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IF WE ARE SO RICH
WHY ARE
WE SO POOR?
Issue 3 | August 2012 | www.gga.org
An embarrassment of riches
Africa is rich in gold, diamonds, oil and many other coveted natural resources. Yet it
has not managed to capitalise on its wealth: its infrastructure is underdeveloped, its
economies are small and unsophisticated, and its people languish in poverty.
Despite promising growth in recent years, Africa, with almost 15% of the
world’s population, still contributes less than 3% to the world’s GDP, according to the
World Bank. The United Nations Human Development Indicators, incorporating health,
education and living standards, show rock-bottom scores for most African countries. Its
governance scores, compiled by organisations such as the Economist Intelligence Unit,
Foreign Policy magazine and Transparency International, are similarly dismal. Angola
is a textbook example of this contradiction, as Louise Redvers shows.
As resource-rich countries grapple with poor performance, it is no wonder that
there is much talk of the “resource curse”. But clearly the curse is avoidable, as Joshua
Greenstein and Terra Lawson-Remer argue. There are countries blessed with riches that
have found ways to make the resources work for their citizenry. Norway and Canada
spring to mind, as does Botswana, which had the world’s fastest-growing economy
between 1966 and 1999, growing at 9% per year on average.
African countries are exploring different ways of diverting a greater share
of resource revenues into the national coffers, with proposals ranging from outright
nationalisation to launching new state-owned operations to various taxation models.
Richard Poplak gives an overview of the various models. J. Brooks Spector reviews the
South African approach and Tony Hawkins looks at the Zimbabwean indigenisation
policy. Not surprisingly, experiences from other countries indicate that the most
successful models are those that include the private sector, provide a stable policy and
political environment, and offer attractive profit opportunities.
Improving governance and reducing corruption in the resources sector would
go a long way towards ensuring the benefits reached all citizens instead of a small, well-
connected elite. The Extractive Industries Transparency Initiative and the United States’
Dodd-Frank Act are two campaigns aimed at greater transparency. Mark Thomas and
Nicholas Long examine the measures in detail. None of these actions is fulfilling their
promise yet and some appear to have achieved the opposite of what was intended.
They do, however, represent a start.
Good governance activates natural resources as a catalyst for long-term growth,
as Edward Conway argues in his article on governance in the Democratic Republic of
Congo (DRC). Will the DRC and other African countries be able to turn the corner?
John Endres
CEO of Good Governance Africa
Joshua Greenstein is currently pursuing a PhD in Economics at The New School for Social
Research, New York. He holds an MA in International Affairs, also from the New School.
His research interests include development economics, poverty and inequality, human
development, social and economic rights, and measurements and methodologies for
assessing each.
Nicholas Long is a freelance journalist working for Voice of America and other media.
He has been reporting on Africa for 14 years and has also consulted for the Forum on
Early Warning and Early Response, the International Crisis Group, the International
Institute for Strategic Studies and Partnership Africa Canada. His interests include rural
development, land tenure systems and infrastructure.
Terra Lawson-Remer is a fellow at the Council on Foreign Relations and assistant professor
of international affairs and economics at The New School, New York. Previously she was
senior adviser at the United States Department of the Treasury. Ms Lawson-Remer has
also worked for social justice organisations and as a consultant to the World Bank.
Mark Thomas is the news editor for the investigative magazine Noseweek, based in
Cape Town, South Africa.
Richard Poplak is an award-winning freelance journalist and author, who has worked
extensively in Africa and the Middle East. His book “The Sheikh’s Batmobile: In Pursuit
of American Pop Culture in the Muslim World” won positive reviews in The Economist
and elsewhere. He is currently writing a book and starring in a documentary series on
Africa rising, called Continental Shift.
J. Brooks Spector is associate editor of The Daily Maverick online publication. He is also
a frequent commentator on radio and television on international affairs—as well as
American politics and South African culture. Before settling in South Africa, he was an
American diplomat. He has co-authored a study of the social impacts of the diamond
industry in Africa.
Oil-rich Angola is one of the most talked-about investment destinations in Africa, but
behind the economic boom there is an impoverished and disenfranchised population
burdened with some of the worst social indicators on the continent. Elections in late
August are unlikely to improve their fortune. Louise Redvers looks at why the oil money
is gushing for a few and dribbling down to the rest.
Vicente.
Mr Vicente, likely to Source: Organisa on of the Petroleum Expor ng Countries (OPEC), 2012
become Angola’s vice-president
after the election, is alleged to have awarded an equity stake in a lucrative offshore oil
concession to a company in which he had shares. Mr Vicente denies any wrongdoing
and says he no longer owns any shares in Nazaki Oil and Gas, which is in partnership
with Cobalt International Energy Inc., a US-based exploration firm.
OSISA’s Mr Isaac wants the international community to pay more attention to
Angola and for overseas companies to consider the ethics of their business deals.
friendly and communist, is meant to keep the party in balance. Instead, it creates a
political snake pit.
The debate has become so pointed that Mineral Resources Minister Susan
Shabangu was forced to issue a palliative at Cape Town’s Mining Indaba 2012: “[In] this
debate about nationalisation, we have consistently maintained that nationalisation is not
the policy of the ANC or the government of South Africa.” This is not properly true: the
ANC’s guiding document, the 1955 Freedom Charter, insists that “The national wealth
of our country, the heritage of all South Africans, shall be restored to the people. The
mineral wealth beneath the soil…shall be transferred to the ownership of the people as
a whole.” Some interpret this as a call for nationalisation.
To nationalise or not to nationalise—therein lies the riddle repeated across
the continent. In the early 1990s, following the end of the apartheid regime, Nelson
Mandela was incapable of garnering support from the international community for
nationalising South African mines. Privatisation became the order of the day, alienating
the powerful National Union of Mineworkers (NUM) and other leftist alliance members.
The nationalisation conversation never disappeared, because it was never properly
pursued in the first place.
Stemming from an ANC National General Council resolution in 2010, the
ruling party published a substantive study called State Intervention in the Minerals
Sector (SIMS) designed to address the still festering wound. SIMS looks in detail at
12 countries’ varied approaches to resource nationalisation. It points out something
that is true of most African countries: the
minerals energy complex, or MEC, is “the
Is there any real di erence
main driver of the economy”. In 2011 the
between a super-profit tax and mining sector contributed $35.9 billion to
state ownership? Can a full- the South African economy, or 9.8% of
GDP, according to Statistics South Africa.
blown SMC mine and market
SIMS complicates the idea of
commodi es without private resource nationalisation while studying its
sector involvement? myriad formulations. How, for instance,
does a state-owned enterprise (SOE) or a
state minerals company (SMC) best inveigle
itself into the mining sector? Is there any real difference between a super-profit tax and
state ownership? Can a full-blown SMC mine and market commodities without private
sector involvement?
South Africa’s sub-Saharan peers offer many, often contrasting, answers to
these questions. In the Democratic Republic of Congo, Kinshasa demands 5% free
equity and 15% to 51% negotiated equity shares in any mining venture handled
through its SMCs Gecamines and Sokimo. They do not invest in prospecting and mine
development, often leaving critical infrastructure, such as roads and hydro dams, up to
the mining companies.
Several African countries agree. Zambia, under President Michael Sata, doubled
royalties from 3% to 6% in the 2012 budget. But Zambia did not re-introduce the 25%
windfall tax it abolished in 2009. In Lusaka, windfall taxes remain a botched experiment,
on the scrap heap with independence leader Kenneth Kaunda’s nationalisation
catastrophe.
At the recent ANC policy conference, a 50% super profit tax and a 50% capital
gains tax were discussed in tandem with nationalisation. Indeed, they form part of the
same argument.
While taxes and state ownership may increase government revenue in the short
term, they do not necessarily increase development. The African Union Mining Vision
demands a “knowledge-driven African mining sector that catalyses and contributes to
the broad-based growth and development of, and is fully integrated into, an African
market…” In African Union-speak, this is a call for a continent-wide commitment to
beneficiation.
Beneficiation is the grafting of a macroeconomic vision onto mining policy. It
is easier conceptualised than realised. The SIMS compilers commissioned a study by
Sweden’s Raw Materials Group which looked at trends in state ownership in mines.
It found that when commodities prices
are high, state ownership rises and the
Without development African share of rents increases. In other words,
countries will remain mere governments behave like and compete with
exporters of raw materials. businesses. They enter sectors that promise
rewards.
What is more, the global data
on the success rate of SMCs shows that their efficacy is based on overall economic
development. The Nigeria National Petroleum Corporation is notoriously dysfunctional;
Norway’s Statoil reliably and routinely fulfils its mandate. For an SMC to work and
for the state to become meaningfully involved in the minerals sector, SIMS suggests
a roadmap: there needs to be a clear distinction between the state as owner and as
regulator; clear lines of communication between the owner and the company; no
link between the SMC and the treasury; full transparency; clear and transparent
development goals; and a listing of the SMC on the appropriate stock markets.
While neatly prescriptive, these criteria are still vague. They hint at the national-
isation debate’s great and tragic handmaiden: beneficiation. Without development
African countries will remain mere exporters of raw materials. When the resources
are gone—and resources are always finite—there will literally be nothing left. In
Indonesia, for example, miners must by 2014 process coal, iron and nickel into value-
added products before export; the country is committed to jump-starting a culture of
beneficiation that will spur development away from mere digging and drilling.
For Zimbabwe, which has been de-industrialising since the 1980s, such a policy
would seem intuitive. Instead, the Mugabe regime demands a 51% share of all mining
activity in the country, further scaring off already jittery investors. South Africa, which
has the most to gain from an enlightened beneficiation policy, is similarly struggling
with a model.
SIMS acknowledges that SMCs and nationalising chunks of the industry are not
guarantees of success. Largely, it comes down to governance. To work, SMCs have to be
linked to the macroeconomic picture and the state has to be mindful that investment in
one sector does not drain other funding priorities, like housing or education. Considering
the losses that other state-owned enterprises in South Africa have incurred, that would
appear to be wishful thinking. And what of the conflict of interest that arises when the
state is both a player and a regulator?
No matter which route governments choose, achieving a successful outcome
requires mining industry participation. Blanket policy imposed from above rarely
works. As SIMS puts it, any African country hoping for long-term success needs to create
linkages throughout the MEC sector, train people and invest in mining technology.
SIMS suggests a mining super-ministry to oversee the industry’s melding into the
macroeconomic big picture, while increasing rents and creating a sovereign wealth
fund, such as Norway’s.
Nowhere in SIMS is the dreaded “n” word tabled as a solution. Indeed, the
trend in Africa towards nationalisation is something of a paper tiger. But more state
involvement, higher taxes and greater pressure on mining companies to integrate with
the wider economy are all likely to be part of Africa’s mining future.
800
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Miners are rapacious and exploit poor African countries. Botswana is a paragon of good
governance and the Democratic Republic of Congo is a hopeless basket case. That is the
received wisdom—but J. Edward Conway asks if it is true.
The Democratic Republic of Congo (DRC) is one of the most corrupt countries
in the world, one of the most dangerous, and one of the riskiest places for foreign
investment. It is also one of the planet’s most resource-rich countries. The DRC’s water
resources alone could solve Africa’s energy challenges through hydroelectric power. The
DRC’s agricultural prospects, if realised, could feed the continent. In terms of potential,
the DRC is one of the top five areas in the world for mineral development.
The key word here is potential. Today, the DRC ranks at the bottom of countries
recommended for mineral investment, says advisory firm Behre Dolbear. Instead of
basking in the exalted company of Alaska and the Yukon, it squats beside Bolivia and
Russia. How can the DRC realise its mineral potential? Is the solution good governance?
The answer is “that depends”. Take Botswana—also a sub-Saharan state
with great mineral wealth. “Botswana is rightly held up as an example of how sub-
Saharan Africa’s natural resources can—if correctly managed—play a very positive
role in driving broad and transparent sustainable development,” says Gus Macfarlane,
a specialist at the risk intelligence firm Maplecroft. The country ranks very low in
corruption and security risks. The legal and tax environments are favourable. The
government regularly passes a balanced budget. It responsibly reinvests revenue from
the mining sector back into important growth sectors like infrastructure.
But is Botswana a country with good governance?
Using political plurality as a measure, the country leaves much to be desired.
The Botswana Democratic Party has been in control of the government for five decades
since independence in 1966, winning every election. The presidency works on a system
of automatic, unelected succession. On some key social indicators, Botswana is no
different from the DRC. They share, for instance, tragically low life expectancies for their
citizens at birth, 53.2 years and 48.4 years respectively, according to the United Nations
Development Programme. When in 2005 then Botswana-based Professor Kenneth
Good described governance in the country as controlled by an elite that manipulated
state media and largely ignored rural development, he was (tellingly) kicked out of the
country.
Foreign investors give Botswana high marks despite an investment environment
that can at times be at odds with good governance. Former President Quett Masire knew
that the most important factor guiding foreign investment, particularly in the mining
industry, is not good but rather stable governance. Botswana’s gains “are the fruits
of goal-directed and surefooted leadership,” he said during the 1994 parliamentary
elections. Those words are as true now as they were then.
Botswana, DRC and Zambia: GDP and GDP per head (2010)
a GDP per head
GDP (PPP,
current $bn) (PPP,a current $bn)
30 16,000
14,000
25
12,000
20 10,000
15 8,000
6,000
10
4,000
5 2,000
0 0
Botswana Democratic Republic Zambia Botswanab Democratic Republic Zambia
of Congob of Congob
Source: Interna onal Monetary Fund, World Economic Outlook Database, April 2012
a PPP = Purchasing Power Parity. PPP is an adjustment of prices that compensates for price level di erences
between countries. The purpose is to make economic sta s cs such as the GDP more comparable.
b Es mates.
investors, when industry analysts see evidence that political plurality can be expressed
in a smooth leadership transition, the result is a net positive.
The DRC faces a similar watershed moment in 2016. Under the state’s constitution,
the president may serve only two consecutive terms. This means that Mr Kabila will be
ineligible to run, unless he changes the constitution, which africapractice’s Mr Wilson
assesses to be unlikely. Opposition leader Mr Tshisekedi will be too old to stand. So who
will lead the DRC in 2016? This is a moment of high uncertainty in the country, but also
one of great opportunity. The election of Matata Ponyo or Vital Kamerhe, two of the likely
candidates, “would be a positive development for the investment environment, with
both politicians known for their technical competence and positive foreign relations”, Mr
Wilson says. If the DRC can show that free and fair elections can lead to a smooth transfer
of power on a platform that includes the interests of foreign investors, the country will
make significant headway in its political risk ratings.
The second convergence point between governance and investment is taxes.
The DRC, like Zambia, suffers from a serious inability to collect taxes. In Zambia, for
instance, the mining industry accounts for about 80% of the country’s export earnings
but only 2% of the government’s annual revenue. The situation is suspected to be as
severe in the DRC, if not worse. There is a dearth of legitimate governmental authority
in the provinces as well as low technical knowledge of the mining sector. This translates
into a government that cannot adequately
assess the levels of production within the In Zambia, for instance, the
sector and therefore has no benchmark mining industry accounts for
for determining what to tax. Zambia
about 80% of the country’s
is now participating in the Extractive
Industries Transparency Initiative (EITI), a export earnings but only 2%
voluntary programme in which countries of the government’s annual
and companies publish their payments
revenue.
and revenues (see page 32). As a result, it
has discovered how large the gap is between what is collected and what should be
collected, motivating the country to act. The DRC should follow Zambia’s example. More
tax revenue means more money to spend on infrastructure such as roads, rail and
power distribution. It is an example of good governance promoting a better business
environment for investors and a better quality of life for citizens.
Industry analysts believe growth in the mining sector in the DRC will explode
over the next several years—by 70% to 100% by 2016. During the last boom in the
sector, from 2003 to 2008, the country’s corrupt practices and inadequate tax collection
meant that the vast majority of Congolese lost out while a small group at the top profited
handsomely. Zambia was no different, but today the country is trying to avoid making
the same mistake twice. Good governance and mining investment do not always go
together. In the DRC’s case, however, improving tax collection paired with successful
elections in 2016 will go far in opening the country to foreign investors. What is good
for governance can be good for miners, too.
Vast mineral wealth has fuelled the on-going conflict in the Democratic Republic of
Congo (DRC). Its forests and mountains are home to minerals such as tin, tungsten,
tantalum and gold which are used in cellphones, computers, medical devices and
automotive parts. Rogue militias have hijacked chunks of this mineral trade and used
the profits to fund their activities. To stop the funding of these armed groups the United
States (US) Congress passed legislation. Nicholas Long looks at why this law may have
caused more harm than good.
In the past ten years many reports have blamed mineral wealth and its
uncontrolled trade for bankrolling armed groups and inflaming the brutal conflicts in
the DRC.
Various measures have been tried to cut off that funding. Individuals and
companies have been sanctioned. By the end of 2009, the Congolese army, with help
from the United Nations (UN) peacekeepers, had driven armed groups, including the
Rwandan Democratic Forces for the Liberation of Rwanda (FDLR), away from the larger
mines in the eastern Kivu region, the DRC’s main conflict zone.
But this progress was not enough to satisfy US lawmakers. In July 2010
Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act.
This legislation’s section 1502 is aimed at companies that use so-called conflict minerals:
gold, tin, tungsten or tantalum. It requires companies listed on the US Securities and
Exchange Commission (SEC) to state if their products contain minerals from the Congo
and if so, what steps have been taken to ensure that their sales do not fund armed
groups. Some of these minerals are used in high-tech gadgets such as tablet computers
and smartphones.
The International Crisis Group describes the Dodd-Frank act as a “qualitative
leap forward” in that it makes due diligence, as applied to the supply chain for minerals,
legally binding for the first time. So far, its achievements on the ground are questionable.
The UN’s independent “group of experts” on the DRC, which monitor the arms
embargo, notes that an “unintended consequence” of the law has been “the withdrawal
of reputable international companies from the DRC’s minerals market”. The United
Kingdom-based International Tin Research Institute (ITRI) describes this as a “de facto
embargo” of the Congo’s 3Ts, tin, tungsten and tantalum, caused by the reputational
risk, particularly to high-tech end-users like Apple, Intel and Motorola.
The DRC’s export figures are debatable but observers agree they are sharply
down for the 3Ts, although little changed for gold. One consultant for a western
government puts the drop in 3T exports since 2010 at 60% to 80%, most of which he
ascribes to Dodd-Frank.
Uwe Naeher, DRC project manager for Germany’s Federal Institute for
Geosciences and Natural Resources (BGR), reckons the Congo’s exports of cassiterite (tin
ore) have fallen from a monthly average of 1,300 tonnes in 2007–2008 to 350 tonnes in
recent months, with tungsten and tantalum on the same trend. Prices paid to Congo’s
artisanal miners of the 3Ts fell from $8 a kilo to less than $2 and have now recovered to
$3 to $4. Globally, prices for the three minerals held up between 2008 and early 2012
despite the economic downturn.
How many hundreds of tonnes are smuggled and do not show up in any
statistical ledgers? Rwanda’s exports have risen to 250 tonnes a month, whilst the DRC’s
production cannot be more than 150 tonnes, Mr Naeher says. But Congo’s production of
the 3Ts has fallen almost as much as exports, judging by the lack of activity in formerly
thriving mining zones. “The effect of the embargo on the economy and livelihoods has
been devastating,” he adds.
The hardship the law may be causing in some communities should only be
temporary, says Senator Jim McDermott, who lobbied for section 1502 on the grounds
that “the black market in minerals doesn’t have to fuel war and sexual violence”.
In September last year, the senator announced that in a year or so the DRC and
its neighbours would be “close to their old level of production”.
A few sites in the DRC are now producing what Sen. McDermott describes as
“cleanly bagged and tagged minerals”, or minerals traceable to a certified conflict-free
mine. Until there is a viable traceability system, potential buyers cannot feel confident
about satisfying Dodd-Frank requirements.
The Kivu region hosts about 2,000 mining sites. In a first phase, representatives
of the DRC government, BGR, ITRI, USAID (the US government aid agency) and the
UN peacekeepers (MONUSCO), are hoping to validate as conflict-free some 150 to
200 mines. That task is made even more challenging by the US State Department’s
insistence that conflict-free must include free of extortion by the military.
Many of the 150 sites are three to four days from a passable road, making
regular inspections difficult. Although 60 sites were inspected last year, BGR says that
only one of the 3T mining sites can deliver to the required standards set by the region’s
inter-governmental body.
And what of the effect of section 1502 on war and sexual violence? Sources
within MONUSCO conclude that so far it has had little impact on the armed groups.
The FDLR, the main focus of UN disarmament efforts, had lost control of nearly all the
significant 3T sites in the DRC, and the routes to those sites, by late 2009.
The Congolese military has felt more of an impact because it controls most of
the larger 3T sites. Cutting the links between the Congolese military and mining is an
important long-term objective, but dislodging the army from the mines would increase
insecurity, a MONUSCO member confided.
Dodd-Frank may have already heightened insecurity. The government
withdrew army units from some of the mines, but other units replaced them, thereby
fuelling tensions within the military, Mr Naeher says. Animosity between ex-rebel
commanders integrated into the Congolese army and senior officers led to a mutiny
by the former rebels in April. This has tipped North Kivu back into war. Miners without
income or jobs, partly due to the US law, may have joined armed groups. A drastic
reduction in money from mining must have strained relations between underpaid
soldiers and local communities.
The SEC may announce its rules for implementing section 1502 later this
year. It might make Congo’s minerals less toxic for buyers by dropping the current
interpretation that conflict-free must include free of taxation by the military. Instead it
could insist that a mine will not be validated if a military unit controlling a mine includes
human rights abusers.
MONUSCO says it already refuses to include human rights abusers in its joint
operations with the Congolese army. This condition would be more feasible than trying
to prevent the Congolese military from profiting from mining sites.
Meanwhile, the mutiny in the Kivus continues. No one knows who controls the
mines. But if the army’s control of the larger 3T mines is found to have been significantly
reduced, the embargo may have more justification.
In the longer-term, section 1502 should help to raise revenue from the 3Ts. In
addition, by formalising the sector, the law may encourage investment. Until then, the
army will need to guard these mines even though military lawlessness remains part of
the problem.
Africa holds 60% of the world’s platinum deposits, more than 40% of the world’s gold
and almost 90% of the world’s diamonds, not to mention substantial oil reserves that
remain largely unexplored—yet it remains the world’s poorest continent, with 47% of
the population living on less than $1.25 per day. No wonder there is a constant refrain
in Africa: “If we are so rich, why are we so poor?” Terra Lawson-Remer and Joshua
Greenstein examine how the global community can help Africa tackle the resource
curse.
Many resource-rich African countries make poor use of their wealth. Take
Equatorial Guinea, a small oil-producing country on the continent’s west coast. In
2010, an estimated 75% of the population lived on less than $700 a year, but the
average per capita income was almost $35,000, the continent’s highest. Instead of
creating prosperity, resources have too often fostered corruption, undermined inclusive
economic growth, incited armed conflict and damaged the environment.
Corruption is endemic in many of Africa’s most resource-rich countries. Rather
than invest resource revenues into infrastructure and education, crooked politicians,
often in collusion with the companies mining the resources, siphon proceeds from the
continent’s mineral and petroleum wealth into their own pockets.
Resource-rich countries are plagued by a phenomenon called “Dutch disease”.
(The Economist coined the term in 1977 to describe the impact of the North Sea gas
bonanza on the economy of the Netherlands, whose exports of natural resources led
to foreign exchange inflows which drove up the value of the currency. The overvalued
currency made domestic manufacturing, agriculture, and other exports less competitive.)
This illness afflicts both well-governed and poorly-governed countries, but the former
have more ways of allaying the consequences.
Often countries with weak governance and abundant natural resources are
prone to armed violence. For example, Sudan, where oil rents are equal to more than
18% of gross domestic product (GDP), and Nigeria, where oil rents amount to almost
30% of GDP, have been plagued by conflict.
Natural resource dependence insulates leaders from public pressure and
accountability. Troublingly, Freedom House rates only five of the world’s 20 top oil-
producing countries as “free”. In many countries with significant natural resources,
important checks on government power, such as a long democratic culture and a
vociferous civil society, are in short supply.
In Africa, the top eight oil producers in 2011 were Nigeria, Algeria, Angola,
Egypt, Libya, Sudan, the Republic of Congo and Equatorial Guinea. In the last decade,
violent conflict or repressive regimes have plagued these countries. Every one for which
a ranking is available has a negative score on the World Bank’s control of corruption
index. Polity, a United States-based project which measures the authority characteristics
of states, scores these countries from mediocre to awful.
loans. Launched by ten banks in 2003, less than a decade later more than 70 banks
are participating, covering more than 70% of project finance in emerging economies.
However, there is no mechanism for determining if the borrowers and banks are
actually adhering to the EP standards.
In 2010 the US Congress enacted the Dodd-Frank Wall Street Reform and
Consumer Protection Act. It requires extractive industries that are listed on the US stock
exchange to make public the type and amount of payments they make to governments.
The European Commission also recently proposed transparency requirements that are
in some respects stricter than Dodd-Frank. However, European Union (EU) member
states and the EU parliament have yet to approve these measures, and the US Securities
and Exchange Commission has so far stalled in issuing the final disclosure rules for
companies. In the meantime, the industry campaigns to dilute or abandon the reforms.
The Open Government Partnership (OGP), launched in 2011, is another
international action for more government transparency and accountability. The
Extractive Industries Transparency International Initiative (EITI) pursues similar aims
(see page 32).
Africa has made limited progress in ensuring more transparency. For
example, Ghana last year established an accountability committee of political and
business leaders. As reported in the Ghanaian Times in May 2012, the panel’s first
report claimed to have found a major oil-related revenue stream that was either
Sub-Saharan Africa
South Asia
North America
misdirected or not documented properly. The Revenue Watch Institute, a New York-
based non-governmental organisation that promotes the transparent and accountable
management of oil, gas and mineral resources, has long considered Ghana a country
with poor transparency. These recent events may be cause for optimism.
Transparency alone, however, is not sufficient. Nigeria, for example, has joined
EITI, yet the country is still widely viewed as corrupt by its people, according to World
Bank indicators.
Polity Democracy/Autocracy Scores
(-10 to +10) Taking the step from transparency to
actual accountability requires a civil society with
Region Average Score
the skills and training for effective monitoring.
North America 10.00
The demand for these skills exceeds available
Latin America & Caribbean 6.70
funding. Bilateral donors, the multilateral
Europe & Central Asia 6.53
South Asia 3.71 banks and the private sector should support
East Asia & Pacific 3.00 programmes to educate citizens in auditing,
Sub-Saharan Africa 2.46 accounting and tracking of revenues and
Middle East & North Africa -3.00 expenditures. If citizens do not have these
analytical and technical skills, they cannot
Source: Center for Systemic Peace, 2012
hold public officials accountable for spending
The values refer to 2010, the last year for which data
was available. The scale ranges from -10 (autocracy) resource revenues badly.
to +10 (democracy), using the Polity2 ranking. The The G20 countries could immediately
regional values were calculated by the authors on
the basis of aggregated country values. agree to apply the IFC’s updated extractive
industry transparency requirements to all
bilateral development loans, export credit agencies and sovereign risk guarantees.
Stronger transparency standards would ensure that a greater portion of externally-
funded projects in Africa are socially and environmentally responsible.
Countries that export private capital and have jurisdiction over leading stock
exchanges such as the United Kingdom, Japan and India should apply more rigorous
transparency and reporting standards. The internationalisation of these rules would
make it difficult for companies to ignore the requirements, as companies would not
want to delist from these stock exchanges. The extractive industry sector is concerned
with competition. Internationalisation of these rules might also ease domestic pressure
in the US against the Dodd-Frank requirements and industry pressure against reform
in the EU.
Voluntary reporting initiatives in the financial industry can be strengthened
and improved. The Equator Principles are an excellent start by the private sector to
hold itself accountable, but the lack of monitoring to ensure compliance is troubling.
Equator banks should establish an independent monitoring mechanism to ensure that
the lenders and borrowers are doing what they purport.
The steps taken thus far to increase transparency are promising but woefully
insufficient. Coordinated international action is needed. These reforms, while not
a panacea, might help countries across Africa beat the resource curse and translate
natural resource riches into sustainable and inclusive growth.
High commodity prices over the past decade have generated healthy profits for many
companies and governments worldwide are keen to increase their cut. Zimbabwe is no
exception. Tony Hawkins sounds a cautionary note on the country’s “indigenisation”
approach.
Two articles in the Financial Times at the end of June 2012 set nerves jangling
in African finance ministries and central banks.
The first, about the end of the commodity supercycle, coincided with reports
of oversupply, falling prices and mine closures in markets as diverse as oil, diamonds,
platinum and ferrochrome. The second focussed on sharply rising grain prices in the
United States, the world’s largest exporter. For a continent where most countries are
net food importers, this made gloomy reading at a time when its export markets were
losing momentum.
The decade-long commodity supercycle since 2003, which may well not yet
have ended, is mirrored in the rise of resource nationalism. From Australia to Zimbabwe,
in rich as well as in developing economies, governments are seeking a bigger slice of
the resource cake. For some, the solution is nationalisation; for others, minority state
participation, perhaps through production contracts; for many, maybe most, it is higher
taxes, especially royalties, levied on revenue not profits.
The share of state revenue in gross domestic product (GDP) in the median
African state is only 20% against public spending of 28.5%. Cash-strapped African
governments are always on the lookout for new sources of revenue. All the more so
today: as aid budgets tighten and foreign lenders become increasingly risk averse, so
the allure of oil, gas and minerals as sources of funding has grown, especially where
foreign owners are reaping bumper profits.
In Zimbabwe, President Robert Mugabe’s Zanu-PF party chose local ownership
in the form of indigenisation, a policy wrapped up in the guise of empowerment, to
appeal to voters at the polls in 2013. The Economic Empowerment and Indigenisation
Act, approved by parliament in 2007 before the advent of the coalition administration
in 2009, stipulates that all businesses with assets worth more than $500,000 must be
51%-owned by indigenous—for which read black—Zimbabweans.
The coalition between the two wings of the Movement for Democratic Change
(MDC) and Zanu-PF is split on the policy. All three parties agree that the “principle” of
indigenisation is “noble” but disagree over implementation. Mr Mugabe’s indigenisation
minister, Saviour Kasukuwere, a radical firebrand, is driving the programme, so far
with very little success. To date his focus has been on mining. He is demanding that
all companies, regardless of asset size, implement local ownership programmes in the
short term.
The programme is littered with inconsistencies. For a start, some of the country’s
sharpest legal brains say it contravenes the constitution, but to date no company has
had the backbone to test this in the courts. When it privatised the state-owned Ziscosteel,
the government broke its own law by selling a majority stake of 54% to the Mauritian
subsidiary of India’s Essar group.
The basic indigenisation “model”, as in the agreement-in-principle between
the government and South Africa’s Impala Platinum group, provides for government
to take a 31% stake, while 10% is owned by employees and another 10% by a
community trust. In both the latter cases the shares are to be paid for out of future
dividends from Zimplats, which is 87%-owned by Impala and is Zimbabwe’s largest
exporter. The purchase terms for government’s 31% share are yet to be negotiated.
There are several objections to indigenisation. First and foremost, the
government is facing an $830m hole in its cash budget for 2012, primarily because
diamond revenues have fallen far below expectations. It simply does not have over
$600m to buy 31% of Impala’s stake, never mind other foreign-owned assets.
In addition, as pointed out by David Brown, the former chief executive officer
of Impala, there are practical reasons why 51% local ownership by shareholders
with no or very limited resources would not work. Zimbabwe policymakers appear to
believe that the 49% shareholding would provide 100% finance for exploration and
development. But if indigenisation goes ahead as planned, the cost of capital will rise
sharply in line with increased risk and reduced return. Capital budgets will be reduced.
Output, employment, exports and economic growth will all suffer.
In the face of these objections, Minister Kasukuwere insists that the government
will not pay for its own resources. He says that when the mining resource at Zimplats is
valued appropriately, the country will have put in more than 31 percent of the equity.
In other words, he is hoping to pay Impala for its shares by handing over mineral
wealth that is vested in the state and therefore has no cash value. Impala would be
exchanging shares that have a cash value on the stock market for mineral reserves that
do not and for which it is paying fees to the state.
Some political and business interests are touting an alternative option:
”leverage” or “mortgage” the country’s mineral wealth by borrowing against ore
reserves and using the cash to buy out the foreign owners. This assumes not only that
there are financiers willing to lend to a government with a near-unparalleled track
record for disregarding property rights and with a sovereign debt that far exceeds
its GDP, not to mention outstanding arrears of 70% of GDP. It seems implausible, but
there are those who insist that Chinese investors cannot wait to get their hands on
Zimbabwe’s rich platinum, chrome, nickel, gold and diamond resources.
Then there is the empowerment argument. The proponents of indigenisation
claim the policy will improve the lives of ordinary Zimbabweans. But how does state or
employee ownership empower the average man or woman on the street? As with South
Africa’s black economic empowerment, the process is not empowerment but cronyism.
Aside from the many financial and economic obstacles to Zanu-PF-style
localisation, there is a political dimension that many believe will turn out to be decisive.
The assumption is that indigenisation will be at the forefront of the 2013 election
campaign during which foreign investors and owners are likely to be given a bumpy
ride. But once a MDC administration, led by Morgan Tsvangirai, is securely in office,
the programme will be watered down to become much more palatable.
This is probably a realistic scenario, suggesting that it makes sense for mining
companies and banks that appear to be next in Mr Kasukuwere’s firing line to play for
time. Again, there are snags. One is that Zanu-PF is backed by the military and security
services. With direct access to diamond revenues that are not reaching the MDC-run
Treasury, it might just win in 2013. It seems highly unlikely but 15 months is a very
long time in politics.
The second is Mr Tsvangirai, who has underperformed since he became
prime minister in February 2009. When push comes to shove after the polls, his past
assurances may count for little.
Most important of all, resource nationalism is not going to disappear just
because there is a change of government. The next administration will be faced with
the same intractable budgetary and economic challenges as the current one. Resource
wealth will be there to be exploited, yet the manner of its exploitation may change.
And so it should. “Resource curse” theory—that a country is somehow worse
off because it is fortunate enough to have mineral, oil or gas wealth—arises not from
resource possession but from misgovernance. It can be seen in Zanu-PF’s Wild West-
style exploitation of Zimbabwe’s alluvial diamond wealth in the Chiadzwa/Marange
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fields in the country’s east. Zanu-PF hopes that the blend of diamond revenue and
indigenisation will secure it an improbable victory at the polls in 2013. If governance
were good, the curse need not arise.
The curse may overwhelm good governance when it distorts the pattern
of resource allocation. Nigeria’s oil and gas wealth contributed to the country’s de-
industrialisation and reliance on food imports via Dutch disease. (Dutch disease, a term
first coined in 1977 by The Economist, described the impact of a North Sea gas bonanza
on the Netherlands’ economy: commodity exports drove up the currency’s value,
rendering other parts of the economy less competitive, leading to a current-account
deficit and even greater dependence on commodities.) Booming oil exports and huge
capital inflows led to an overly strong local currency. As a result, manufacturing and
agriculture became uncompetitive.
Zimbabwe in 2012 is suffering a resource-curse backlash. Dollarisation,
diamonds, gold and platinum have left the country with an unsustainable current
account balance-of-payments deficit of 40% of GDP in 2011. Manufacturing and
chunks of agriculture are simply uncompetitive. Consequently, far from moving up the
value-addition ladder, the economy is becoming progressively more reliant on natural
resource exports.
The preoccupation of policymakers, including those at the World Bank, the
International Monetary Fund and the United Nations (UN), with immediate gains poses
a severe threat to resource-rich countries. The UN has set 2015 as the deadline for
reaching its millennium development goals (MDG) related to reducing poverty and
other deprivations. These international bodies are therefore willing to see countries
accelerate exploitation of oil or minerals if it means that the MDGs will be met sooner
than later, as now looks likely.
This is a short-term view widely supported by the donor community. As a
result, there is a very real danger that countries will consume their wealth, thereby
leaving fewer resources for a much larger future population.
Resource-rich countries the world over have a track record of under-investing
and over-consuming. Zimbabwe is no exception. To maintain and grow the country’s
wealth, policymakers must ensure that when non-renewable resources such as oil or
minerals are exploited, the state mobilises so-called resource rents or excess profits for
reinvestment in physical and human capital. When this is not done, a country’s natural
wealth declines and there is no compensatory increase in produced wealth.
The halving of poverty by 2015 is a worthy objective. But if it is to be achieved
by depleting natural wealth, thereby making future generations poorer, it is a short-
term fix at the expense of long-run sustainability.
Getting politicians to accept this reality is no easy task. In Zimbabwe’s case,
after a decade of falling living standards, today 70% to 80% of the population lives in
poverty. With elections that are likely to be bitterly contested a year or so away, quick-
fix resource depletion policies are certain to win the day but unlikely to win Mr Mugabe
another term as president.
During the 2001–2008 commodities boom, South Africa’s mining sector shrank by 1%
a year, while the world’s top 20 mining countries achieved an average growth rate
of 5% a year, according to South Africa’s Chamber of Mines. Much of this decline is
due to a dramatic drop in gold production, which has halved in the last 10 years. But
policy uncertainty, regulations and infrastructure are also to blame. J. Brooks Spector
examines how South Africa fell off the commodities cliff.
South Africa’s extraordinary mineral wealth has been the core of its economy
since 1867, when diamonds were discovered on a farm near Kimberley in the country’s
Northern Cape province. Almost 20 years later, huge gold deposits were unearthed
near Johannesburg and South Africa became one of the world’s paramount mining
countries. Today it houses the world’s largest reserves of chromium, gold, manganese,
platinum and vanadium.
Despite this trove of natural resources, South Africa has missed the commodities
boom, mostly fuelled by China’s extraordinary economic and industrial growth.
Instead, an uncertain investment climate due mostly to calls for nationalisation, ageing
infrastructure and mines, and burdensome regulations have led to a contraction in the
mining sector.
The commodities boom coincided with the overhaul of South Africa’s mineral
rights regulation, says mining law specialist Peter Leon. The Mineral and Petroleum
Resources Development Act of 2002 replaced private ownership of mineral rights with
state custodianship and conditional mining licenses supervised by the department of
mineral resources. This new system led to long delays in processing mining licenses
and deterred potential investment. In contrast, other countries such as Mozambique
adopted investor-friendly codes and thereby attracted new exploration and production.
Calls for nationalising South Africa’s mines remain a contested topic in this
country and are blamed for its shrinking mining sector. Proponents argue it is the way
to liberate wealth that has been extracted—then effectively stolen—by the country’s
mining houses. Opponents argue that continuing advocacy of such policies has created
an unstable investment climate and depressed domestic and foreign investment in the
mining sector.
“The nationalisation debate put a damper on mining investment,” says a foreign
diplomat familiar with the mining sector. “And infrastructure deficits in rail, ports and
energy have also discouraged mining investment. The bottom line: the government has
grand visions of building new manufacturing industries, but it has done a lousy job of
supporting mining, even though it remains one of South Africa’s biggest employers and
sources of export earnings.”
The mining sector accounts for nearly 9% of South Africa’s gross domestic
product (GDP) and more than one-half of export earnings, according to a Chamber of
It may be too late to learn for China’s economic engine and its consequent
demand for raw materials are slowing down, even if the country still has growth rates
most nations envy. China consumes half of the world’s annual iron ore production
and more than a third of most base metals, says Edward Russell-Walling in The Wall
Street Journal. But “China is unlikely to trigger a full-scale commodities rescue in the
near future,” he says. This cannot be a cheering prospect for a nation hoping China’s
demand for minerals will be the overwhelming driver for domestic mining expansion.
But if South Africa has failed to benefit fully from the recent boom, how should it
prepare itself for the next positive economic cycle? South Africans debate beneficiation
from mining in too limited a sense, concentrating on jewellery manufacturing instead of
broader industrial plans, says economist Iraj Abedian. Where is South Africa’s research
and development on chrome and magnesium, he asks, given its generous endowment
of these metals.
The crucial problem is the government’s questionable planning skills. South
Africa “needs a capable state that can plan in an integrated manner across state
institutions as well as parastatals”, Mr Abedian says. Absent such a change, South Africa
“could end up in a [new] version of the colonial past. We’ll dig, then battle over taxation,
have energy shortages. In short, it will be the opposite of leveraging upward.”
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1910
Source: Chamber of Mines of South Africa, 2012 and US Geological Survey, 2012
South Africa’s gold sector experienced its heyday between 1957 and 1980, when it produced more than half
of the world’s annual gold produc on, peaking at two-thirds in 1970. In 1970 South African miners extracted
13g of gold from each tonne of ore processed. Today the yield is only between 3g and 4g per tonne of ore.
A voluntary programme to promote greater transparency in oil, gas and mining may
have entrenched devious ways of concealing bribes and other forms of corruption.
Mark Thomas looks at this initiative and shows how corrupt governments and private
companies circumvent it.
Africa is teeming with oil, diamonds, gas, platinum, gold and other minerals.
Despite this wealth, it remains the world’s poorest continent. Nearly half of sub-Saharan
Africa’s population live in countries that are rich in these natural resources, according
to the World Bank. These countries account for some 70% of Africa’s gross domestic
product (GDP) and receive the overwhelming bulk of foreign direct investment (FDI)
into the continent. Commodity prices have risen about 75% in real terms since 2000.
Despite these surging revenues, only a tiny elite of Africa’s citizens and many
foreign firms are reaping the benefits. Too many of these resource-wealthy countries
remain poorly governed and wracked by corruption and conflict.
The goal of the Extractive Industries Transparency Initiative (EITI) is to promote
better use of mineral revenues for economic growth and poverty alleviation through
increased transparency and accountability. It encourages governments and companies
to publish their revenues and payments and then submit them to independent auditing.
But ten years after its launch in Johannesburg at the World Summit for
Sustainable Development, it is now apparent that the initiative lacks teeth. Demanding
transparency from governments and corporations in the extractive industry is not
enough to ensure good governance, economic growth and more equitable distribution
of wealth. Governments and private companies still resort to timeworn and ingenious
ways of hiding their buyoffs and kickbacks.
“A mere demand for transparency is not necessarily a check for acts of bribery
that happen in the industries,” said Oladayo Olaide, a policy analyst with the Open
Society Initiative for West Africa. “Corporations and political players involved in the
underhand deals have perfected the means of hiding the proceeds of such acts beyond
the unqualified eyes of the public… How do we assess the ‘cost build-ups’ and ‘in-
kind’ payments? Most governments lack the capacity to query figures and fees that the
involved corporations present.”
The EITI is a voluntary programme. Countries that sign up commit to allowing
regular audits and reconciliations to be conducted by a local group that includes
representatives from government, private companies and civil society. Of the 36
countries which have signed up, 21 are from Africa.
Its grading system awards two marks: pass and fail. There are no punitive or
other measures to ensure that identified discrepancies are rectified conclusively. The
most the EITI international secretariat, based in Oslo, Norway, can do is plead with the
offending governments. So far, 14 countries have attained compliance status, including
seven in Africa.
Nigeria signed up for the EITI in 1999, following demands for economic reforms
by its international trading partners—Britain, the United States and several members of
the Paris and London Clubs, two informal groups of private creditors from some of the
world’s biggest economies.
Despite achieving full-compliance status, Nigeria has not addressed the
discrepancies revealed by the latest reconciliation conducted by Hart Nurse Limited
and SS Afemikhe & Co., the independent auditors hired by a local group of government,
company and civil society representatives.
The extractive industry is notorious for
corruption, which remains entrenched
despite the EITI. Oil, gas and mining
Shady deals may come to light
companies are linked infamously to human only when a losing contender
rights violations such as in the Chiadzwa reveals an earlier demand for a
fields in Zimbabwe, kidnappings in the
Niger Delta, conflict in the Congo, murder
kickback or when an employee
and environmental abuse elsewhere. with knowledge of the
Uncovering fraud, bribery, money fraudulent transac ons decides
laundering, tax cheating and other corrupt
practices is tricky. The EITI validates
to spill the beans. O en illicit
compliance on a country-by-country basis. payments can be found in the
This allows multinationals to hide under- balance books, hidden under
the-table payments in other countries that
may serve as tax havens.
such rubrics as “cost build-up”
“By splitting the analysis between and “in-kind payments.”
countries—thus missing the transnational
element and failing to scrutinise rich
countries’ role—one too easily reaches the conclusion that they (in Africa) are corrupt,
while we (in the West) are clean,” said Richard Murphy, director of Tax Research LLP,
a United Kingdom accounting consultancy, and Nicholas Shaxson, an associate fellow
at Chatham House, a London-based think tank, in an editorial published in 2007 in the
Financial Times.
Shady deals may come to light only when a losing contender reveals an
earlier demand for a kickback or when an employee with knowledge of the fraudulent
transactions decides to spill the beans. Often illicit payments can be found in the
balance books, hidden under such rubrics as “cost build-up” and “in-kind payments.”
Government watchdog groups lack the technical expertise and auditors for private
companies cannot be relied on to query such payments.
Until the September 11th 2001 attacks in New York City, corporations could
vie for lucrative concessions and shroud their payoffs into the offshore secret accounts
of politicians and other key players. But more open banking practices instituted
worldwide in the fight against terrorism have made secret bank accounts difficult to
hide.
Nigeria is Africa’s largest oil producer and has decades of experience. But it
still relies on oil companies to determine the volume of oil produced and shipped out
of its territory.
So if the EITI provides only a superficial clean bill of health, should it be
maintained?
Some information is better than nothing, Mr Olaide says. “For decades, extractive
industries were seen as an exclusive preserve of governments who entered into secret
contracts with mining, oil and gas exploration companies without any involvement of
communities or civil societies,” he says. “Now, at least with the limited publication of
information, the civil societies as well as the citizens are slightly armed to an extent that
they are able to interrogate details of contracts entered into by their governments.”
Algeria
Western
Sahara Libya
Egypt
Mauritania
Mali
Niger Sudan Eri
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Senegal Chad a
Gambia
Burkina
Faso
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Leone Lib d’Ivoire Ghana African Sudan
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Togo Cameroon
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Equatorial Guinea
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Congo Uga Kenya
Sao Tome Gabon
and Principe Rwanda
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of Congo Burundi
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Angola Malawi
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South Africa
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