Minerals Wealth With All Africans
http://blogs.worldbank.org/nasikiliza/the-case-for-sharing-africa-s-new-minerals-wealth-with-all-africans
Institutions and Systems Matter for Health and Social Development
http://blogs.worldbank.org/health/institutions-and-systems-matter-for-health-and-social-development

Also, see OECD, 2008. Natural Resources and Pro-Poor Growth: The Economics and Politics highlights the potential for natural resource management and environmental stewardship to contribute to poverty reduction and economic development of developing countries. http://www.oecd.org/environment/environment-development/42440224.pdf

Jennifer Johnson Calari who is now the Director/Global Head of Reserve Advisory Management in FABRP has edited and contributed to a book on this subject which describes funds in Alaska, Norway, Wisonsin, Botswana, Kuwait and many more that have been set up for this purpose:
http://www.amazon.com/Sovereign-Management-Jennifer-Johnson-Calari-Rietveld/dp/1902182464

Take a minute to read the edition of WBG Africa's Pulse (http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/0,,contentMDK:23004589~pagePK:146736~piPK:226340~theSitePK:258644,00.html)which points to Africa's new oil, gas and mineral wealth discoveries as a renewed opportunity for inclusive development, encouraging African countries to increase investments in better health and education, cheap, nutritious food, more jobs, more electricity, and other transformational programmes. This is why WBG has established a new trust fund (http://www.worldbank.org/en/news/2012/10/05/world-bank-launches-fund-african-countries-negotiate-deals-for-oil-gas-minerals)that will help African countries win the best possible deals from the big international minerals companies for their new discoveries of oil, gas, gold, and other natural resources, while also encouraging governments to invest their new-found wealth in the sort of long-term development investments that will power their countries forward for the next generation and the next.

Also see a New York Times blog on the same subject (http://green.blogs.nytimes.com/2012/12/10/fighting-the-resource-curse-part-2/).

Submitted by Christian Lukusa on

Dear Patricio, thank you so much for your nice post with useful information. I wonder also if you could explain further to me which criteria or which tools are you using to assess and determine the level of achievement. Each country is specific and different. For example it’s usually to read among scholars concepts such "good governance" as a tool to improve growth in mining sector. It’s a broad concept. My aim is to trace four paramount criteria or “international best practices” and to investigate their integration within the mining industry in South Africa and in DRC. And after that using those criteria in order to access their implementation while comparing with experiences from Chile, Norway, Botswana and Malaysia based on the same 4 components of either "Good governance" or "sustainable performance index" or "best international practices". We will end our research by suggesting the best and more appropriate best practices possible due to the success in those three countries. What make the Chile, Botswana, Norway and Malaysia different based on four keys index or criteria. Of course for me one of the key element will be the "legal framework and the implementation", “local content”, etc

Submitted by Bill Savedoff on

I definitely think countries should consider dedicating natural resource revenues to social development, but Texan education is a strange example to use. A quick check on google showed that Texas education presents a mixed picture.

Texas was 47th among US States in terms of per student spending. So, the earmarked natural resource revenues are being used to keep other revenue streams (income and sales taxes) low relative to other states. This despite the fact that Texas is the state with the 24th highest median household income. Texas students apparently score at the national average on standardized tests and high school graduation rates have been rising (which suggests the low spending is relatively efficient) but the students who leave high school are having declining success at completing college (which might mean that the low spending is not really turning into learning).
[http://247wallst.com/special-report/2014/06/03/states-spending-the-most-and-least-on-education/4/ ]

So, yes, definitely use natural resource revenues for important public investments like education and health. But don’t use those earmarked revenues as an excuse to spend less or to spend poorly.

Submitted by Patricio on

Thanks Bill for your comments and information. By presenting the "strange example" of Texas as you put it, (or should I say "weird", using part of the popular slogan "keep Austin weird"), we wanted to bring to the table a seldom acknowledged century-old good practice of establishing permanent endowments for dedicated human development purposes using taxes and royalties from oil, gas and mineral wealth discoveries. This to reinforce our argument that new mineral riches should be used by countries as an opportunity for fostering inclusive development, increase investments in better health and education, more jobs, better infrastructure, and other transformational programs. Investing and managing well new-found wealth in the sort of long-term development investments such as education and health, and infrastructure, will help countries move forward into the development path. Glad that you agree!

Submitted by Giovanni Marquez on

Refreshing....especially in the era of scarcity of resources for boosting human capital.

Like tobacco (sin) taxes very important source of income for MOH in COR, THAI expansion of UHC others.

Good stuff

Submitted by Patricio on

Many thanks. On tobacco taxes, please see: http://blogs.worldbank.org/health/making-public-health-case-tobacco-taxation

Submitted by Olga B Jonas on

Texas is a cool example, actually, because it may be unexpected and as such will provoke discussion.

Another explanation for the good outcomes in primary and secondary schools, despite low per student public spending, may be that private expenditures are above average? Are they?

In higher education, there's a noteworthy example: Texas A & M has an impressive interdisciplinary program on "One Health." This shows that the oil funds are being allocated wisely at the higher level, to get the next generation of graduates in the various relevant disciplines to collaborate. This collaboration has been extraordinarily difficult to achieve elsewhere. It's also essential for prevention and control of infectious diseases, which are overwhelmingly zoonotic. Zoonotic diseases "jump" from animals to humans, like AIDS, flu, SARS, Ebola etc, potentially with catastrophic results globally.

Spending what resources are available well (efficiently, effectively) is actually an overriding priority, coming ahead of just getting more - see http://onehealth.tamu.edu/ as well as https://www.facebook.com/groups/112491482110940/

Investments in veterinary and human public health systems (i.e. delivery of "One Health") are actually "the single most important area for productive investment on behalf of mankind," according to Harvard economist Larry Summers, April 2014 (see video and transcript on WB website).

Initiatives such as the One Health program at Texas A & M are unfortunately still rare -- and are usually ignored by human medical curricula, policies, and practice. This is both ineffective and inefficient.

Many thanks Olga for your comments and perspective which I fully support. After working on the Ebola response in West Africa this past year, it became clear to me that if the countries of the region were to effectively adopt and follow “One Health” principles, the region will be in a better position to detect early, report, do case confirmation, and timely respond to outbreaks of infectious diseases, both new and endemic, by linking public health, veterinary and environmental services, as well as to deal with antimicrobial resistance.

We should be mindful that outbreaks of Ebola and other dangerous viruses such as the Middle East Respiratory Syndrome (MERS) in Saudi Arabia, are an ever-present danger in our interconnected world. The risk of animal-to-human transmission of lurking viruses will continue to be nurtured by close contact of people with wildlife, which is facilitated nowadays by the rapid spread of human settlements, aggressive mineral extraction practices, environmental degradation, the globalization of trade and services, mobility of people across borders, and poor, inadequate, and dysfunctional health systems in many countries.

Submitted by Todd J Moss on

Terrific and useful post. Thank you. I think we have something to learn from here, including for our work on "Oil to Cash". http://www.cgdev.org/initiative/oil-cash-fighting-resource-curse-through-cash-transfers
I'd be interested in any further information about the specific mechanisms for enforcing the endowment fiscal rules?

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