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Governance for Development in Africa: Mineral Resources Governance

Presentation by Yao GrahamThird World Network-Africa at

SOAS-CDD Ghana WorkshopAlisa Hotel, Accra 7th May 2013

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Structure of Presentation• Key concepts – “Development Governance” and “Natural

Resources”, “Mineral Resources”, “Resource Curse”, “Winner’s Curse”– Natural resources and material life

• Minerals in African Economies – retrospect and current• Governance issues - From FDI Attraction to Africa Mining Vision

(AMV)– Principles and consequences on mining policy since 1980s– Resource Curse– New Policy Directions – National to AMV– Drivers of Change– AMV Implementation Challenges – Imperative of Democratic Developmental State– Alliance for Change

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Natural Resources = Minerals

• “Natural Resources” variously used:–oil, minerals, forest resources, and

agricultural crops; abundance of land or the size of the primary sector;

• Term used here to mean: –non-hydrocarbon mineral resources;

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Usages- GovernanceDevelopment governance is governance that is oriented to solve common national development problems, create new national development opportunities and achieve common national development goals. This is not simply a matter of designing appropriate institutions but also of policies and the processes through which they are formulated and implemented. Which institutions matter is inseparable from what policies are adopted. Development governance is thus about the processes, policies and institutions that are associated with purposefully promoting national development and ensuring a socially legitimate and inclusive distribution of its costs and benefits.

LDCs Report 2009- The State and Development Governance

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EXPORT MINERALS

AFRICAN % OF WORLD

AFRICAN RANK IN WORLD

AFRICAN %OF WORLDRESERVES

RANK IN GLOBAL SHARE

Platinum Group Metals

54% 1 60+% 1

Phosphate 27% 1 66% 1Gold 20% 1 42% 1Chromium 40% 1 44% 1Manganese 28% 2 82% 1Vanadium 51% 1 95% 1Cobalt 18% 1 55+% 1Diamonds 78% 1 88% 1Aluminium 4% 7 45% 1

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Minerals in Africa’s Economies- retrospect

• Finite non-renewal resources• Since end of colonial period publicly owned resource (vested

in State for all)• Key driver of colonization and centre-piece of colonial

economy, foreign investment and foreign trade– Choice of exploited mineral driven by interests of colonial

power and not local needs• Post colonial legacy

– economic structure of dominant export enclave with weak local links

– Foreign ownership of strategic sector– raw material commodity export dependence – economic vulnerability due to international price volatility

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Minerals in Africa’s Economies- retrospect

• Post colonial attempts at regaining control and reform– Nationalization in 1960s and 1970s– International commodity agreements; – UN resolutions on right to development,

permanent sovereignty and calls for NIEO• Low global prices and crisis 1970s and 80s, • SAPs and mining sector reforms

– FDI led growth strategy and new governance

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Minerals in African Economies - current

• Mineral prices have driven African economic growth since 2000

• Between 2003-2010 average revenue• increase is 23%.• Between 2002-2007 average prices of minerals and

metals rose by 260%.• Ghana gold export values:

– 2000 - $755m– 2012 - $5.643 bn

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Minerals in African Economies - current

• In SADC the mining sector plays an important role to a varying degree in the different economies; contributing 22percent (US$ 92 billion) towards the total regional output and 13percent (3.2 million jobs) towards regional employment.

• Main export earner for a number of countries in West Africa (Ghana, Sierra Leone, Guinea, Mali, Liberia

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Growth of Chinese metals consumption 2000-2007 (% share of global)

2000 2007

• Aluminium 13.0 32.5• Copper 11.8 26.2• Lead 10.1 30.6• Nickel 6.0 24.9• Tin 18.6 39.9• Iron ore imports 15.6 48.2 (Sea borne)

Source: Ericsson (2009)

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Enduring Governance issues• Define and manage terms of access for direct producers (large and small)• Prevent/ minimise negative social and environmental impacts

– Rights and livelihoods of communities– Workers income, health and safety in large mines– Health and safety of ASM– Protection of ecology, water bodies– Minimise conflicts– Post mine closure issues

• Distribute direct benefits equitably– Local livelihoods– Corporate returns– State fiscal benefits

• National development benefits– Transform into sustainable and greater value– Develop linkages and diversification– Develops local economic capabilities and enterprise ownership

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The mining critics want

• Exploit in manner which:– Involves participation and sensitive to local concerns– Minimizes negative social and environmental impacts– Enhances local livelihoods and respects human rights– Distributes benefits equitably– Transforms minerals into sustainable and greater value

through promoting linkages and diversification– Develops local economic capabilities and enterprise

ownership– Fundamentally enhances local economy

• Within transparent and accountable processes

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Evolution of Governance Focus since 1980s: From FDI Attraction and Managing Resource Curse to Africa Mining Vision

a. Creating enabling environment for FDIb. Managing the Resource Curse c. Winner’s Curse, Popular Resistance and

Resource Nationalismd. The Africa Mining Vision –minerals for

transformation

Principles of Mineral Policy since the 1980s

“Overall, the main objective of donor intervention in African mining - whether through technical assistance or investment financing - should be to facilitate private investment and help reduce the country and project-related risk for the private investor.” World Bank, Strategy for African Mining, 1992

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“The recovery of the mining sector in Africa will require a shift in government objectives towards a primary objective of maximizing tax revenues from mining over the long term, rather than pursuing other economic or political objectives such as control of resources or enhancement of employment. This objective will be best achieved by a new policy emphasis whereby governments focus on industry regulation and promotion and private companies take the lead in operating, managing and owning mineral enterprises.”

Strategy for African Mining – World Bank, 1992

Principles of Mineral Policy since 1980s

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Mineral Development Strategy since mid 1980s

• State withdrawal from production and privatization of mining SOEs

• Emphasis on attracting foreign investment into sector– Creating enabling environment for FDI– Passage of laws, Creation of institutions and processes

deemed necessary for development of FDI based export led mineral development strategy

– Overgenerous incentives regime (e.g. tax exemptions and low rates, forex retention)

• Focus on developing minerals with export value• Revenue stream main planned benefit of mining• Ghana Mining Law of 1986 pioneer

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Consequences of Strategy- 1

• Promotion of institutions that promote and service FDI• Huge inflow of foreign capital into high demand export

mineral sector –gold• Expansion in mineral production and exports• Revival and growth of mining revenues• Reinvigoration of colonial style mining enclave with weak

linkages to rest of economy • Weak development of regulatory institutions and

enforcement and policy incoherence• Massive lay offs of workers (40,000 ZCCM)• Conflicts in mining areas –due to negative impacts and

rights violations

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Consequences of Strategy-2• No or weak policy framework for minerals and

economic development including:– Upstream and downstream linkages– attention to local enterprise promotion and support, e.g.

ASM– No local content policy -- best endeavour in employment

and procurement – Industrialisation involving exploitation of industrial minerals

fell off the agenda

• CSR as rural development • Casualisation of work in mines – job insecurity low

income, health and safety (Marikana)

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Consequences of Strategy-3

• Mutually damaging race to the bottom among African countries in contest for FDI– e.g. changes in Ghana’s 2006 Mining Act

“some observers have described the incentive competition as a “winner’s curse” for host countries, whereby investment competition among host countries can trigger a “a race to the bottom” not only in the more static sense of forgone fiscal earnings but also in terms of giving up policy options necessary to organize a more dynamic long term growth path” (UNCTAD,2005)

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Notion of a resource curse

• Natural resource wealth leads to bad development outcomes and have focused on trying to explain why this is the case, either in general or in respect of particular regions or countries.

• Concept amalgam of various perspectives• Evidence inconclusive

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Andrew Rosser 2006• economistic perspectives that emphasise economic mechanisms; • behaviouralist perspectives that emphasise emotional or

irrational behavior on the part of political actors; • rational actor perspectives that emphasise self-interested

behaviour on the part of political actors; • state-centred perspectives that emphasise the nature of the state; • social capital perspectives that emphasise the degree of social

cohesion in countries; • structuralist perspectives that emphasise the role of social groups

or socio-economic structure; and • radical perspectives that emphasise the role of foreign actors and

structures of power at the global level.

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Resource Curse focus • Influence from outside• Voluntary, international, corporate, unilateral• Revenue transparency and anti-corruption

– (EITI, PWYP, OECD guidelines)• Impacts –Conflicts, less HR and social and

environmental– Kimberley process, Dodd-Frank Act– Guidelines on lending (IFC, Equator, AfDB) – CSR (slew of voluntary frameworks and principles)

• More recently – China bashing

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New Policy directions

• National policies to increase benefits

• ECOWAS – Draft Mineral Development Policy 2011– 2009 Directive on the Harmonisation of Guiding

Principles and Policies in the Mining Sector • ACP• Africa Mining Vision 2009 and subsequent

documents• World Bank on local content 2011

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National policy reforms, tax hikes and renegotiation of mining contracts

– South Africa debate about nationalisation, talk of windfall taxes, and capital gains tax

– Zambia raised royalties to 6%, new retention law– Ghana tax hikes and re-negotiations, mining policy– Guinea new code, bigger shareholding– Zimbabwe – indigenization at least 51%– DR Congo contract review– Sierra Leone – contract review– Namibia – new national exploration and mining

company

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• Conclusions of UN-ECA/AFDB February 2007 policy Big Table on “managing Africa’s natural resources for growth and poverty reduction”

• ISG set up in 2007 by UN-ECA as result of Big Table decision to review Africa’s mining regimes

• October 2008 - 1st AU Ministerial on Mining adopted Africa Mining Vision

• February 2009 AU Heads of State adopt AMV and charge preparation of Action Plan for its realization

• December 2011 – 2nd AU Mining Ministerial adopts AMV Action Plan informed by work of ISG

• December 2011 – ISG Report published• Decision to create AMDC – December 2011

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Essentials of African Mining Vision• A knowledge-driven African mining sector that catalyses &

contributes to the broad-based growth & development of, and is fully integrated into, a single African market through:

• Down-stream linkages into mineral beneficiation and manufacturing;

• Up-stream linkages into mining capital goods, consumables & services industries;

• Side-stream linkages into infrastructure (power, logistics; communications, water) and skills & technology development (HRD and R&D);

• Mutually beneficial partnerships between the state, the private sector, civil society, local communities and other stakeholders;

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Essentials of AMV -2• A mining sector that has become a key component of a

diversified, vibrant and globally competitive industrialising African economy;

• A mining sector that has helped establish a competitive African infrastructure platform, through the maximisation of its propulsive local & regional economic linkages;

• A mining sector that optimises and husbands Africa’s finite mineral resource endowments and that is diversified, incorporating both high value metals and lower value industrial minerals at both commercial and small-scale levels;

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Essentials of AMV -3• A sustainable and well-governed mining sector that effectively

garners and deploys resource rents and• A sector that is safe, healthy, gender & ethnically inclusive,

environmentally friendly, socially responsible and appreciated by surrounding communities;

• A mining sector that harnesses the potential of artisanal and small-scale mining to stimulate local/national entrepreneurship, improve livelihoods and advance integrated rural social and economic development; and

• A mining sector that is a major player in vibrant and competitive national, continental and international capital and commodity markets.

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Key elements of new framework

• Action plan clusters – Mining Revenues and Mineral rents management– Geological and mining information systems– Building human and institutional capacities– Artisanal and small scale mining– Mineral sector governance– Research and development– Environment and social issues– Linkages and diversification– Mobilizing mining and infrastructure investment– Resourcing the Action Plan and the AMV

• Levels – national, regional and continental• Actors – States, private sector, CSOs and IFIs

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Key elements of AMV framework-2

Work clusters of the AMDC• Policy and Licensing• Geological and mining information systems • Governance and participation• Artisanal and small-scale mining (ASM)• Linkages, investment and diversification• Building human and institutional capacities• Communication and advocacy

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Key Points of Change• Covers most important issues in debate and

contestation– Taxation review of regimes (stabilisation

clauses, transfer pricing, incentives framework)

–Main focus of most countries– Community issues (FPIC, HR instruments,

participation, improved revenue sharing)– Step back on CSR

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Key Points of Change• Puts industrialization back on agenda

(ref LAP1980) • value addition and use of industrial minerals• Industrial policy • Strong role for the state• Local enterprise development• Cross sectoral – national/regional

development planning implications

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Key Points of Change

• Policy harmonisation and coherence• Institutional and HR development• Domesticate transparency processes (EITI to

APRM) and strengthen overall governance (role CSOs, legislature)

• ASM and rural livelihoods and employment– Estimated 5m

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AMV National Action for viable and sustainable ASM sector that contributes to growth and development

• Regularise and mainstream ASM into broad stream socio-economic activities;

• Develop policies laws, regulations, standards and codes to promote a viable and sustainable ASM sector

• Develop programmes to upgrade knowledge, skills and technologies in the ASM sector; including:– Promoting local service providers in the sub-sector;– models for partnership with government and large-scale mines

to facilitate access to technology, skills, knowledge and markets; – financing and marketing programmes appropriate to the ASM

sector – Improved health, safety, environment and gender in ASM

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National actions for Promoting ASM • Determine and designate geologically suitable areas for ASM• Promote youth employment and engagement in the ASM

sector• Develop methodologies or templates for distinguishing

potentially viable ASM operations for targeted support• Develop and strengthen ASM associations.• Implement international and Regional instruments relevant

to the ASM sector• Develop programmes for promoting value-addition in ASM• Develop institutional linkages from national through to local

levels for effective management of ASM

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Regional actions for ASM• RECs to harmonize ASM policies, laws, regulations, standards and

codes;• Coordinate and facilitate technology development and transfer at

sub regional level• Develop and promote implementation of a regional tool kit for

engagement between LSM and ASM including requiring LSM to develop the capacity of ASM

• RECs to lead initiatives to formalize and upgrade skills, knowledge and practices in the artisanal and small-scale mining sector;

• Promote and coordinate standard measures for training examination and certification for the ASM sector

• AUC/NCPA to lead efforts to develop continental policies, laws, regulations, standards and codes to promote sustainable ASM;

• Adopt and strengthen measures to address illicit trade in minerals

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Drivers of Change from below• Community struggles against and CSOs exposure of

negative HR, social (loss of livelihoods) and environmental impacts and brutal policing• NGOs and acedemic research, Reports on taxation, investment

agreements, mining codes across Africa

• AIMES (1999); NCOM (2001), SARW, Benchmarks

• Growing fundamental societal questioning of overall cost-benefits of mining boom and operative frameworks and organisations for change; pan-African reaching out

• Workers protests over casualisation - unionisation, working conditions (health and safety, wages) – ILO convention 176

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Drivers of change from above – Winner’s Curse

• Response to pressures from society–Zambia

• Failure of model to deliver on expectations• Eye-opener of aggravation of unequal

benefit sharing with onset of demand boom and price surge from 2002

• Impact of global crisis on prices and revenue

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Unmet expectations-Development[It is] enigmatic is that poverty in Africa is chronic and rising … despite significant improvements in the growth of African GDP in recent years. The implication: poverty has been unresponsive to economic growth. Underlying this trend is the fact that the majority of people have no jobs or secure sources of income.

• Various reasons have been given for Africa’s lack of response of poverty to economic growth.

• Growth has been concentrated in the traditionally capital-intensive extractive sector

• Inequality in the distribution of opportunities created by economic growth. UN-ECA 2005 Economic Report on Africa)

Commodity dependence intensified over past decade

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Unmet expectations- RevenueBetween 2002 and 2006 average net profits of biggest mining firms increased by more than 1,400%, going up by 64% between 2005 and 2006 alone. (PWC,2007)

2003-2011 profits grew average 20% a yearIn 2010, the financial results for the Top 40 were spectacular:– Revenues increased 32% – breaking $400 billion for the first

time– Net profit was up 156% to $110 billion– Operating cash flows grew 59%, leaving more than $100

billion cash on hand at year end– Total assets approached $1 trillion

45Source: PWC –Mine 2012

Net profit & net profit margin top 40 mining firms

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Loopholes in benefit sharing

• Windfall gains for developing countries “have been partly offset by increased profit remittances by transnational corporations”

• “Cross country studies have shown that many mining taxation regimes are regressive with governments’ share of mining revenue of falling as the profitability of operations rise”

UNCTAD 2009

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Terms of Trade changes versus actual benefits of price increases (UNCTAD, 2008)

From Bryan Land (World Bank) presentation “Taxing the Minerals Industry in Turbulent Times”, 2009

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Causes? e.g.Tax avoidance

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Switzerland’s copper imports from Zambia

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Mining Revenues and Mineral rents management

• Enhanced share of mineral revenue accruing to African mining countries

• Improved management and use of mineral revenue

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AMV Actions for Enhancing state share of mineral revenue

• Improve national capacity to physically audit mineral production and exports

• Review mineral regimes in terms of optimising revenues• Build capacity and enhance skills of officials in negotiating fiscal

issues and effectively monitoring compliance with taxation laws• Negotiate or renegotiate contracts to optimize revenues and to

ensure fiscal space and responsiveness to windfalls• Develop systems to evaluate components of tax regimes for

leakages, losses and tax avoidance & evasion (e.g. transfer pricing)• Review terms of double taxation agreements and BITs with host

countries of mining companies including the principle that minerals should be taxed at the point of extraction

• Build capacity & systems to auction mineral rights where applicable

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Improved management and use of mineral revenue

• Explore strategies for investing windfall earnings and mineral rent into sovereign wealth funds including stabilization funds and infrastructure funds

• Develop rent distribution systems for allocating part of mineral revenue to communities near mining areas and local authorities.

• Develop mechanisms to facilitate local communities’ access to jobs, education, transport infrastructure, health services, water and sanitation.

• Develop the capacity of local communities to negotiate partnership agreements.

• Develop systems for strengthening capacities for national and sub-national bodies for revenue management

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Regional actions on revenue

• Review the current fiscal environment in African mining countries to develop guidelines & standards for optimizing revenue (e.g. tax & dividends) packages in a manner that does not discourage mining investment

• • Develop mineral taxation guidelines for implementation

at the REC & national levels• Develop typical financial models for mineral projects for

member states and run training workshops at REC level

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Lessons of History- Crisis lessonsBoom, bust and boom of prices – from Zambia to Botswana 90% collapse of diamonds and Botswana went to AfDB

Botswana effect as most dramatic illustration of mineral dependence.

Structurally little had changed since colonial times but a lot had changed in the mineral market since the pre SAP years.

Raw material exporters, little processing and development of minerals for domestic and regional markets; FDI dominated

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Past lessons- Commodity Prices and Terms of trade losses 1970-2000

• Terms of trade declined by 24% and 21% respectively for North and Sub Saharan Africa

• Cumulative terms of trade losses in 1970-1997 represented almost 120% of GDP, a massive and persistent drain of purchasing power”. (World Bank, (2000)

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Challenges - From vision to changes in policy and practice

• History of passing resolutions and visions–LAP 1980, industrialization framework

• State capacity and political commitment• Structural dependence of countries • Movement from competition to

cooperation among African countries• Vested interests within and without• Financing change –who will pay?

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Power of corporations and interest of Consuming countries

• Existing contractual obligations –stability agreements• Declared hostility to resource nationalism• EU raw materials Initiative, US Criticality,

EU/Japan/US use of trade instruments• Asian/Chinese South challenge• FOCAC (resource for infrastructure) Chinese take

over activity , Brazil (CVRD), India Turkey, etc.• Outsiders will pick and choose elements of agenda

that suits them (NRC, WB, EU, China, Aus)

Challenge of trade and investment rules and agreements

• Constraints from WTO Agreements– TRIMS, evolution of GATS and demands• Issues from BITs

• Dangers posed by EPAs– Investment elements and constraints on policy

autonomy– Competition and effects on policy space– Constraints for regional integration

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Developmental state in context of mining

The role of the African State • Forward movement requires multiple state role beyond

facilitating mining• Pro active role supporting mining within an integrated

development framework• Committed to and promotes national and regional

ownership of policy • Committed to supporting the development of local

enterprise• Commitment to regional integration as a strategic aspect of

national development• Promote respect for rights and environment

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Developmental state for mining• Facilitates domestic resource mobilization/national

capital accumulation• Recognises and defends the importance of national

and regional policy space for fulfilling national and regional development needs

• Promotes horizontal and vertical policy coherence across different sectors as well as between internal policies and international positions at regional, continental and global levels especially in key fora such as the WTO and the emerging framework of relations with the EU, USA, China, India, etc.

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Building an African Alliance for Change

• State and citizens -from conflict to common purpose– Need for base in African society and intelligensia– build democratic state-citizens’ engagement for change– Challenge of overcoming built up suspicions of state policy and

practice• Experience at national levels and what needs to

change– Role of legislatures– Citizens, CSOs and mining policy making

• Among African states – from competition for FDI to cooperation for change

• Regional/continental processes– What roles for citizens and CSOs

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