Mining for Africa’s development
Africa’s all-important mining sector is in crisis. At its root is a lack of trust between mining companies, governments and civil society. A failure to tackle this crisis will result in serious, adverse implications for both economic growth and employment prospects at the very moment the continent’s need for jobs is rapidly increasing.
African economies are heavily dependent on the extractives sector, which comprised 28% of the continent’s combined gross domestic product in 2012, 77% of total exports and 42% of all government revenues. Studies by the International Mining and Minerals Council (ICMM) show that for every US$1 generated by mining, at least an additional US$3 is generated elsewhere in the local economy, and that for every direct mining employee, as many as 15 more jobs are created elsewhere in that economy.
During the commodity boom, there was considerable optimism that African economies were changing and that they were no longer dependent on raw material exports. However, the commodity price downturn has illustrated the continent’s continued dependency on this sector and its vulnerability to variations in external demand, especially from China which, since 1990, has grown its share of worldwide metals consumption sevenfold to over 40%.
In this new, highly competitive yet austere environment, governance and policy attractiveness will become increasingly important differentiators in the performance of African countries. Just as important will be the state of health of regulatory and administrative processes needed to ensure strong and diversified growth. These factors, too, will be vital determinants for attracting investment and growth in mining projects. Indeed, as the World Bank has noted, after geological factors, governments are the single largest determinant of where mining investments flow globally.
Towards a vicious downward cycle
Despite the commodity boom, the relationship between the industry and government in Africa has been characterised by abiding levels of mistrust on both sides, fuelled by misperception. Legend persists that mines have massive wealth and, at an extreme, deliberately steal ore or withhold tax through under-declaration or ‘transfer pricing’. Meanwhile the mining companies complain that the long-term nature of their business, through good and bad times, and the levels of risk they have to take are not understood by those who set the rules. Such tensions are compounded by increasing capital intensity and mining mechanisation, the effect of which is felt particularly in those countries where mining is the mainstay of the economy and often the main or even only source of jobs.
While the success of mining demands a partnership of common interest, and Africa’s young and burgeoning population demand jobs and growth, policy instability has planted the seeds for a vicious downward cycle. Policy uncertainty leads to investor uncertainty, limits the pool of capital available and thus decisions on many major mining investments are put on hold. As large mining companies rebalance their portfolios seeking the best returns for the least risk, policy uncertainty fuels a move from reputable to less reputable and ultimately small-scale mining companies, and eventual ‘de-evolution’ of the mining sector. These smaller mining companies tend to have less-developed governance systems, which in turn increases the burden of regulatory oversight in an environment in which many governments already possess only limited capacity. Lower capacity and the increased need to regulate can result in further distrust and renewed dissatisfaction of government and society, creating political pressure for even more change.
Zambia’s policy instability
Zambia’s mining policy changes illustrate this cycle.
The giant US$2.1bn Kalumbila Mine in the northwest, which is beset with challenges of power provision and land title rights, was the country’s last major new mining investment. New investments and mine life extensions are being deterred as a result of government changes to the mining tax regime and abrogation of development agreements that assured investors of a 15-year stability period on fiscal policy.
Yet the country’s tax regime has offered precisely the opposite to the stability investors seek.
In 2011 the Zambian government implemented a 6% turnover tax and 30% corporate tax for the mines. In January 2015 it switched to a flat 8% turnover tax on underground mines and 20% Mining Royalty Tax (MRT) for open pit operations. As the IMF concluded in June 2015, “at 50%, the AETR (Average Effective Tax Rate) for Zambia was second-highest among major copper-producing countries.” This came on the back of an earlier change to VAT arrangements, resulting in government prevarication on repaying around US$1bn to mining companies. Then the new tax regime was overturned within eight months in favour of a 9% royalty tax for open pit operations and 30% corporate tax plus a variable tax of 15% above a specified profit threshold. After much heated debate, in 2016, the government proposed a 30% corporate tax and sliding royalty scale of 4-6%, still some way off the global sweet spot of a 30% corporate tax and a 3% royalty.
South Africa’s troubles
The mining industry in South Africa is also suffering through a combination of policy instability, persistent fears about nationalisation and labour militancy. The publication by government of the 2016 Mining Charter draft in spite of industry representations is cited as a current example; the manner of the publication of the Codes of Good Practice for the Mining Industry in April 2009 and its subsequent amendment is cited as a more historical one.
A 2010 Citibank survey put South Africa as the world’s richest mining country in terms of non-oil reserves, worth an estimated $2.5tr at then current prices, more than Russia and Australia at around $1.6tr apiece. Yet, whereas by the late 1980s South Africa’s share of global mining was 40%, with some 880,000 jobs in the sector, by 2014 it had declined to 4.5% and fewer than 500,000 jobs, even though the sector still accounted for 8% of GDP and more than half of South Africa’s merchandise exports. By 2011 South Africa’s global share of greenfield mining projects was just 5%; Australia’s was 38%.
Such a drop in investment is consistent with trends in other parts of Africa, and undermines growth.
It does not have to be this way.
Lessons from Chile
Meanwhile Chile’s economic growth since the 1980s has been nothing short of remarkable, particularly during the 1990s when it averaged an annual rate of over 7%. In 1972 it was recorded to have the ‘second worst economy in Latin America’, inflation had reached 500%, there were frequent strikes and ‘nationalisation, price controls and high tariffs were the order of the day’, and the state controlled more than two-thirds of economic output. Yet from a low of US$4,000 per capita in 1975 in the wake of political instability, real income per person more than tripled over the next 30 years.
This transformation has been built on two pillars.
The first was the institution of free market economic reforms in the mid-1980s by a team of bright young economists. The second pillar of economic transformation relied on a massive increase in domestic copper production. Copper, of which Chile supplies nearly a third of the world’s annual consumption, accounts for some two-thirds of the country’s export revenue.
The transformation of this sector over a quarter century, however, has been spectacular. In 1990, the private sector accounted for less than one-quarter of Chilean copper mining output. By the end of the 2000s, the state mining company CODELCO was producing more than twice as much copper as it had done twenty years before; yet the private sector was producing two-thirds of the annual national output of six million tonnes. In 1970 Chile produced the same amount of copper as Zambia; four decades later it produced eight times more.
Chile is not alone: Botswana, Panama, Mauritania all offer other thought-provoking success stories.
From tensions to win-win outcomes
Solving the current crisis in African mining requires firstly an acknowledgement that the sector is beset by a number of critical tensions between government and business, around policy content and consistency on the one hand, and a mismatch of expectations on the other. The African narrative on mining tends to be fuelled by sentiment, emotion, and a lack of information. These issues manifest themselves in the role of personal discretion in determining outcomes, rather than administrative processes, which invariably increases uncertainty and invites corruption. Instead of negotiation as a means to moderate and arbitrate regulation and policy, this results in a tendency towards litigation.
So how do we move beyond tensions like this and create a ‘win-win’ deal for all?
All parties need to recognise, as a matter of urgency, the inevitable outcomes of the current cycle – the gradual deflation and downsizing of the industry – and the losers: current and future workers, governments, populations, and the mining companies. Such a strategy will need to build on a number of existing initiatives, but do so with much greater cohesion and commitment.
As importantly, agreement will have to be reached on what a successful mining industry looks like.
There must be recognition that mining is an inherently risky and long-term endeavour. For success and the mutual benefit that results, risk needs to be reduced, by all parties, as far as possible. But this needs to comprise more than an enlightened business case. Mining also needs to understand the problems that government has to address and in so doing make a strategic contribution to wider issues (enterprise development, water, land, education and so on) in an atmosphere of collaboration, not confrontation.
All parties must recognise that trust has broken down. For the sake of Africa’s economies and its people, it needs to be rebuilt.
About the authors
Former President Obasanjo, Dr. Greg Mills and Major General (retired) Dickie Davis are with the Brenthurst Foundation and are the co-authors of the recently released ‘Making Africa Work: A Handbook for Economic Success’.