News

Myths and Mining: The reality of resource governance in Africa

March 10, 2014

Claude Kabemba
 
There are two economic realities on the African continent today. You will find the first one in World Bank, IMF and Africa Development Bank reports – and in articles across the globe about ‘Africa Rising’. This reality depicts Africa as a continent that is forging ahead – onwards and upwards. And some of the world’s best performing economies are indeed in Africa, such as Angola and Mozambique, which are growing at an extractive-powered rate of knots. Meanwhile, other southern African states are also surging ahead – with Zambia, Zimbabwe and the Democratic Republic of Congo (DRC) growing at speeds not seen in a very long time.

The second reality depicts Africa as the world’s poorest continent, where the majority of people live with no access to clean water, decent health care, education and electricity, and struggle to survive in the face of high levels of unemployment, poverty and inequality. This is the reality we see all around us when we travel through southern Africa.

Unsurprisingly, many people are asking how there can be two such conflicting realities. And in particular they are asking about the exploitation and export of our region’s mineral resources. They want to know what governments are doing with the revenues that they collect from the commercialisation of these minerals – and why our natural riches do not seem to translate into a reduction in poverty. And another question that comes up time and again is – how have other nations managed to use their minerals to successfully build their societies and diversify their economies?

The extraction of Africa’s minerals by Africans started long before colonialism and even before the slave trade. In fact, the oldest mines in the world are to be found in Africa – such as the Ingwenya mine in Swaziland, which was being exploited 2000 years ago for iron ochre for rock paintings. In addition, there are thousands of ancient gold and base metal mines across the continent. In general, these mines were integrated into the local pre-colonial economies, providing essential raw materials and high value goods for trade (gold, copper).

The extraction took another form when the Arabs began trading in mineral resources, such copper and gold, in addition to their existing slave and ivory trading. And extraction took yet another turn with colonisation, which stopped the evolution of mineral trading in its tracks by directing everything towards Europe. Africa has never recovered.

Following the European colonial conquest of the continent, African mining became integrated into the economies of European countries, providing raw material for their industrialisation. Subsequently, Europe monopolised the exploitation and commercialisation of Africa’s mineral resources for its own advantage. Indeed, African minerals contributed significantly to the development of Europe – a reality that is not always told.

Europe expanded natural resource extraction in Africa dramatically by using forced labour and ensuring that access to the continent’s minerals was free. There was no compensation for people displaced from their ancestral land or for the destruction of the environment. Human right abuses were seen as normal and acceptable. The custodians of land and customs, the chiefs, were introduced to corruption. They sold their land and their people as slaves and labourers in exchange for beer and guns – often with no bullets. African chiefs were transformed into administrative clerks for the colonialists. This is important because the picture has not changed much today.


The outside world continues to enjoy a monopoly over African resources today. Since colonialism, the West’s approach to African resources has been to exploit them as much as they can for as little as they can – or ideally for free. The method has changed depending on the circumstances but the philosophy remains the same.

At independence, most aspects of African economies, including control of mineral resources, remained in the hands of elite metropolitans. These groups continued to control, exploit and trade in minerals resources as in the past without being threatened by the new political elite. The few African leaders who dared to speak about reclaiming – let alone those who actually tried to take control of – these resources were silenced or their political goals were sabotaged by fomenting chaos in their countries. In other situations, African leaders – many of whom came to power with the support of the West – gave European powers free access to minerals to ensure the security of their regimes. While the Cold War raged, Africa was the scene of many proxy battles since economic control of resource rich countries was critical in the geostrategic considerations of the two superpowers and their supporters.

The structural adjustment programmes that were imposed on African countries were also designed to ensure that the continent’s mineral resources would continue to be exploited for the benefit of Western countries – primarily as the main means of repaying Africa’s vast debts.

In the 1980s most African countries were deeply indebted because of the nature of the international economic system, which ensured that Africa was a net exporter of raw materials and a net importer of manufactured goods. Because of the decline in the price of minerals in the early 1970s, African countries were accumulating less revenue from their mineral exports than they needed to pay for all the manufactured goods that were being imported – forcing them to borrow to fund their ever increasing trade deficits. At this point, African nations lost control of their own economies and economic policies and were forced to abide by decisions imposed on them by foreign creditors, including governments and international multilateral institutions such the World Bank, the IMF, the Club of Paris and the Club of London.
One of the results was the imposition of structural adjustment programmes. These were not introduced to help Africa countries restructure their economies but rather to ensure that they were able to continue repaying their debts. It was an era when key countries – the United States under President Ronald Reagan and the United Kingdom under Prime Minister Margaret Thatcher – were pushing a less statist, more market-orientated approach. This philosophy influenced the SAPs – with states being required to cut the number of teachers, health care workers and other civil servants as well as workers in the manufacturing and agricultural sectors.

Indeed, only one sector was spared the axe – the mining sector. It was critical to protect this sector because it was the only sector capable of generating sufficient returns to repay the Western debt. But with mineral revenues being used to cover debt repayments, there was very little left over – and not much from any other sector – to support state administration and social services. Indeed, with the price of raw materials continuing to fall, mineral revenues were often insufficient to cover all the repayments, so debts and defaults increased.


The end of the Cold War and the failure of the structural adjustment programmes paved the way for the wave of democratisation that swept across much of the continent in the early 1990s. While democratisation gave African people the opportunity to ask questions that they could not ask previously, it also brought with it a new economic strategy – privatisation. Right from the start, the crown jewels of the privatisation process were mineral resources.

Two cases of failed state run mining companies will help us understand this phenomenon – namely Zambia Consolidated Copper Mines, and Gecamines in the DRC. In both cases, the World Bank advised the governments to privatise these companies by unbundling them into different units. Unsure whether to follow this advice or not, both countries delayed implementation – and their relationship with key donors suffered. Eventually, they proceeded with privatisation when they qualified for the World Bank’s Heavily Indebted Poor Country (HIPC).[1] But the key point is that both countries were put under serious pressure to choose between debt relief or control over their own mineral resources.

Throughout the privatisation process, African governments were encouraged to establish an ‘investor friendly’ policy regime. What did this mean? Simple – it meant allowing the unrestricted flow of foreign direct investment (FDI), particularly into the mineral sector. Because of price pressures and difficulties in attracting FDI, countries were forced to sell off their precious mineral rights cheaply – on the assumption that private owners would pump money into the mines, revive the sector, generate employment and help kick-start the economies. But many countries – including the DRC and Zambia – were misled into thinking that the foreign purchase of existing capital goods was the same as foreign direct investment. In reality, many investors who bought into the mining sector were solely interested in asset stripping the mines, not wealth and job creation. And the result – in the long run, the countries, especially the DRC, became poorer.

This is not to say that privatisation failed. In both DRC and Zambia production increased – from 50,000 tons in the late 1990s to 600,000 tons today in the DRC and from 250.000 tons to 850.000 over the same period in Zambia. But privatisation has not significantly resolved the previous problems faced by the mining sector or contributed to genuine, sustainable socio-economic development.

The biggest problem with privatisation is that it has created enclave economies. Companies are reluctant to beneficiate minerals on the continent, preferring to export the raw materials and add value elsewhere. Across Africa, mining economies are not really linked to the broader local economies. Equally, because of increased automation in the mining sector, it is unable to contribute significantly to job creation.

Meanwhile, as Africa continues to be pressurised into privatising its extractive industries, much of the rest of the world is intent on nationalising its natural resources. Today two thirds of oil exploration and extraction is controlled by state companies from Russia, China, Saudi Arabia, Venezuela, Iraq, Norway etc.

But in Africa, mining activities are undertaken by private foreign entities, which pay taxes to the state. However, mining activities are not contributing as much as they should to national economies. Despite the increase in productivity and profits, the real benefits of mining have yet to be felt by the majority of the people, especially mining communities. Many factors – including the negotiation of dubious mining contracts by politicians with no real experience in the sector, keeping contracts secrets[2], lack of transparency by both mining companies and governments, tax evasion, transfer pricing and corruption – have contributed to reducing the amount of revenue that goes to governments and is therefore available to support critical socio-economic development programmes.

Furthermore, the mining companies’ much celebrated corporate social responsibility projects are usually little more than charity and not pursued out of any real conviction or determination to improve the socio-economic conditions of mining communities.

And while the SAPs played a critical role in destroying African states’ capacity, internal economic policies and corruption also contributed significantly to the demise of the mining sector. Many prominent political figures – from both ruling and opposition parties in southern Africa – have interests in extractive industries and this can compromise government policies by putting the interests of the well-connected elite ahead of the needs of the majority. Fortunately, there is no evidence of the direct involvement of political parties themselves in the mining sector – with the exception of the African National Congress in South Africa, which has a holding company called Chancellor House, which does invest directly in mining activities (including across the border in Swaziland).


All of this points to the need for a new approach to mineral resources in Africa. And governments and civil society on the continent are reflecting on the current state of the extractive industry and discussing different models to ensure that Africa benefits as much as possible from its natural wealth. In South Africa, a debate on nationalisation has been raging for the past few years but the government has now made it clear that it will not pursue that approach. Instead, the ANC is considering the introduction of a super tax. Meanwhile, in Zimbabwe, the government has introduced an indigenisation policy, which calls for 51 percent of all shares in mining companies to be in the hands of indigenous Zimbabweans. This policy has been widely criticised but the reality is that most governments in SADC are partners in mining companies. The DRC government controls 25-30 percent of the shares in all mining companies, while the Zambian government holds 20-25 percent of the shares in most mining companies. The Zimbabwean government boasts a 50 percent shareholding in two diamonds companies, while Botswana owns a 51 percent stake in Debswana and Namibia control 51 percent of NamDeb (both of which are joint ventures with De Beers). And Mozambique has just decided that it should maintain 20 percent shareholdings in all extractive companies.

Governments are also increasingly prepared to review badly negotiated mining contracts. In the DRC, the government has renegotiated 63 dubious contracts. Mozambique is also considering reviewing previous deals but it is not clear whether the government has the stamina – or political will – to go through the lengthy process since investors are strongly opposed to it. Zimbabwe could also review some of its diamond contracts.

Another option is the introduction of a windfall tax, In Zambia, the MMD government introduced a windfall tax just before the financial crisis hit but then U-turned when commodity prices started to fall. However, what is really interesting here is that the Zambian government reversed a decision that mining companies, despite their earlier opposition, had agreed to implement. Needless to say, the price of copper soon picked up but by then it was too politically embarrassing to try and reintroduce the windfall tax.

A lot of attention has been focussed on the Botswana model, which has attracted considerable praise over the years. The model, which has benefited from luck and strong leadership – certainly seems to have been more successful than most. Many other governments have studied it but none have subsequently introduced it in their own countries. And it is true that the model is not perfect. Indeed, a very similar model in Namibia does not seem to work so well. For example, according to a statement made by the Namibian Minister of Mines and Energy, Erkki Nghimtina in 2009, “NamDeb is literally a post office through which money is dispatched. The money is just for operational costs and the real profits go to De Beers.” Furthermore, while the Botswana government has invested heavily in social services using the proceeds from the country’s diamonds and its 51 percent stake in Debswana, the fact is that Botswana is still struggling with acute poverty, serious inequality, and one of the highest rates of HIV/AIDS in the world. This suggests that even Botswana’s celebrated model is inefficient and not up to the task of truly transforming society for the better.


So what needs to be done? Clearly, governments need to tackle corruption and try to ensure that policies and profits benefit all the people, not just the elite few. However, it is far too simplistic to simply affirm that corruption and a lack of transparency and accountability are solely responsible for limiting the benefits of natural resource extraction. While corruption and secrecy remain serious challenges, there is also a genuine lack of capacity within government administrations to manage the sector.

Many countries in SADC are facing administrative challenges in terms of the necessary qualified staff, infrastructure, information, technology and financial resources to manage properly the sector. Indeed, the intrinsic complexity of managing the sector – including developing laws and regulations; conducting contract negotiations; monitoring the behaviour of mining companies in relation to production levels, tax evasion, environmental controls, human rights; collecting and distributing revenues; and continually re-evaluating policies – may be the biggest challenge to better resource governance in southern Africa, especially as weak administrations also foster corruption.

This weakness extends beyond the executive to other key institutions of the state – such as parliament, the police and the judiciary – that are supposed to provide oversight, support and control. And it is not just the state. Civil society groups are also weak, while most communities are not empowered and are unable to make their voices heard.

It is clear that drastic changes are necessary – and that there is now a chance that real change can now happen. The African Mining Vision has finally produced a charter that all African countries can use to improve the governance of their natural resources – to start to transform the mining sector so that it benefits everyone not just foreign mining companies and local elites. But to achieve change, countries need to strengthen those institutions that are essential to controlling, directing and overseeing the mining sector. In particular, parliaments need to be given the skills and knowledge to perform their role better. It is not a ‘silver bullet’ since other work also needs to be done – to build capacity of civil society and local community groups, to root out corruption, to make companies adhere to international best practices – but boosting the ability of parliaments to oversee the mining sector would go a long way towards improving governance of this critical sector.

And this is why SARW – in partnership with the SADC-Parliamentary Forum – has devoted considerable time and resources over the past three years to develop a Southern Africa Resource Barometer, which can help to empower members of parliaments to play a more constructive role in the extractive sector in the region on behalf of all the people by highlighting key issues and demonstrating how they can be most effective.

The design of the barometer was enhanced by contributions from civil society activists, members of all 14 SADC parliaments, selected mining companies and community members. Created to strengthen the capacity of parliaments and parliamentarians, the barometer is a set of simple and clear principles to measure transparency, accountability and equity in the management and distribution of mining benefits. It is expected that the barometer will be officially launched in November 2013 in Mozambique and will be utilised across the region. Indeed, as it is in line with the African Mining Vision, the barometer could easily be used in the rest of the continent as well.
 
DISCLAIMER: The purpose of the ICF Newsletter is to compile and share relevant information for its users regarding the investment climate in Africa. The focus of this information will predominantly be on the latest reforms in customs, taxations, commercial justice, business registration and licensing, land registration and relevant events relating to the ICF’s mission.
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10 March 2014

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10 March 2014

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10 March 2014

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Family businesses control a significant portion of Africa’s economy. While family businesses are quite common across the continent, only a handful of them enjoy longevity. The survival rate of most African family businesses beyond the founder’s generation is extremely low. For example, the late Nigerian business mogul Moshood Kashimawo Abiola, who at one point was believed to be one of the wealthiest men in Africa, successfully built one of Nigeria’s biggest business empires consisting of an airline, a chain of newspapers, extensive real estate, fisheries and retail. After his death in 1998, his businesses crumbled. None of them exist today. Read More »
10 February 2014

The Ministry of Finance and Planning in partnership with the Investment Climate Facility for Africa (ICF) and the African Development Bank (AfDB) has today officially launched a new project in Cabo Verde to modernise tax administration and make the tax system simple, efficient and more customer service oriented in order to improve the investment climate in Cabo Verde. Read More »
07 February 2014

Watch this short video to see exactly how ICF is transforming the investment climate across Africa in a meaningful way. It showcases a variety of successful projects that are making a positive impact for business in Africa. Read More »
07 February 2014

Taxpayers in Senegal can now enjoy a fully automated experience. The Modernization of Tax Administration project, co-funded by the Government of Senegal and the Investment Climate Facility for Africa (ICF), addressed challenges faced by business owners and tax payers in the country. Read More »
07 February 2014

2014 brings with it new challenges and opportunities for business owners, all of which need to be incorporated into a business’s plans going forward. This is according to Gerrie van Biljon, executive director of Business Partners Limited, who says business owners should make use of the first few weeks of the New Year to reflect on what worked well in 2013 and what needs to be improved or changed for the year ahead. Read More »
07 February 2014

WHEN Kenyan President Uhuru Kenyatta laid the foundation stone for the country’s biggest post-independence infrastructure project late last year — a high-speed railway line from the port at Mombasa to Nairobi — he said the scheme would define his political legacy. Read More »
07 February 2014

Libreville — Burkina Faso, benefitting from the close support of the African Development Bank (AfDB) and the World Bank, has successfully become a member of the Forest Carbon Partnership Facility (FCPF). Read More »
07 February 2014

Jean-Claude Béga, the Chief Financial Officer of Mauritius’ largest conglomerate, GML, spoke to AfricaMoney on how the arbitrage between existing operations and new opportunities sets apart a great company from a good one. Read More »
07 February 2014

IBM (IBM.N) began rolling out its Watson supercomputer system across Africa on Thursday, saying it would help to address continental development obstacles as diverse as medical diagnoses, economic data collection and e-commerce research. Read More »
07 February 2014

IT MAY be imprudent to write this about someone who is spending $10m on African journalism. But then, of all the things I have been accused of in my time, prudence was never among them. Read More »
07 February 2014

Japan has promised financial assistance to resource-rich African nations totalling $32 billion (R357bn) for investment in infrastructure and mineral resource development, along with education, health care and human resource development, in its bid to cement relations with the continent. Read More »
07 February 2014

Lately many observers have been avidly discussing the recent high rates of economic growth in Africa. Speaking in Washington earlier this year, Donald Kaberuka, the president of the African Development Bank offered some cautionary words. Read More »
07 February 2014

The potential for agriculture to drive inclusive economic growth, improve food security, and create opportunities for millions of Africans is enormous. Read More »
07 February 2014

Nestled on the southern stretch of the Gulf of Guinea, Gabon, a country of 1.5 million people in an area the size of the U.K. is something of a paradox; Gabon is rich, but does it make sense to do business there? Read More »
07 January 2014

Nigeria will overtake South Africa as Africa's largest economy in the next two years, experts predict. But concern is also rising that by not doing “enough” business in Africa, the country is missing an opportunity to benefit from the continent's economic resurgence. Read More »
07 January 2014

Rwanda, Jan 7: Revolutionary reforms which have made it easier for small and medium-scaled businesses (SMBs) to get credit, pay tax and deal with construction have militated favourably in Rwanda’s second place on the latest World Bank’s ‘Doing Business’ (DB) report. Read More »
06 January 2014

(CNN) -- A Chinese-funded railway project in Kenya could transform transport in east Africa, and strengthen cross-border political and economic ties. Read More »
06 January 2014

BBCR4TODAY @ BBC RADIO 4 TODAY Read More »
06 January 2014

In 2001 the world began talking about the Bric countries - Brazil, Russia, India and China - as potential powerhouses of the world economy. The term was coined by economist Jim O'Neill, who has now identified the "Mint" countries - Mexico, Indonesia, Nigeria and Turkey - as emerging economic giants. Read More »
04 January 2014

The International Monetary Fund (IMF) managing director Christine Lagarde tells Berna Namata about the EAC partner states’ economic prospects this year and other cross-cutting issues affecting the region ahead of her visit to Kenya on January 6. Read More »
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