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Angola's oil riches:
gushing for a few
Africa's natural resources:
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, wellconnected 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
2 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
CONTENTS
2 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.
4 About our contributors
5 Angola’s oil riches stream into the
pockets of an entrenched elite
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. Louise
Redvers looks at why the oil money is gushing for a
few and dribbling down to the rest.
9 How to fatten government coffers:
nationalisation?
To take, to tax, to share? These are the questions
governments of countries rich in oil, gold, diamonds,
platinum and other natural resources are asking
themselves. How can they share this wealth with
mining companies while making sure their citizens
benefit, too? Richard Poplak examines the growing
trend towards resource nationalism.
14 Prospecting for better governance in the
Democratic Republic of Congo
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.
18 US law curbing conflict minerals may hurt
local economy more than the rebels
The persistent problem of armed groups and conflict
in the Democratic Republic of Congo has often been
blamed on the region’s abundance of mineral
resources. In 2010, US lawmakers came up with a
novel solution to the problem, a law that puts the
onus on companies to ensure that DRC minerals
are not funding armed groups. Nicholas Long asks
whether this law may have caused more harm than
good.
21 Beating the resource curse in Africa
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—yet it remains the world’s
poorest continent. Terra Lawson-Remer and Joshua
Greenstein examine how the global community can
help Africa tackle the resource curse.
25 Are diamonds Mugabe’s best friend?
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.
29 Crumbling infrastructure, red tape and
fear of nationalisation shaft South Africa’s
mineral wealth
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.
32 Transparency alone fails to reveal
corruption
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 in Fact is published by Good Governance Africa
Constanza Montana, John Endres (CEO)
Catherine Schulze
Sarah Zwane
Deon Mclellan
Editors
Research
Layout and typese ng
Cover illustra on
Opinions expressed are those of the individual authors and not necessarily of Good Governance
Africa. Contents may be republished with a ribu on to GGA. Contact us at [email protected].
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 3
About our contributors
J. Edward Conway is an independent political risk consultant specialising in the
extractive industries. His analysis has been presented in forums such as the Wall
Street Journal and Foreign Affairs. He is the author of the recent monograph “Political
Risk Management and Mining in Kazakhstan”. He is also a doctoral candidate at the
University of St. Andrews in Scotland.
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.
Tony Hawkins is a professor of economics at the University of Zimbabwe’s Graduate
School of Management.
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.
Louise Redvers is a freelance journalist based in South Africa reporting on Angola,
Swaziland and Zambia. She files for the BBC, the Mail & Guardian, Inter Press Service,
The Africa Report and the Economist Intelligence Unit. She lived in Angola between
2008 and 2010 and was the correspondent for the BBC and French news agency
Agence France Presse.
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.
4 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Angola’s oil riches stream into the pockets of
an entrenched elite
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.
Luanda’s ever-expanding glass and steel skyline stands as a proud symbol of
Angola’s impressive post-war economic growth.
Thanks to its vast oil reserves, the country has more than bounced back from
the decades of isolation and conflict that ended in 2002. Between 2004 and 2008 its
gross domestic product (GDP) rocketed by an average of 17% a year, reaching 22%
in 2007, according to the International Monetary Fund (IMF). This year its economy is
expected to expand by over 9%.
Angola topped the continent in foreign direct investment (FDI) inflows in 2010,
according to the United Nations Conference on Trade and Development (UNCTAD). It is
now sub-Saharan Africa’s third-largest economy behind South Africa and Nigeria with
a rapidly expanding banking sector and a growing portfolio of investments in Portugal
and beyond.
However, away from Luanda’s shiny new bay-front promenade with its palm
trees imported from Miami and freshly-watered grass, there is another Angola.
Despite the billions of dollars of oil revenues pouring into the country—Africa’s
second biggest crude producer after Nigeria and the main supplier to China—the
government’s own statistics show that half of the population still live on less than $2 a
day and one in five youngsters dies before the age of five.
Slum-style neighbourhoods, known locally as musseques or bairros, stretch for
miles around the capital, housing about 4m people in overcrowded and unhygienic
conditions. In rural areas, most families survive on subsistence farming. They live in huts
of mud and wattle. Conditions have barely changed in decades.
Countrywide, schools are understaffed and overcrowded. Clinics lack skilled
personnel and medicines. Unemployment and crime rates are stubbornly high.
The government recognises the need for improvement and is spending oil
money on social and infrastructure projects. Billions of dollars have been poured into
roads and bridges. The country’s three railway networks are expected to be fully
operational again by 2013. Airports and ports have been upgraded to increase capacity.
Billions of dollars have also been spent on schools and hospitals. There will soon
be universities in all 18 provinces. New housing developments are going up everywhere
aiming to clear slums and reduce overcrowding.
Many feel, however, that changes have not come quickly enough, given how
much money the government has had at its disposal and the small size of the population,
estimated at 19m.
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 5
Angola’s oil riches stream into the pockets of an entrenched elite
Oil provides about three-fourths of the government’s revenue. Economists at
the World Bank and the IMF have long been calling for Angola to diversify its economy
by establishing a stronger private sector that can create jobs and help distribute the
wealth.
There are moves in the right direction, with various investments designed to
restore the once-profitable agricultural sector, boost local manufacturing and give small
businesses start-up loans.
But Elias Isaac, country director at Angola’s office for the Open Society Initiative
for Southern Africa (OSISA), sees these as token gestures by a government which he and
others see as running the country for the benefit of themselves, not the majority.
“It is not in the interests of individuals within the elite to see Angola diversify
its economy,” he says, explaining that most businesses are run by people in or directly
connected to the ruling party, the MPLA (Popular Movement for the Liberation of
Angola). Allowing other people to become independently wealthy would weaken the
party’s grip on power.
“When you have people making this much money from importing food, they
are not going to want to develop agriculture, nor are the people making all the money
from generators going to want more electricity infrastructure. There are too many
conflicts of interest, development is not a priority,” Mr Isaac explains.
Jon Schubert, who is pursuing a PhD at Edinburgh University evaluating
political authority and modalities of power in post-war Angola, acknowledges the irony
of a formerly Marxist liberation party now being so disconnected from its electorate.
“The overriding feeling that I have from my research is that the Angolan elite
just doesn’t really care about the population at large,” he says. “The gap is so wide
between the elite and the majority, they are like different people from a different
country.”
The Angolan government misses no opportunity to defend itself against its
critics. It blames the length and scale of the war and the impact that it had on human
capacity and institutions for the country’s problems.
Senior figures also accuse “international forces” of trying to stoke up rebellion
among the Angolan youth to destabilise the government, warning people against an
Egypt-style uprising that could re-start the war.
Angolan journalist and anti-graft campaigner Rafael Marques says corrupt
officials are exacerbating Angola’s problems. Government departments are spending
public money wildly without proper consultation, he adds.
Bearing testimony to this theory are white elephant projects such as football
stadiums built for the 2010 Africa Cup of Nations, the massive Chinese-built housing
estate where apartments remain unsold one year on, and the government’s ability to
run up $9 billion worth of debt to overseas construction firms in 2009.
Mr Marques also alleges that patronage money is splashed around to maintain
the MPLA’s grip on power, even though the party holds an 82% majority in parliament
and passes any law it wishes.
6 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Angola’s oil riches stream into the pockets of an entrenched elite
He refers to this patronage process as “co-opting” and says it is an approach
regularly used on journalists, civil society activists and the Catholic church, a staunch
critic of government during the war years.
Others claim that the government’s controlling nature, its stranglehold on
state and private media and intolerance of criticism, undermine Angola’s claim to be
democratic.
The former prime minister, Marcolino Moco, has accused President Jose
Eduardo Dos Santos, who has been in power for nearly 33 years without being elected,
of running a “one-man state” using the country’s oil wealth to serve his own ends.
There are widely-reported doubts about how much of the money from Angola’s
oil exports actually makes it into the government’s official coffers. Its oil exports surged
to more than $49 billion in 2010, according to the IMF, which also recently noted that
between 2007 and 2010 as much $32 billion of state money went “missing” from the
books.
Brave
investigations
Proven crude oil produc on in 2011
by Mr Marques, whose reports
’000 barrels per day
0
have led to his arrest on several
occasions, are aiming a new
spotlight on the small Angolan
oil outfits that are making billions
of dollars from signing lucrative
contracts with international oil
companies. Members of Mr Dos
Santos’ family own some of these
firms.
The
regulator,
Exchange
United
the
States
Securities
Commission,
and
has
launched a probe which is looking
at the state petroleum company
Sonangol’s former chief executive
officer, now minister of state for
economic co-ordination, Manuel
Russia
Saudi Arabia
United States
China
Iran
Venezuela
Kuwait
Iraq
United Arab Emirates
Brazil
Nigeria
Norway
Angola
Kazakhstan
Canada
Algeria
United Kingdom
Azerbaijan
Colombia
Indonesia
Others
2,000
4,000
6,000
8,000 10,000 12,000
9,943
9,311
5,859
4,080
3,576
2,881
2,659
2,653
2,565
2,550
1,975
1,680
1,618
1,326
1,258
1,162
1,007
916
914
794
11,712
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.
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 7
Angola’s oil riches stream into the pockets of an entrenched elite
“These companies come from countries where principles of transparency and
good governance are upheld, so they have a moral obligation to uphold such values
when operating in Angola,” he says.
“They also have a moral responsibility towards the Angolan people whose
resources they are extracting, because this oil is not going to last forever and once it has
gone, what about the impoverished people they will have left behind?”
More immediately though, the population’s anger is rising at the government’s
failure to share the country’s wealth more evenly.
A string of rare public protests by youth groups calling for Mr Dos Santos to
resign have ruffled the feathers of the authorities. Former military veterans, supposedly
the backbone of the MPLA, have also taken to the streets to demand unpaid pensions.
Human Rights Watch and other international groups have criticised the
government’s heavy-handed response. They have raised concerns about reports of
“hired thugs”—supposedly linked to the MPLA—who have been targeting individual
protestors, injuring them at demonstrations and raiding their homes.
The protests, while small, are
The opposi on are complaining
bi erly about what they say is
fraudulent management of the
electoral system.
extremely significant in the Angolan context
where the importance of “keeping the
peace” after a 27-year civil war is promoted
by
the
government
to
curb
unrest.
Furthermore, few dare to criticise authority
for fear of losing their jobs or being shunned
by party networks.
Angola holds a legislative election on August 31st.
The MPLA won an 82% majority in 2008, Angola’s first peacetime election.
(The 1992 poll was abandoned mid-way due to fighting.) The ruling party is certain to
win again, not only because of its incumbency advantage, but also through its control
of the media and state resources. The opposition are complaining bitterly about what
they say is fraudulent management of the electoral system.
Under the terms of the country’s controversial new constitution, the head of the
party with the most votes will automatically become president. Thus Mr Dos Santos, who
turns 70 three days before polling, will more than likely be handed a new five-year term.
“I am pessimistic about the elections because I can’t see the MPLA in its current
incarnation accepting a significant loss of votes, just as I can’t really see the opposition
or students accepting them winning another 70% to 80% majority,” Mr Schubert says.
“The potential for escalation around the elections is really quite worrying.”
Since the end of Angola’s war in 2002, the international and business community
have lauded Mr Dos Santos for maintaining political stability, allowing oil companies
and investors to make money without any of the troubles and constraints seen in places
such as Libya, Nigeria or Sudan.
If that scenario changes, the unwavering investor support for his government
may start to wane.
8 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
How to fa en government co ers: na onalisa on?
To take, to tax, to share? These are the questions governments of countries rich in oil,
gold, diamonds, platinum and other natural resources are asking themselves. How can
they share this wealth with mining companies while making sure their citizens benefit,
too? Richard Poplak examines the growing trend towards resource nationalisation.
No word in Africa’s post-liberation lexicon causes as much brouhaha
as “nationalisation”. Along with its unhappy corollaries—state ownership, state
participation, indigenisation—any talk of nationalising mines sends investors and neoliberal wonks into a frenzy. The spectre of a dark era rises before us: corrupt Big Men
swapping commodities for palaces until the national coffers are bare. But read the
business papers in Africa and you will notice an increasing trend towards revisiting
state ownership in the minerals and petroleum sectors. “Nationalisation,” a recent
Goldman Sachs report warns us, “never works.”
Except when it does. Norway, Brazil, Botswana and Chile have successfully
nationalised portions of their commodity sectors. The Norwegian government “participates” in 50 to 70% of all mining licenses, collects taxes, royalties and dividends, and
has built a petroleum fund worth $500 billion. What makes a state-by-state comparison
so fascinating is that there is no standard model of nationalisation that can be applied
like a salve. Models that work are the exception rather than the rule. In Botswana’s case,
often cited as Africa’s leading light, the state has forged a partnership with the private
sector. The Botswana government owns 50% of a joint venture with DeBeers, called
Debswana, which mines the country’s richest diamond concessions, generating about
two-thirds of gross domestic product (GDP) and more than 70% of export earnings.
What works for Botswana now may not work for Botswana in the future; nor
is the model necessarily exportable. Despite efforts to bevel the edges off a massively
complicated issue, “resource nationalisation” is not a single problem. There are sweeping
differences between the various mineral and metal commodity sectors; Niger, for
instance, does not have Botswana’s diamonds. Whichever way resource nationalisation
is approached, it tends to expose an ideological conflict that dates back to the liberation
era: privatised extraction in a liberalised economy vs. state-managed or state-owned
extraction in a closed economy. This battle has long passed its expiry date.
African countries want more from their resources. But, as Dr Mzukisi Qobo, the
former head of South Africa’s Department of Trade and Industry, wonders, “What are
we talking about when we talk about more?”
Nowhere is this question being asked with more urgency than in South Africa.
At the African National Congress (ANC) policy conference in June, something of a dry
run for the leadership conference scheduled for December of this year, nationalisation
was once again on the table. The ANC is less a traditional ruling party than an alliance
of pre-liberation entities that squabble amongst themselves under the umbrella of a
National Executive Committee (NEC). This push-pull between left and right, market-
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 9
How to fa en government co ers: na onalisa on?
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
Is there any real di erence
between a super-profit tax and
state ownership? Can a fullblown SMC mine and market
commodi es without private
sector involvement?
minerals energy complex, or MEC, is “the
main driver of the economy”. In 2011 the
mining sector contributed $35.9 billion to
the South African economy, or 9.8% of
GDP, according to Statistics South Africa.
SIMS complicates the idea of
resource nationalisation while studying its
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.
10 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
How to fa en government co ers: na onalisa on?
Compare this to Botswana, where the government is required to invest $1.5
billion in Jwaneng’s Cut 8 diamond mine, matching its partner DeBeers penny for
penny. The DRC represents the old-school state-involvement model: sit around and wait
for the cheques to clear. Botswana belongs to the new school: run state involvement like
a business and reap the dividends.
As the executive director of the Free Market Foundation, Leon Louw, put it
recently, “The Botswana government makes it very clear that it does not tax the mines,
but just owns the shares in the partnership companies.” South Africa, despite legislation
requiring 26% black ownership in local mining ventures, does not own the mines. It
merely taxes them. According to Mr Louw, under its current tax policy, South Africa
derives “50% of the substantial profits from
South Africa’s mining industry” without
Calculated as a fixed
percentage above the na onal
lending rate, miners complain
that supertaxes penalise them
for profi ng from the immense
risks that are the hallmark of
the business.
investing a cent. Because the government
does not participate in the industry, it does
not subsidise the industry, as it must its
parastatals.
Like most free marketeers, Louw
would like this to continue. In West Africa,
another nation has taken a very different
approach.
Ghana has been at the forefront
of
the
nationalisation
debate
since
independence in 1957. Its gold production fell from 915,317 ounces in 1960 to 282,299
ounces in 1984, all but destroyed by poor state management and a plummet in global
prices. In 1993, after radical liberalisation, production climbed tenfold to 2.9m ounces.
Accra is determined to maintain this trajectory.
Ghana’s legislation is an example of a mixed approach that is becoming more
and more common. Full nationalisation has not been on the table for 20 years: the state
takes 10% free equity in both minerals and petroleum projects and has an option to
buy a further 20% at market prices. Royalties float between 3% and 12% related
to the operating margin, a policy designed to give companies a break should the
international market dive.
The latest budget caused much handwringing in the mining industry, due no
doubt to Ghana’s traditional bellwether status. It imposes a tax rate of 35% and an
additional 20% profit, or “windfall” tax. There is also a capital gains tax that kicks in if a
company increases in value after a merger. In a country where gold makes up 37% of
exports, Ghana intends to extract as much value as possible from its resources.
The element of Ghana’s mining legislation that most rankles the industry is, of
course, the windfall tax. For as long as the notion of windfall taxes has existed, it has
acted as something of a doppelganger for the nationalisation issue. Calculated as a fixed
percentage above the national lending rate, miners complain that supertaxes penalise
them for profiting from the immense risks that are the hallmark of the business.
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 11
How to fa en government co ers: na onalisa on?
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
Without development African
countries will remain mere
exporters of raw materials.
are high, state ownership rises and the
share of rents increases. In other words,
governments behave like and compete with
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 nationalisation 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 valueadded 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
12 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
How to fa en government co ers: na onalisa on?
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.
Copper mine produc on in Zambia, 1960–2011
900
800
’000 tonnes
700
600
500
400
300
200
100
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
0
Source: Interna onal Copper Study Group, 2012
In 1969 Zambia produced 868,117 tons of copper and President Kenneth Kaunda announced that the copper
mining companies—which contributed over 50% of government revenues—would be na onalised. By 2000
produc on had declined to 249,100 tonnes and the government decided to priva se the mines. By 2010
produc on had recovered to 685,694 tonnes.
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 13
Prospec ng for be er governance in the Democra c
Republic of Congo
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 subSaharan 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.
14 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Prospec ng for be er governance in the Democra c Republic of Congo
Maplecroft’s Mr Macfarlane elaborates: “In addition to its diamond resources,
the stability and consistency offered by Botswana’s particular political system and society
has undoubtedly been beneficial in terms of attracting investment to the country.”
Unfortunately, stability and political plurality do not always go hand in hand.
What can the DRC learn from Botswana? There are many uncertainties
surrounding the technical challenges of bringing ore out of the ground and processing
it at a profitable margin. As a result, foreign miners look to reduce security, corruption,
legal and regime risks. These risks are low in Botswana, a nod no doubt to the country’s
ability to govern effectively. In the DRC, on the other hand, violence in the east
continues to be extreme, corruption is pervasive at all levels of government and judicial
independence is non-existent.
Botswana, DRC and Zambia: GDP and GDP per head (2010)
a
GDP (PPP,
current $bn)
30
25
20
15
10
5
0
Botswana Democratic Republic
of Congob
Zambia
GDP per head
(PPP,a current $bn)
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Botswanab Democratic Republic
of Congob
Zambia
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.
Complicating the situation, the DRC’s political system—though arguably more
representative than Botswana’s—is plagued with uncertainty. President Joseph Kabila’s
election in 2011, “while contentious”, nevertheless “prevented further destabilising
the fragile country”, says Thomas Wilson, head of strategic advisory services at the
industry and government advisory firm africapractice. But the next election cycle in
2016 “poses a major risk to Congolese stability,” Mr Wilson says. Mr Kabila will be
ineligible to run and the head of the opposition, Etienne Tshisekedi, will be in his 80s
and therefore unlikely to stand. With no clear successor, unlike in Botswana, political
concern increases.
Is there hope?
Despite the DRC’s many negative risk factors, security has improved
dramatically and real advances have been made in tackling corruption. Global Witness,
a human rights organisation, lauded the government this year for passing a law aimed
at curbing the role of mineral development in funding violence and, more importantly,
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 15
Prospec ng for be er governance in the Democra c Republic of Congo
enforcing the law against two Chinese mining companies.
The legacy difficulties confronting the DRC should not be underestimated.
Unlike Botswana, for instance, the country was more severely exploited in its colonial
past. With independence it suffered from one of the most notorious dictators in the
world: President Mobutu Sese Seko left the country bankrupt in 1997 while personally
profiting to the tune of an alleged $5 billion. In addition, one of the bloodiest and most
horrific conflicts in modern history—the Rwandan genocide—has scarred the DRC and
significant spillover effects continue today.
The DRC can succeed in improving its governance and attracting foreign
investment. The Canadian gold explorer and miner Banro Corporation, for instance,
has been operating in the eastern DRC since 2004 and maintains an extensive socioeconomic development programme at each of its four sites. Banro Foundation projects
in education, healthcare and social infrastructure are suggested by local committees,
implemented by the foundation using local labour, and then turned over to a nongovernmental organisation (NGO) or provincial governmental body to operate. Along
with the $2.5m that the Banro Foundation has contributed to DRC communities over
the last seven years (and another $2m estimated for 2012), Banro has created roughly
4,000 jobs for local Congolese either directly or by contract, is a leading purchaser of
domestic DRC goods (about $26.3m in 2011), and in the course of satisfying its own
infrastructure needs, has spent over $16m on roads, bridges and other public facilities
across the eastern DRC. This is all in advance of the miner actually turning a profit,
which is still years away.
The indirect effects of a company like Banro on the DRC are immense. The
company’s presence creates a multiplier effect in local economic development. That
a foreign miner listed on the Toronto and New York Stock Exchanges can operate
safely and within Canadian expectations on corporate governance has an inestimable
reputational effect for the DRC as a destination for foreign direct investment (FDI). “The
most important thing for us in attracting investors is getting them to the site,” says Martin
Jones, chairman of the Banro Foundation. “Once they see how safe the situation is, and
how well we are regarded locally, it changes investors’ perspective entirely on the DRC.”
There are two issues pressing the DRC today that are good for governance and
for business, and it is here where good governance advocates should focus: political
plurality and taxes. Forget Botswana as a guide and instead look to Zambia: also subSaharan, also rich in minerals. While not nearly as positive an investment environment
as Botswana, nevertheless it is a more applicable solution for the DRC.
Critically, Zambia’s recent history shows that political plurality, if managed
appropriately, can actually increase investor confidence. IHS Global Insight’s Country
Risk Ratings, an industry standard, downgraded Zambia’s risk score from “significant”
for over a decade to the improved rating of “medium” in late 2011. Why? With Michael
Sata’s election, the country passed through “the successful transfer of power to an
opposition president/party” after a legacy of one-party rule, says Gus Selassie, subSaharan analyst for the firm. So while political uncertainty is a negative for foreign
16 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Prospec ng for be er governance in the Democra c Republic of Congo
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
sector and therefore has no benchmark
for determining what to tax. Zambia
is now participating in the Extractive
Industries Transparency Initiative (EITI), a
voluntary programme in which countries
and companies publish their payments
and revenues (see page 32). As a result, it
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.
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.
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 17
US law curbing conflict minerals may hurt local economy
more than rebels
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
18 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
US law curbing conflict minerals may hurt local economy more than rebels
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
Democra c Republic of Congo
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 19
US law curbing conflict minerals may hurt local economy more than rebels
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.
20 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Bea ng the resource curse in Africa: a global e ort
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 oilproducing 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.
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 21
Bea ng the resource curse in Africa: a global e ort
The mix of resource abundance and poor governance is especially lethal in
resource-rich Africa. As a share of GDP, sub-Saharan African resource rents are higher
than those of any other region in the world, according to the World Bank. Rents are
defined as the difference between the value of production at world prices and the total
cost of production for oil, natural gas, minerals, coal, and forests.
For example, the Republic of Congo has the highest total resource rents as
percentage of GDP in Africa (64%) and one of the lowest control of corruption scores.
Equatorial Guinea, with a government widely seen as autocratic, has the worst control
of corruption score among African countries. It also has very high resource rents as a
share of GDP, at 47%.
But resources do not automatically lead to poor outcomes. For instance, North
America produces more oil than Africa, but it has the lowest resource rents as a share
of GDP and has good governance ratings. Canada remains among the top ten world
oil producers, according to the US Department of Energy, but has one of the least
corrupt governments in the world, also
according to the World Bank. Norway is
Equatorial Guinea, with a
government widely seen as
autocra c, has the worst
control of corrup on score
among African countries.
one of the top ten exporters of crude oil in
the world, while maintaining its stature as
a perennial leader of the United Nations
Human Development Index. The resource
curse is avoidable.
Africa could be prosperous if it
practised good governance: transparency
in its dealings with mining, oil and gas
companies; stronger disclosure and anti-corruption rules; and economic policies
that promote diversified economies and discourage dependence on resource rents.
Transnational companies could be compelled to play a more important role, too, by
enforcing and strengthening existing transparency rules.
Governments in extracting and capital-exporting countries, bilateral donors,
multilateral financial institutions, the extractive industry, private financial institutions,
and civil society have made promising steps towards addressing the resource curse in
recent years.
For example, the World Bank’s International Finance Corporation (IFC)
stipulates the social, environmental, and governance requirements for all World Bank
investments in private-sector projects. In 2011 the IFC made revisions that included
strong improvements mandating contract and revenue transparency. However, the IFC
rules do not affect bilateral loans. This loophole permits donor countries to continue
lending money to companies that collude with unsavoury officials while keeping the
terms of billion-dollar oil and mining deals secret from the public.
There have also been some signs of progress in the financial industry. The
Equator Principles (EP) is a voluntary programme that requires borrowers to adhere
to social and environmental standards before the participating banks will provide
22 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Bea ng the resource curse in Africa: a global e ort
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
Total natural resource rents as share of GDP
0
5%
10%
15%
20%
25%
30%
Middle East & North Africa
Sub-Saharan Africa
Latin America & Caribbean
South Asia
East Asia & Pacific
Europe & Central Asia
North America
Source: World Bank, 2012
Natural resources include oil, natural gas, minerals, forests and coal. 2010 is the latest year for which figures
were available.
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 23
Bea ng the resource curse in Africa: a global e ort
misdirected or not documented properly. The Revenue Watch Institute, a New Yorkbased 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
Polity Democracy/Autocracy Scores
(-10 to +10)
Region
Average Score
North America
10.00
Bank indicators.
Taking the step from transparency to
actual accountability requires a civil society with
the skills and training for effective monitoring.
The demand for these skills exceeds available
Latin America & Caribbean
6.70
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,
2.46
accounting and tracking of revenues and
-3.00
expenditures. If citizens do not have these
Sub-Saharan Africa
Middle East & North Africa
Source: Center for Systemic Peace, 2012
The values refer to 2010, the last year for which data
was available. The scale ranges from -10 (autocracy)
to +10 (democracy), using the Polity2 ranking. The
regional values were calculated by the authors on
the basis of aggregated country values.
funding. Bilateral donors, the multilateral
analytical and technical skills, they cannot
hold public officials accountable for spending
resource revenues badly.
The G20 countries could immediately
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 externallyfunded 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.
24 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Are diamonds Mugabe’s best friend?
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,
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 25
Are diamonds Mugabe’s best friend?
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
26 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Are diamonds Mugabe’s best friend?
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 Weststyle exploitation of Zimbabwe’s alluvial diamond wealth in the Chiadzwa/Marange
Zimbabwe’s economic performance
2011
2010
0
2008
0
2009
100
2007
1
2005
200
2006
2
2003
300
2004
3
2002
400
2001
4
2000
500
1998
5
1999
600
1996
6
1997
700
1995
7
1993
800
1994
8
1992
900
1991
9
GDP (current US$, in billions)
GDP per capita (current US$)
Source: World Bank African Development Indicators, 2011.
Zimbabwe’s GDP halved from 1990 to 2008, as did its GDP per capita. Sound economic management was not
one of President Mugabe’s strengths. The economy started growing again from 2009 a er a power-sharing
agreement was reached between President Mugabe’s Zanu-PF party and the opposi on MDC, and the US
dollar became the de facto currency of Zimbabwe.
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 27
Are diamonds Mugabe’s best friend?
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 deindustrialisation 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 shortterm 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, quickfix resource depletion policies are certain to win the day but unlikely to win Mr Mugabe
another term as president.
28 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Crumbling infrastructure, red tape and fear of na onalisa on
sha South Africa’s mineral wealth
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
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 29
Crumbling infrastructure, red tape and fear of na onalisa on sha South Africa’s
mineral wealth
Mines executive. It employs half a million people.
The diplomat blames history for the government’s ineptitude. Gold and other
minerals created the foundation for South Africa to become the continent’s largest and
most advanced economy. But many still recall the apartheid era when a black workforce
extracted this wealth for the benefit of white-owned companies.
“The ANC [African National Congress] seems to have a deep ambivalence about
mining, probably because of the sector’s role in structuring the apartheid economy,”
he says. Until now, the ANC has devoted more thought and energy to “transforming”
the mining sector than to nurturing it and ensuring that it drives growth for decades to
come, he adds.
Crumbling and inefficient infrastructure has also undermined South Africa’s
mining potential. The growing deficiencies in transportation and railway capacity
for bulk commodities began driving up mining costs from about 2000 onwards, says
economist Mike Schüssler.
For instance, the state-run Transnet Rail service hauls coal for export to Richards
Bay on South Africa’s east coast. Though the port’s annual export capacity exceeds 91m
tonnes, the rail network could move only 68m tonnes last year. Electricity prices have
nearly doubled in the last few years and the entire country has suffered from frequent
power outages since 2007.
Costs and insecurities have continued to mount from this period onward, Mr
Schüssler says. First there were potential social security expenses and then a proposed
national health care plan. Then charges that energy and chemicals company Sasol had
been extracting “super profits” from its synthetic petroleum production fuelled the
nationalisation debate, he adds.
The need to invest in greater beneficiation, or complementary industries that
raise the value of the raw natural resources, was added to this simmering cauldron, Mr
Schüssler says. From the industry perspective, this meant extra costs added to already
burdensome affirmative action requirements.
These additional expenses and red tape depressed investment in the mining
sector, says economics journalist Barry Wood. “Overall South Africa is not seen as
particularly hospitable to FDI [foreign direct investment],” he says. He is reluctant,
however, to admit that South Africa has entirely missed the commodities boom.
“Without coal, gold and platinum exports, forex [foreign exchange] earnings would be
tiny,” Mr Wood says.
Gold is also a major factor in South Africa’s shrinking mining sector. Its ageing
gold mines are getting deeper and thereby dearer to explore. From 2000 to 2010,
annual gold production dropped from 428 tonnes to 191 tonnes.
There is yet another issue beyond South Africa’s borders: China. South Africa
has suffered from “a significant lack of understanding of the significant developments
in the Chinese economy and the actual drivers of commodity demand in that country,”
says China–Africa trade specialist Martyn Davies.
30 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Crumbling infrastructure, red tape and fear of na onalisa on sha South Africa’s
mineral wealth
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.”
SA/world gold produc on, 1910–2009
3,000
14
2,500
12
10
2,000
8
1,500
6
1,000
4
2
0
0
1910
1912
1914
1916
1918
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
500
Annual production of gold (world, in tonnes)
Annual production of gold (South Africa, in tonnes)
Grams of gold per tonne of ore (South Africa)
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.
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 31
Transparency alone fails to reveal corrup on
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 ‘inkind’ 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.
32 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Transparency alone fails to reveal corrup on
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
companies are linked infamously to human
rights violations such as in the Chiadzwa
fields in Zimbabwe, kidnappings in the
Niger Delta, conflict in the Congo, murder
and environmental abuse elsewhere.
Uncovering fraud, bribery, money
laundering, tax cheating and other corrupt
practices is tricky. The EITI validates
compliance on a country-by-country basis.
This allows multinationals to hide underthe-table payments in other countries that
may serve as tax havens.
“By splitting the analysis between
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 transac ons decides
to spill the beans. O en illicit
payments can be found in the
balance books, hidden under
such rubrics as “cost build-up”
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.
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 33
Transparency alone fails to reveal corrup on
Companies and governments are now resorting to “in-kind payments” to
disguise these backhanders. For instance, leasing office space from an individual with
the right political connections at a rate higher than the prevailing market price is a
common way of making an in-kind payment.
Another practice is to recruit relatives or friends of an influential and politicallyconnected individual and retain them on payrolls as “facilitators” or “consultants”
without clearly-defined responsibilities. Inflating costs for replacing equipment and
parts is another fraudulent practice.
Companies use their subsidiaries as another vehicle for hiding bribes under the
heading of “cost build-up”. Invoices to subsidiaries are also disguised as consultancy
services.
Since taxes are often based on profits, companies may under-declare to save
on these levies. By billing a subsidiary, sometimes with highly inflated invoices, the
multinationals reduce their tax obligations
In other instances, gold and
diamonds are polished or cut
in a third country which has
a lower corporate tax. The
company declares a lower
value for the raw product and
therefore pays a lower tax.
to the host country.
Most multinationals have perfected
the art of exaggerating their real overheads
to tax authorities, Mr Olaide says. “An oil
company would document the need for a
particular ‘proprietary item’, which can
only be supplied by one of its numerous
subsidiaries at a self-determined price. It’s
not like a water or wine glass where one
can go to the market and establish the
average going price.”
Tax authorities and other govern-
ment agencies frequently lack the technical knowledge needed to verify the true value
of invoiced items. “Even the EITI, as narrow as its objectives are, has not been able to
address the issue of bloated costing. It only looks at the final products—the information
that has been provided by the executives of the extracting corporations. It does not go
out to verify the validity of those cost items,” Mr Olaide adds.
In other instances, gold and diamonds are polished or cut in a third country
which has a lower corporate tax. The company declares a lower value for the raw
product and therefore pays a lower tax.
Many African countries lack the capacity to assess and qualify the costs
involved in the industries and surrender the responsibility to experts provided by the
World Bank, the United Nations, the International Monetary Fund as well as various
international oil companies.
Unfortunately, these external experts rarely prioritise the interests of the local
communities, particularly during contract negotiations. Once the contracts are signed,
these countries lack the expertise to evaluate the exact quantities of the resources
extracted and have to accept whatever value the corporations declare.
34 | Africa in Fact | Issue 3 | August 2012 | www.gga.org |
Transparency alone fails to reveal corrup on
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.”
THE EITI CRITERIA
1 Regular publication of all material oil, gas and mining payments by
companies to governments (“payments”) and all material revenues received
by governments from oil, gas and mining companies (“revenues”) to a
wide audience in a publicly accessible, comprehensive and comprehensible
manner.
2 Where such audits do not already exist, payments and revenues are the
subject of a credible, independent audit, applying international auditing
standards.
3 Payments and revenues are reconciled by a credible, independent administrator, applying international auditing standards and with publication
of the administrator’s opinion regarding that reconciliation including
discrepancies, should any be identified.
4 This approach is extended to all companies including state-owned
enterprises.
5 Civil society is actively engaged as a participant in the design, monitoring
and evaluation of this process and contributes towards public debate.
6 A public, financially sustainable work plan for all the above is developed by
the host government, with assistance from the international financial institutions where required, including measurable targets, a timetable for implementation, and an assessment of potential capacity constraints.
Source: ei .org, accessed July 30th, 2012
Financial impropriety in Africa, often documented as the “cost of doing business
in Africa”, affects consuming countries with higher prices and producing countries with
lower tax revenues. To remedy these problems, several countries are in the process of
strengthening their anti-corruption laws, such as the United States’ Dodd-Frank act and
the United Kingdom’s Bribery Act. Mr Olaide reckons that civil society organisations
could use the information provided from the EITI audits to seek legal redress using these
new laws.
Africa in Fact | Issue 3 | August 2012 | www.gga.org | 35
Tunisia
Morocco
Algeria
Western
Sahara
Libya
Egypt
Mauritania
Mali
Senegal
Sierra
Leone
eri
a
Burkina
Faso
in
Guinea
Lib
tre
Chad
Gambia
Ben
GuineaBissau
Eri
Sudan
Niger
a
Côte
d’Ivoire
Nigeria
Togo
Cameroon
Somalia
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and Principe
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Sudan
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African
Republic
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nda
Uga
Congo
Kenya
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Republic
of Congo
Burundi
Seychelles
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Comoros
Angola
Malawi
Botswana
r
Ma
Namibia
dag
asc
a
M
Zimbabwe
oz
am
biq
ue
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Lesotho
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