1

Governance for Development in Africa: Natural Resources Governance

Presentation by Yao GrahamThird World Network-Africa

Addis Ababa, 26th March 2012

2

Structure of Presentation• Key concepts – “Governance” and “Natural Resources”• Minerals in African Economies• Construction of current mineral regime and its

governance• Governance experience– Resource curse focus– Governance as process– Outcomes of governance: lessons and issues

• Towards a mineral governance for development: The African Mining Vision

• Terms of the AMV and associated processes• Drivers of Change• Implementation challenges

3

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;

4

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

5

Minerals in Africa’s Economies

• Finite publicly owned resource• Exploit in manner which:– Transform into sustainable and greater value– Prevent/ minimise negative social and

environmental impacts– Develops local economic capabilities and

enterprise ownership– Fundamentally enhances local economy– Enhances local livelihoods– Distribute benefits equitably

6

Minerals in Africa’s Economies

• Mineral Resource endowment• Colonial construction of raw material(mineral)

export dependence and production enclaves dominated by foreign firms

• Post colonial attempts at regaining control• Crisis, SAPs, FDI led growth and new

governance

7

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

8

Minerals in Africa’s Economies

• Historically created by colonialism as foreign enclave economic activity dominated by foreign capital with weak linkages to rest of economy

• Choice of which mineral exploited and how driven by conception of role of mineral resources in development of colonial powers– Colonial strategy interested in raw mineral for

export

9

Minerals in Africa’s economies

10

11

12

13

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

14

“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

15

Mineral Development Strategy since mid 1980s

• No policy framework for minerals and economic development including:– Upstream and downstream linkages– local enterprise development

• Focus on developing minerals with export value• Emphasis on attracting foreign investment into

sector– Creating enabling environment for FDI– Creating institutions and processes that deemed

necessary for export led-FDI based mineral development strategy

16

Generations of Mining Policy and Legal Reform in Africa Since 1980s -1

•During the 1980s: The main emphasis of these regulations was the withdrawal of the State through extensive privatisation processes deemed necessary to opening up the sector and attract FDI. The Minerals and Mining Law (Law 153/1986) of Ghana is one the earliest example. •Early 1990s: Regulations passed involved and increasing recognition of the need for certain forms of regulation, notably with respect to the environment, with responsibility for this assigned mainly to the private actors. An example of this generation is the Guinean Mining Code (1995)

17

Generations of Mining Policy and Legal Reform in Africa Since 1980s -2

Late 1990s: They intend to enhance participation and consultation aspects and address regulatory questions Tanzania (1998), Mali and Madagascar (both 1999) exemplify this generation.

After 2000s: This generation broadens further the scope of law and regulations to include allocation and redistribution of mineral revenues to local governments and communities, compensation criteria, enhancing environmental and social dimensions, public participation and government accountability. The Mining Laws of Ghana (2006) and DRC illustrate these reforms.

18

Overgenerous Incentives for FDI

Liberal tax regimeNo local content policy -- best endeavour in employment and procurementInformalisation of work in minesInstinctive siding with foreign investors against communities

19

Over generous tax regimes• Roughly similar trends across continent• Sweeping exemptions and holidays– No export or import taxes– Low CIT rates (30% or lower vs 40% in 70s/80s)– Extremely low withholding taxes– No windfall or additional profit taxes– Low royalty rates: average 3% (0.6% in Zambia)– Stability agreements freezing fiscal terms– External retention of earnings

20

Consequences of Strategy• Huge inflow of foreign capital into high demand

export mineral sector –gold• Expansion in mineral production and exports• Revenue stream main planned benefit of mining• Industrialisation involving exploitation of industrial

minerals fell off the agenda • Revival of colonial style mining enclave with weak

linkages to rest of economy • Promotion of institutions that support FDI• Weak attention to local enterprise promotion and

support

21

Consequences of Strategy-2• Weak development of regulatory institutions and

enforcement and policy incoherence– Trade policy, industrialisation and mining

• Race to the bottom among African countries – 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)

22

Consequences of Strategy-3

• Limited employment in mines– Wage disparities

• Displacement and rights violations• Rural development as CSR• Discontent in mining areas

23

Notion of a resource curse

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

• Evidence inconclusive

24

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.

25

Resource Curse focus • Influence mainly from outside• 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– Taxation regime

26

The African Mining Vision and related policy processes

• 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

27

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;

28

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;

29

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.

30

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

31

Key elements of new framework• 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

32

Key Elements of change• Covers most important issues in debate and

contestation–Community issues (FPIC, HR instruments,

participation, improved revenue sharing)– Step back on CSR– Taxation review of regimes (stabilisation

clauses,transfer pricing, incentives framework)

–Main focus of most countries

33

Key elements

• Policy harmonisation and coherence• Institutional and HR development• Domesticate transparency processes (APRM)

and strengthen overall governance (CSOs, legislature)

• ASM and rural livelihoods and employment– Estimated 5m

34

National Actions to build competitive skill base that drives an African industrial economy

• Assess human resources and skills need for the mining sector

• Resource and strengthen training and public institutions to attract, train,

• Diversify education, academic and professional training funding sources to include private sector,

• Strengthen continuing professional development through short courses;

• Align human resources development to AMV policy direction and needs of industry

35

National Actions to build competitive skill base that drives an African industrial economy-2

• Build capacities of government officials and other stakeholders on aspects of the mineral value chain, such as minerals marketing, taxation, accounting, auditing and contract negotiations

• Build stakeholder knowledge and capacities on policies, legal frameworks and regulation of the mineral sector

• Develop strategies and guidelines to retain competent staff, and to acquire necessary technologies and equipment to perform their functions

• Coordinate and ensure policy coherence within and across public sectors

36

Regional Actions to build competitive skill base that drives an African industrial economy

• Compile database of existing education and training institutions

• Establish a strong inter university collaborative programmes

• Develop a uniform accreditation and competence framework at sub regional level;

• Improve cross-country accessibility of learning centres. • AUC and RECs to promote the movement of skills

within and between regions• Promote the development of mining centres of

excellence

37

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

38

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

39

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

40

Drivers of Change from below

• Community struggles against and CSOs exposure of negative HR, social (loss of livelihoods) and environmental impacts and brutal policing

• Growing fundamental societal questioning of overall cost-benefits of mining boom and operative frameworks and organisations for change; pan-African reaching out– e.g. AIMES (1999); NCOM (2001)– Studies, Reports on taxation, investment agreements,

mining codes across Africa

41

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

42

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

43

COPPER PRICE MOVEMENT 2001-2011

44

GOLD PRICE MOVEMENT 2001-2011

45

Aluminium Price Movement 2001-2011

46

Platinum Price Movement 2001-2011

48

49

Unmet expectations- RevenueBetween 2002-2007 average prices of minerals and metals rose by 260%.Between 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)

• In 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

50

Loopholes in benefit sharing

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

• 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

51

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

52

Tax avoidance

53

Mining Revenues and Mineral rents management

• Enhanced share of mineral revenue accruing to African mining countries

• Improved management and use of mineral revenue

54

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

55

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

56

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

57

Global 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

58

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)

59

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?

60

Institutional steps for implementation

• Creation of African Mining Policy Centre• Joint project of AfDB, AU and ECA– Preparation of models and toolkits, capacity

building work• Declarations of support from various external

sources• Support from CSO groups

61

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

62

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

63

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.

64

Policy space and international agreements

• Developmental state assumes policy autonomy

• State role and policy space lessons from Africa’s experience and global South– China, India, NICs, new wave in Latin America

• Lessons and opportunities in current global situation –states and markets

65

Building an African alliance for change

• State and citizens -from conflict to common purpose– Need for base in society– 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

66