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GREAT insights Magazine

Can Africa Harness Potential Mineral Rents for Development?

July 2012

Olan'g, S., Schreuder, J. 2012. Can Africa Harness Potential Mineral Rents for Development? GREAT Insights, Volume 1, Issue 5. July 2012. Maastricht: ECDPM.

Africa is a continent well-endowed with a variety of mineral resources; it ranks first in chromium, cobalt, diamond, gold and vanadium reserves and production, among others. For about a decade now, the world has witnessed a steady rise in global demand for these metals and minerals triggered by rapid economic growth in China and India. This trend offers unique opportunities for mineral resource rich countries in terms of revenue generation and diversification. 

In spite of this favorable context, most African mineral resource rich countries have so far failed to harness the full potential of the resource boom to spur their economic growth and development. Evidently, many African mineral resource-rich countries register frustratingly low rates of non-resource sector growth, high levels of poverty, increasing inequality gaps and low tax revenue/GDP ratios (1). In short, while extraction might be expanding at a high rate, its impact on development remains limited. In fact, resource rich countries have performed poorly both in terms of revenue generation and socio-economic development.

Need for strategic management

By and large, Africa lacks strategic management of mineral resources in terms of good policy, legal frameworks and institutions capable of managing development path strategically, i.e. aligning mineral resource extraction to long term national development goals. Extractive industry value chains underpin the logic of strategic management of extractive resources. The framework helps policy makers and planners in resource rich countries to reflect on strategic questions such as why and when to extract their mineral resources, and or what it takes to optimize revenue collection accruing from mineral extraction and spend it on sustainable development (see Figure 1).

Figure 1: Extractive Industry strategic value chain

Great-vol1-5-olang-schreuder-fig1

Source: Adapted from Revenue Watch Institute. www.revenuewatch.org

The most critical but always neglected decision facing resource rich countries is if and when to begin extracting their natural (especially nonrenewable) resources and convert them into monetary or other benefits. In principle, this decision is supposed to be reached after thorough consultation to get prior and informed consent from citizens. They need to be informed about what they should expect from extracting their resources in terms of achieving national development goals; how expected revenues will be spent and managed and where mining activities should or should not take place. To effectively address these questions, governments should undertake a cost-benefit analysis that makes every effort to weigh all the costs, benefits and risks over the expected timeframe of extraction and beyond. Only when the benefits outweigh the risks it is justifiable to move on with exploration. 

Currently, the practice in Africa is that this decision is overridden by the companies’ interests – rather than national development agenda. Alarmingly, the decision often involves only a few technocrats! It may be argued that at the pre-exploration stage there is little motivation for financially constrained poor country to invest a significant amount of its meager resources to undertake detailed cost benefit analysis for an unknown amount of mineral deposits. While, to some extent, this argument makes economic sense, the cost to the country of not doing so is enormous in the long run.

Establishing a conducive framework

Prior to the commencement of exploration activities, a country must independently establish proper frameworks for awarding rights to explore and extract resources in conjunction with the legal and fiscal terms governing those rights. While exploration and extraction rights may be awarded in a variety of ways, the legal and financial arrangements governing the extraction process need to be enshrined in the law to avoid too wide a room for case by case negotiations that are always asymmetrical. More often than not, resource rich African countries have been at a disadvantage when negotiating with multinational mining companies; consequently, they get less revenue than they should. To address this challenge, Africa needs to build its own pool of in-country multidisciplinary expert negotiators. However, not all countries have the capacity to mobilize such expertise in the short term; these countries may consider outsourcing technical assistance around the globe(2).The donor community, especially UN institutions, could also assist these countries to access such expertise from the growing global pool of experts which is heavily deployed by the industry exploit resources at their own benefit.

Once the terms are set, extraction will begin and the companies will typically make a variety of financial or in-kind payments to the government. Depending on the size of mining operations, it always takes time before governments can collect sizeable revenues except royalties and fees that are paid immediately after production commences. The terms and manner in which these payments are collected is dictated by the extraction contract and the legal framework, itself subject to how much room the law allows discretional decisions by the Minister responsible for mineral resource development. It is not surprising, however, to find the terms in the contract diverging significantly from the provisions of the respective laws. Secrecy of the contracts further complicates the matter as most of the contracts tend to escape public scrutiny.

International and domestic governance

While revenue collection has been the main focus of national and international efforts, Africa as a continent lags behind, in spite of the fact that it is the potential beneficiary. The Extractive Industry Transparency Initiative (EITI), new United Sates listing requirements for extractive companies, the International Accounting Standards Board’s consideration of a reporting standard for extractives and the proposed EU regulation on mandatory disclosure of payments made by extractive companies to producing governments all seek to make the mining industry more transparent and accountable. Nevertheless, many countries continue to embrace confidentiality clauses in their respective mining laws! Furthermore, such initiatives address only one side of the equation-revenue transparency. While disclosure of what has been paid is very important, such disclosure does not address what the companies should have paid. Effective operational and fiscal audits of multinational mining companies, currently lacking in many countries would significantly reduce possibilities of company manipulations to reduce their tax liability. For example, the mineral audit report in Tanzania discovered that mining companies over declared US$250.8 million as operational costs and capital allowances. Transfer pricing has become one of the most challenging practice promoted by the fast growing tax planning industry. It is estimated that transfer pricing accounts for about 60% of capital losses in Southern African countries(3).

Forward looking management of resources

Minerals are non-renewable assets that must be transformed to other assets – physical, human and financial – which can support a country’s economic growth and development before and after the resources are depleted or prices decline. Governments and citizens need to decide how much to save, how much to spend and on what to do to mitigate the adverse effects of dependency on natural resource revenues. This decision has to be made prior to or early after production starts. It is, however, a common practice in most African mineral rich government and communities to start thinking about how to manage mineral revenues relatively late in the process, making such interventions ad hoc crisis-driven rather than strategic. Botswana’s success in mobilizing resources for development– especially savings and investment is attributed to deliberate choice of transformative and diversification policies supported by overall prudent macroeconomic management(4).The lesson we can draw from Botswana is that resource-rich governments need to spend money well, which implies spending efficiently and practicing integrity in investment execution, and requiring systematic and rigorous monitoring and audits of public investment programs by oversight institutions: both state institutions (parliament) and independent civil society groups. These practices must be institutionalized, contributing to the achievement of good governance. 

The common instrument for revenue management is natural resource funds, mainly in the form of stabilization and savings funds, with clear fiscal rules and transparency in spending. The efficacy of these instruments depends very much on the discipline in implementing fiscal policy, institutional capacity and political commitment without which transformation of mineral wealth to sustainable socio-economic development is unlikely to happen. Most resource rich African countries have failed in maintaining discipline in the management of mineral revenues due to political dynamics, corruption and lack of transparency. Papua New Guinea for example created the Mineral Resources Stabilization Fund (MRSF) for smoothing out resource revenue flows in 1975. Five years later, this noble initiative experienced serious problems in the wake of increasing politicization of public expenditure, structural problems of rapid economic transformation and corruption(5).The importance of stronger institutions to effectively and strategically manage mining sector in order to harness its contribution to national development cannot be overemphasized. First and foremost, it is crucial to have institutions capable of developing the right mineral policies and laws tailored to harnessing the benefits of mineral resources. Such institutions range from relevant government ministries particularly Ministries of Finance, Natural resources (Minerals), Economic affairs and planning; agencies and oversight especially parliament, civil society and the media. The bottom line is that the long-run effect of extractive revenues is likely to be positively significant for good governance countries while negatively significant for bad governance countries (6).In conclusion, for African resource rich countries to harness full potential of resource revenues for sustainable development, they need to embrace the logic of extractive industries value chain as a framework for strategic management of their minerals resources. Strong institutions, technical capacity, audits, and prudent revenue managements are not optional in the quest for sustainable development in resource rich countries.

Silas Olan’g is Africa Senior Regional Associate at the Revenue Watch Institute. Johannes Schreuder is a Fellow of the Revenue Watch Institute

Footnotes

  1. Africa Mining Vision 2009
  2. Revenue Watch is one of the technical assistance providers
  3. http://ataftax.net/news/member-news/continent-must-address-transfer-pricing-collectively.aspx 
  4. http://www.growthcommission.org/storage/cgdev/documents/Africa/Maipose%20on%20Botswana.pdf
  5. http://www.eastasiaforum.org/2012/01/02/managing-the-boom-in-mineral-revenue-in-papua-new-guinea/
  6. African Development Bank, Working Paper Series No. 147- March 2012

This article was published in GREAT Insights Volume 1, Issue 5 (July 2012).

 

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Economic Transformation and TradeExtractive SectorsNatural resourcesRaw materials

External authors

Silas Olan'g

Johannes Schreuder