Sierra Leone's mining and petroleum sector has made a significant recovery since the end of its 11-year civil war in 2002. The nation's vast mineral resources include gold, rutile, ilmenite, iron ore and bauxite, as well as diamonds. Mining accounted for almost 60 percent of exports in 2010, with diamonds contributing 65 percent of that total, but the sector has suffered recent setbacks in both the diamond and rutile industries, contributing to a 13 percent decline in the GDP of the industrial sector from 2008 to 2009. Overall, the economy recorded GDP growth of 4.9 percent in 2010, representing an improvement after the 2009 drop to 3.2 percent.

On 6 September, 2009, Anadarko Petroleum Corporation announced an offshore oil discovery at the Venus exploration well. This is the first deepwater test in the Sierra Leone-Liberian Basin and comes just two years after major oil and gas finds by Anadarko and its partners off the coast of Ghana. The commerciality of the discovery has yet to be proven, so it remains unknown whether the country will emerge as an oil producer.

Sierra Leone ranks 158th out of 169 in the UN's Human Development Index, with 70 percent of its 5.5 million people living below the national poverty line (WB, 2009). Sierra Leone became an implementing country of the Extractive Industries Transparency Initiative in 2006, and, after delays due to political factors, submitted a final validation report in 2010.

A new Mining and Minerals Law was signed in 2009. With these reforms, legislators took important steps to improve mining sector governance, enshrining new transparency and accountability practices in law and enhancing principles of good governance for the extractive sector. During 2011, Sierra Leoneans began debating proposals on a new Petroleum Exploration Act that would make significant changes in the management of the oil sector.

Until the 2009 law was enacted, the fiscal regime governing mining in Sierra Leone was based primarily in the Mines and Minerals Decree of 1994, adopted in 1996 and amended in 1998, and the Income Tax Act of 2000. Among other changes, the new act raised royalty rates for precious stones and minerals (with diamond royalties rising from five percent to 6.5 and precious metal royalties rising from four percent to five), and determined new rules for license fees, surface rents and contributions to the Agricultural Development Fund (set at 0.1 percent of sales, for the benefit of areas in which the mines are located).

The Income Tax Act of 2000 included a separate annex governing the calculation of taxable income for mining operations and providing other mining-specific rules.

The National Advocacy Coalition on Extractives (NACE), a policy advocacy group and member of both the Publish What You Pay coalition and Sierra Leone's EITI multi-stakeholder group, has said that weaknesses in the fiscal framework—such as individual mine-specific taxation regimes that are more generous than the general legislation—and inefficient revenue collection have combined to deny Sierra Leone its fair share of mining revenues.
 
Although the government has stepped up its fight against corruption since 2007, and has established new safeguards with the 2009 legal reforms, the overall mining sector continues to suffer from corruption, lack of transparency, weak oversight and low mining revenues. In NACE's report Sierra Leone at the Crossroads (2009), the director of the mining ministry attributes much of the inefficiency and corruption to the sector's monitoring officers and wardens, who are underpaid, too few in number and often lacking the training and prior education to be as effective as possible in their oversight roles. One clear example is the lack of proper coordination and information flow between the Ministry of Mineral Resources and the National Revenue Authority which collects taxes from mining companies. The newly-approved policies include measures to improve revenue collection mechanisms and minimize leakage.

Another planned improvement is a coordinated effort by the National Revenue Authority and the Ministry of Finance to widen the tax base, control exemptions and tax evasion, and establish a coherent system to offer incentives and fiscal benefits for investment. Officials have also declared interest in creating an efficient and predictable tax system and strengthening the capacity and efficiency of the tax administration.

In June 2006, the country signed on to the EITI, a step that promised to bring industry, government and civil society together to promote transparency and accountability of mining revenues and establish linkages with anti-corruption measures and gains made through the Kimberly certification process.

After EITI activities stalled during the 2007 elections, a revised EITI workplan was drafted in 2008, and a new reconciler and EITI champion were named. Revenue Watch also held a local training in summer 2008 to help speed the implementation process. Sierra Leone produced its first EITI report in March 2010, and was one of several EITI countries granted an extension to complete its national validation process by fall 2010.

Sierra Leone submitted its final validation report to the EITI Secretariat in September 2010. Upon review of the validation report, the EITI International Board found Sierra Leone to have made meaningful progress but to have fallen short on several aspects of implementation. The Board agreed Sierra Leone would retain its status as a candidate country, subject to a clearly defined and agreed work plan for achieving compliant status in line with the EITI Rules.

Despite these encouraging steps, major challenges remain in the effort to ensure government follow-through on EITI, if the initiative is to become a vibrant influence on the country's mineral policy. EITI reports have indicated that there are problems with corruption and the failure of Sierra Leone to make significant income from its mineral sector. Read the Revenue Watch analysis of Sierra Leone's EITI report and download or compare country data at www.revenuewatch.org/EITIreports.

The government established an Anti-Corruption Commission in 1996 to prevent the misuse of funds and to monitor related payments and services. The work of this commission focused on general government fraud and corruption, and not particularly on mining or other extractive industries. After several high-profile investigations at the outset, the work of the commission stalled and its leader resigned in 2010.

Historically, diamonds from small-scale miners helped to finance the brutal Revolutionary United Front (RUF) rebels, prolonging a civil war that had itself brought large-scale, mechanized mining to a standstill.

Since 2002, concrete steps have been taken to improve financial accountability. The following laws have been passed to improve public financial management: Financial Administration Regulations (FMR), 2007; the Government Budgeting and Accountability Act (GBAA), 2005; National Revenue Authority Act, 2003; Local Government Act, 2004; and Public Procurement Act, 2004.

In 2001, the government instituted the Diamond Area Development Fund (DACDF) to help support development through company payments into the fund. Contributions from the fund have contributed to improvements in roads, social infrastructure and reductions in illegal mining, when results are compared to the chiefdoms that do not receive such funds. In light of these benefits, civic groups are calling on the government to consider increasing the percentage of the royalty allocated to the DACDF, but overall company fund contributions remain small in comparison to estimated export revenues for diamonds. Furthermore, the fund has been fraught with problems linked to poor governance at the local and community levels.

The current effort to strengthen the mining sector's legal framework began in 2004, when the government of Sierra Leone, with support from the UK's Department for International Development, requested that the Law Reform Commission lead a process of consultation, review and drafting for an updated Consolidated Mines and Minerals Act. The Commission's objective was to review the current legal framework and recommend new rules to better align mineral sector legislation with international standards for the protection of the environment, health and safety, underground mining operations and export procedures, all in a manner consistent with the requirements of the Kimberly Process and the EITI.

The Law Reform Commission's 2004 report explicitly did not address many important fiscal issues arising in the sector, on the premise that its mandate did not extend to the Income Tax Act. Nevertheless, the report's conclusions helped set the stage for a more detailed revision of the fiscal regime, which is central to any meaningful attempt to address the inadequacies identified in the legal framework. The report confirms that the mining sector has serious transparency challenges, including weak parliamentary oversight and the failure by some companies to provide financial information, including tax payments and reports. There is also very little publicly-available information about mineral production and earnings.

In early 2008, a government task force under the Ministry of Mines began reviewing the country's mining contracts and the sector's legal framework, supported by a group of international advisers, including RWI. The task force has faced a particular challenge tackling these issues amid the current global economic downturn, but the process has offered Sierra Leone the chance to lay a better foundation for mining sector governance and for policy regimes that foster transparency and accountability.

The new Mines and Minerals Act was passed by the parliament and signed into law at the end of 2009, establishing a new legal framework that replaces the Mines and Minerals Decree of 1994. In addition to updating royalty rates and related fiscal terms, the new law also requires dedicated reporting, disclosure and dissemination of revenue and payment information by both mineral rights holders and the government. These rule changes provide the legal basis to make implementation of theEITI compulsory. The law goes some distance to make this an obligation of the license holder, and makes contravention of this provision a prosecutable offense.

The task force was also charged with making specific recommendations on contracts to be renegotiated. To date, this process has resulted in the successful renegotiation of the contract governing Sierra Leone's largest diamond mine. Plans for additional renegotiations have been announced.In the petroleum sector, the Venus discovery has intensified interest in reforming the legal framework in place since 2001, characterized by limited transparency and high levels of administrative discretion. The government instituted a new Petroleum Policy in 2010, establishing a broad set of good governance principles including publication of revenues and contracts. The government submitted a revised Petroleum Exploration and Production Bill to parliament in July 2011 that included several clauses seeking to improve transparency, including a requirement that oil contracts be awarded only through competitive auctions, that contracts be published and that payments be disclosed in accordance with the terms and procedures of EITI. The bill was submitted via a Certificate of Emergency, which resulted in legislative approval without any debate. Sierra Leone’s civil society has called on the government to recall the bill, charging violations of due process norms and failure to conduct any public consultation.

Sierra Leone has yet to enact a Freedom of Information law, but recent increases in national media activity and freedom in public associations is encouraging. Civil society continues to call on the government to pass an FOI law, which would facilitate access to information on extractives. In the meantime, the work of NACE and budget transparency and accountability groups continues to increase public awareness of extractives issues.