African mining has vision and map for growth — now it needs investors
Private sector compact to be spelled out as region seeks to build transformative extractive industries
At the Mining Indaba in 2016, the Mining Industry Association of Southern Africa (representing eight national chambers of mines) and government representatives from the region quietly concluded a “new deal” to work together to implement the African Mining Vision. The terms of the vision’s “private sector compact” will be publicly unveiled at the 2017 indaba — it represents a promising first step in turning around Africa’s mining travails.
The vision itself was adopted by AU heads of state in 2009 as a road map to “transparent, equitable and optimal exploitation of mineral resources to underpin broad-based sustainable growth and socioeconomic development”. Expressed as seven tenets, the vision’s objectives are to promote good governance; develop institutional and human capacity; optimise knowledge and use of minerals; build local and regional infrastructure; stimulate economic diversification; harness the potential of small-scale mining; and foster transparency and accountability.
The African Mining Vision is the first continent-wide mining policy since the World Bank’s 1992 Strategy for African Mining, which recommended that “governments focus on industry regulation and promotion and private companies take the lead in operating, managing and owning mineral enterprises”. This typified the Washington Consensus of that era — economic precepts shared by the principal Bretton Woods institutions, the World Bank and the IMF – prescribing the mantra “stabilise, privatise and liberalise” to developing countries wracked by sovereign debt and economic stagnation in the late 1980s and early 1990s.
Heeding this advice, 30 African countries passed new mining laws during the 1990s and many more made significant policy changes aimed at attracting foreign investment and trade by making their regulatory frameworks less restrictive and more business friendly.
Ghana, struggling to recover from a disastrous experiment with nationalisation, sought the World Bank’s assistance in 1995 to develop a new mining code. Finally enacted in 2006, the law in effect confined the government’s involvement in the mining sector to that of a facilitator (processing applications within strict timeframes and with minimal discretion and agreeing to stabilise fiscal terms for major foreign investors). Ghana quickly became the world’s sixth-largest source of gold and one of Africa’s most attractive mining jurisdictions (beaten only by Botswana in the Fraser Institute’s annual survey of mining companies from 2006 to 2011).
After the turn of the century, when the commodities boom began, the liberal regulatory frameworks prescribed by the Washington Consensus attracted criticism from African governments and nongovernmental organisations. Many argued that the promise of prosperity “trickling down” was a mirage and that the state should correct “market failures” by exerting more control over a nation’s mineral wealth and leveraging it to stimulate long-term economic and social development.
The 2008-09 global financial crisis intensified these concerns as countries dependent on mineral exports suffered a sudden shortage in revenue and sought to tackle their fiscal deficits and growing populist pressures by extracting higher mineral rents from their biggest investors when the latter could least afford it. Many African countries made rash and unpredictable changes to their mining regimes, creating regulatory uncertainty and harming investor confidence.
For example, in 2012 Ghana announced it would impose a 10% windfall tax on gold mining and review its fiscal stability agreements with foreign mining companies but failed to follow through on these measures. In 2014, Ghana amended its mining law to replace the fixed 5% royalty with wide executive discretion to prescribe new rates. The resulting regulatory uncertainty weighed on sentiment. In the Fraser Institute’s survey, Ghana fell from its enviable 2011 ranking of 17th in the world to 38th in 2012 and then fluctuated from 30th in 2013 to 44th in 2014 and 31st in 2015.
Another notable example is the Democratic Republic of the Congo (DRC), Africa’s largest copper producer, the world’s largest cobalt producer and a major source of diamonds, gold, tantalum and tin. Its 2002 mining code strikes a relatively reasonable balance between the interests of the state and the private sector — for example, permitting foreign companies to operate without a local partner but giving the state a 5% free carry. In 2012, the government announced drastic reforms, including increasing the state’s free carry to 30%, doubling royalties on copper, cobalt and gold to 6%, and imposing local beneficiation quotas.
In the face of strong industry resistance, these reforms were never implemented and at the 2016 Mining Indaba the DRC’s mines minister announced they had been formally abandoned. Nevertheless, the prolonged policy uncertainty hobbled investor confidence: in the Fraser Institute survey the DRC fell from 54th place in 2011 to 75th in 2012 and 2013, but recovered to 67th in 2014 and 60th in 2015.
Similar dynamics played out in Guinea, Tanzania, Zambia and, of course, SA, where amendments to the Mineral and Petroleum Resources Development Act proposed in 2013 have entered a fourth year of legislative limbo, while the government (which has had three mineral resources ministers in the interim) seems unable to resolve the dispute with the Chamber of Mines over the Mining Charter’s metrics for calculating black ownership.
Interestingly, the African Mining Vision has increasingly been invoked by African governments to justify resource nationalism measures. However, the vision itself calls for careful long-term refinement of regulatory frameworks, unlike the hasty and haphazard adoption of bolt-on reforms with which many African governments have experimented in the past five years. African governments’ invocation of the vision reveals a desire to varnish their mineral law reforms with the imprimatur of an independent international standard. This is reason enough for the private sector to carefully consider the vision’s tenets.
CLEAR AND SIMPLE GUIDELINES
To translate the vision’s abstract and ambitious goals into practical policy options, the African Minerals Development Centre (AMDC) was established in 2013 as an agency of the AU Commission, cosponsored by the African Development Bank and the UN Economic Commission for Africa. Recognising that “there is no one size that will fit all countries”, the centre published a Country Mining Vision Guidebook in 2014, aiming to “provide decision makers and stakeholders with clear and simple guidelines and options for aligning their mining policies to the goals” of the vision.
The AMDC emphasises that a country mining vision must be a collective agenda, broadly shared by the government, labour, business, communities and civil society, which can be achieved only through mutual understanding and accommodation. While this may be elusive, the AMDC set an encouraging tone at the 2016 Mining Indaba by brokering the compact between Southern African governments and mining chambers.
The compact was concluded against a bleak backdrop, as 2015 was a particularly punishing year for Africa’s major mining jurisdictions. Compared with 2014, the UN Conference on Trade and Development (Unctad) calculated that investment inflows to the DRC declined 9% to $1.7bn as major investors such as Glencore suspended operations. Mozambique, buoyed by prodigious gas discoveries, attracted a significant $3.7bn, but this was still 24% less than in 2014. Zambia’s inflows almost halved, plunging 48% to $1.7bn, reportedly because of electricity shortages and regulatory uncertainty.
Hardest hit was SA, where inflows plummeted to only $1.77bn — 69% less than 2014 and 79% less than 2013. Unctad attributed this to “lacklustre economic performance, lower commodity prices and higher electricity costs”, while the World Bank explained that, despite considerable diversification, SA’s economy remained heavily dependent on mineral exports. In close correlation with mineral prices, GDP growth slumped from 3.2% in 2011 to 1.3% in 2015, at the cost of about 145,000 mining jobs. One year later, there are pockets of improvement. Last week Unctad reported that while SA’s 2016 investment inflows “remained at a relatively low level of $2.4bn”, this was 38% higher than the decade-low depths reached in 2015.
Nonetheless, the outlook for sub-Saharan Africa remains difficult and unpredictable. Projecting only 2.9% growth in 2017 “as the region continues to adjust to lower commodity prices”, the World Bank warned in January that “heightened policy uncertainty in the US and Europe could lead to financial market volatility and higher borrowing costs or cut off capital flows to emerging and frontier markets”.
These conditions make it all the more important for African mining jurisdictions seeking foreign investment to foster trust in their regulatory institutions and practices. The African Mining Vision Guidebook recommends collaborating with the private sector and other stakeholders to develop “clear, transparent, predictable and efficient legal and regulatory frameworks”, which “would not function without adequate protection of property rights, an effective judicial system and independent enforcement and oversight bodies”.
If African governments begin to embrace the essential conditions for investment in the mining industry and if mining companies accept the principle of mining-led sustainable development, as set out in the compact, there is no reason to think that mining cannot significantly transform the economies of Africa’s key mineral producers.