News / Africa

African Mines: A Potential Source of Funds for Infrastructure

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William Eagle
— In sub-Saharan Africa, many economies are growing briskly, thanks to the continent’s abundant natural resources and global commodities boom. Development experts say revenues from minerals, oil and gas could help many countries fund much needed roads, bridges, dams and other infrastructure.  A recent report by the Africa Progress Panel, a group of influential business and political leaders, says there’s great potential in the continent’s extractive wealth – but also many challenges.

There’s plenty of room for optimism.The Africa Progress Report says mining, gas and oil provide more funds than aid – about  seven times as much.
Kofi Anan, the former UN Secretary General and chair of The Africa Progress Panel, put it this way: 
 
"Imagine an African continent where leaders use mineral wealth wisely to fund better health, education, energy, and infrastructure, too," he says. "Africa has oil, gas, platinum, diamonds, cobalt, copper, and more. If we use these resources wisely, they will improve the lives of millions of Africans."
 
One way to improve lives would be to provide more funding for primary and secondary schools.  UNESCO’s Education for All Monitoring Report 2013 says by spending 20% of the additional revenues on education,  resource-rich countries could  educate over half of the 30 million children in Sub-Saharan Africa who are not in school now.
 
The Africa Progress Report uses figures from the IMF and World Bank to estimate the amount of revenue that could come from extractive resources.   It says in Mozambique, natural gas could earn as much as US $10 billion annually.  Angola is expected to produce oil at current levels for more than 20 years – bringing in up to $70 billion in export revenues.   

Meanwhile,  Tanzanian production of gas, gold and nickel could bring in over three billion dollars per year, while Uganda’s Lake Albert field could generate  two billion dollars in revenues annually by 2020.   Ghana’s Jubilee field could produce close to a billion dollars worth of oil yearly once it comes on line.  Nigeria could maintain petroleum production for more than 40 years – for an overall value of about US$90 billion in export revenues.  This year, the billion dollars produced from Sierra Leone’s Tonkolili deposits of iron ore are expected to nearly double the per capita gross domestic product  -- which was US$366 in 2011.
 
Reality check
 
But optimism is tempered by problems of diverted revenues and other forms of corruption which prevent funds from reaching national treasuries. 

The executive director of Oxfam International, Winnie Byanyima, says as a result, potential resources end up by-passing the poor.
 
"In 2011," she says, "exports of oil and minerals from Africa, Asia, and Central and South America were over 1.4 trillion dollars.  It’s more than 10 times the official development assistance provided to these same regions. We argue that if illicit capital flows could be stopped, Africa could fund its own development without need for aid."
 
Among the countries where revenues have been diverted by mismanagement is Nigeria.  The report cites a parliamentary task force which found that nearly seven billion dollars from the transfer of fuel subsidies had been lost between 2010 and 2012.  It says another investigation found that discrepancies in natural gas prices and missing payments from concessions and production-sharing deals accounted for a loss of 29 billion dollars.
 
The economy of Sub-Saharan Africa’s second-largest oil exporter, Angola, has been growing at a healthy 7% per year, with oil producing up to six billion dollars annually.  But the Africa Progress report found that income from the oil boom has reached few of the poor, with half the country still living on $1.25 per day.  Angola also has the eighth-highest mortality rate [about 116,000 deaths per year] for children under five of any country in the world.
 
Undervalued assets
 
The Africa Progress Report also cites another factor affecting the use of extractive resources for funding infrastructure and social programs:  poorly negotiated business deals working to the advantage of large international companies.
 
"The competition among governments to attract direct investment has heated up in recent years," says Biyanyima.  "The advice from the World Bank and IMF plus the competition to attract a number of companies in extractive industries has caused a race to the bottom -- in which each country [is encouraged] to open what’s called an ‘enabling [attractive] environment’ for these companies.  [That includes] offering tax holidays, compromising labor standards, and violating the rights of people in terms of their land rights, and so on."
 
In many cases,  state companies and government officials made deals with foreign investors for minerals and other resources that are below their current market value.
 
Some deals were negotiated many years ago when prices for oil and minerals were low and concessions were made to attract investment.   
 
The report says the DRC lost more than a billion dollars between 2010 and 2012, because of the underpricing of mining assets to offshore companies.  It also says a government commission suggested renegotiating or cancelling 61 of the mining contracts it examined during a 10 year period ending in 2006.
 
Today, the market is offering higher returns, and some countries are renegotiating those contracts.  The report recommends using independent investigations with public hearings to review some of the deals.
 
The African Development Bank suggests another way to increase revenues from extractive industries -- by raising royalty payments on gold exports from three percent – which is below the world average -- to five percent.   The report says the proposal was a adopted in Ghana and in Tanzania, where  it says millions of dollars in revenue were lost as a result of earlier low rates. 

Tax havens
 
Oxfam urges the international community to crack down on offshore- companies registered in tax havens, where disclosure rules are lax or non-existent and serve to facilitate corruption,  bribery and the illegal transfer of funds. 
 
"These are used for stashing away illicit capital flows.  These are part of the big picture of what’s happened," says Biyanyima. 

"There’s also mispricing. For example, a company like Mopani Copper Mine, which is a Zambian subsidiary of a Swiss company Glencore, was mining copper, and exporting it below market price to its parent company.  Then Glencore would re-sell it at the market price.  This is illegal.  With this kind of mispricing going on,  Zambia was losing $ 150 million or so every year, and [with this] exposed, I understand the government is prosecuting the company."
 
The report recommends greater transparency in state contracts with private companies and also in national budgets, which reveal transactions by government-run companies. The study cites reports showing low budgetary transparency and little legislative oversight in several countries, including Equatorial Guinea,  the Democratic Republic of the Congo, Nigeria,  and Zimbabwe.
 
The report also urges countries to adopt legislation that conforms with EITI, the Extractive Industries Transparency Initiative.  It encourages public disclosure of all contracts between the government and private companies.

On an international level, the study suggests multilateral action to curtail tax evasion and to help African countries strengthen tax administration systems.
 
Protecting artisanal miners
 
It also recommends measures for increasing job creation in extractive industries.

For example, the report encourages legislative reforms to protect Africa’s hundreds of thousands of artisanal, or small-scale, miners. They’re helping to extract gold in Tanzania and Mali, diamonds in Central African Republic and a number of other mineral resources including coltan and cobalt in the Democratic Republic of the Congo.  Development specialists say artisanal mining provides employment and revenues for some of Africa’s poorest citizens. 

Governments may also boost employment by promoting linkages between mining companies and local businesses.  Some countries are already doing this:  Ghana requires gold mining companies to recruit and train locally, while Nigeria encourages preferences in licensing for local companies and requires all who are bidding to present a local content plan.  A mining code by the Economic Community of African States (ECOWAS) calls for policies favoring local and regional businesses.
 
Africa Progress Panel chairman Kofi Annan says when managed well, natural resources can enhance poverty reduction, promote inclusive growth and improve living standards.   The alternative is what development experts call the “resource curse” – revenues for development that instead are siphoned away by corrupt politicians and business people.

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