The paradox of Africa’s wealth
Mineral-endowed African countries should levy more taxes on mining companies and negotiate more favourable licensing and tax regimes in the sector if they are to benefit from the commodities price boom.
African countries have remained rent seekers in the mining sector and have failed to reap benefits from the global commodity price boom.
This trend will continue until bold steps are taken to scrap disadvantageous and archaic investment protection clauses and raise government and public participation in existing and future mining projects.
A study entitled “Minerals and Africa’s Development” conducted by the United Nations Economic Commission for Africa (UNECA) and submitted to African Union ministers responsible for mineral resources paints a grim picture of mining contribution to government revenue and social development across the continent.
The paradox of Africa’s mineral wealth on the one hand and the pervasive poverty of the continent’s people is a scar blighting Africa’s economic landscape, the study says.
Africa is the last investment frontier and is alluring as a supplier of strategic minerals to industrialized countries.
However, the inadequate returns to the continent and the enclave nature of mining industries across the continent are not lock-in-step with the developmental agenda.
That proceeds from the mining sector are not benefiting the continent’s citizens can be traced to World Bank economic prescriptions, which were dished out to African governments after attainment of self-rule.
Upon attaining black majority rule, most African countries inherited gargantuan debts and the World Bank exploited the situation by prescribing reforms that largely sought to limit state participation in lucrative economic sectors like mining.
The UNECA report says a wide range of investment incentives were introduced resulting in a surge in foreign direct investment (FDI) inflows in the sector.
Consequently, many African governments also agreed to liberalize exchange control and enact investment protection laws, particularly on dividend repatriation and non-expropriation of mining assets, the UNECA study says.
The World Bank interventions helped to create a more favourable environment for foreign investors negating the mining sector’s contributions to social and economic developmental objectives.
The UNECA study recommends a new African Mining Vision (AMV), which shifts mineral policy beyond a focus on extracting minerals and sharing revenue.
Lending credence to what is now a sweeping continental agenda, the UNECA study says mining-related activities should not be enclaved but should contribute to sustainable development.
“The adequacy of revenue obtained by African governments from mineral exploitation is a subject of controversy. No precise or uncontested measure for determining adequacy exists.
“But the widespread sense that Africa has not obtained commensurate compensation from exploitation of its mineral resources is impossible to ignore.
“This sentiment has become particularly pronounced since the early years of the mineral commodity price boom, which has substantially lifted profits for mining companies,” the study says.
The DRC, Ghana, Guinea, Mozambique, Namibia, Tanzania, South Africa, Zambia and Zimbabwe are some of the countries that are taking steps towards greater government say in mining.
African governments argue that the minerals in their soil are state assets and that a greater share of mining proceeds should be re-distributed among poor citizens.
Despite attracting verbiage of criticism, Zimbabwe has pushed ahead with a 51 percent indigenization law.
Zambia, Africa’s top copper producer, will soon start negotiating for 35 percent interest in mining projects. Aluminium and iron ore-rich Guinea recently amended its laws to raise stakes in mining to 35 percent.
Namibia this year reserved future exploration of strategic minerals for a state mining company, which will decide which private companies it wants to enter joint ventures with.
In both DRC and South Africa, there is a growing lobby for nationalization of mining.
African governments have also argued that mining assets are not delivering their full value in taxation payments.
The Zambian government, for example, argues strongly that its due revenues have been prejudiced and is working out a new export regulation mechanization in which metals exports will be routed through the central bank.
The UNECA report confirms African governments’ contention that mining companies are not paying their due taxes.
Zimbabwe’s Finance Minister Tendai Biti revealed in his 2012 national budget presentation that the country will earn US$2 billion from mineral exports in 2011, from which the government will collect a paltry US$150 million in taxes.
Biti accused mining companies of exploiting loopholes in the current tax regime to dodge payments.
To that end, Zimbabwe’s government is assigning customs agents to audit mineral output at mine sites as part of a raft of new measures to enforce tax compliance and accountability in the sector.
Wilbur Simuusa, Zambia’s Mines Minister, told The Southern Times in October that the government had been prejudiced of revenue.
Zambia presents another interesting case study.
Copper accounts for about 80 percent of export receipts but contributes a miniscule nine percent of GDP.
Zambia does not have proper data capture mechanisms and the government says its investigations have revealed that copper exports are destined for Switzerland, but information on copper deliveries is unavailable in Swiss customs data.
UNECA says African governments face challenges in determining the level of revenue from mineral sales and there is also controversy over proper valuation of mineral by-products.
The study says transfer pricing of inputs and equipment constitutes a complex problem for governments and one harder for them to handle than transfer pricing of production.
“Prices are often less transparent and tax evasion may take place through the use of no-arm’s length suppliers based in tax havens,” UNECA says.
Duties on imported inputs, particularly those used during exploration or mine development phases, tend to be limited where they exist.
Unless properly monitored, this approach can prevent local supply systems from developing, where economically viable, and hence deny the country the benefits of enhanced local linkages.
UNECA says African governments should charge more taxes on the mining sector without fear or favour.
An area in which Namibia has taken the lead is imposing capital gains tax on sale of mining projects/companies, even if conducted overseas.
Tax obligations should be a prerequisite to transfer of any mineral rights, UNECA advises.
“African states should consider imposing a capital gains tax on any mineral property sold before mining operations begin.
“Even if statutes have provisions for capital gains tax, enforcement-when companies dispose of their assets and leave the country-imposes challenges that can be addressed by requiring companies to settle tax obligations as a pre-requisite for any transfer of their mining rights.”
In many large-scale projects in Africa, sponsors and lenders have sought and obtained assurances that there will be no additions to the total tax package initially agreed to.
These assurances should be revised to create a win-win situation.
“During the recent period of high prices and profits, however, existing tax regimes have not earned African mining countries a commensurate share of the large additional profits,” UNECA says.
The study points out that stability clauses in mining contracts facilitate capital raising for large projects, but they are often unnecessarily extensive.
“One factor in determining their duration should be the period for repaying the initial loans to the project from outside lenders, if any.
“Such clauses, inserted with others requiring most favoured tax treatment for the beneficiary company, risk causing unforeseen losses to government revenue if the authorities grant similar concessions to later entrants.”
An important element of a mineral regime that attempts to optimize the development impact is setting a fair market value of resources “price discovery”, the study recommends.
In addition, transparent and competitive concessioning of known mineral assets can help and public tender will clearly have sub-optimal results for terrain with no known assets or areas of low prospectivity.
The reports indicates that revenue from mineral operations give governments the muscle to finance infrastructure and human capital development.
“The effective use of mineral revenue in long-term physical and social infrastructure marks the prudent transformation of finite mineral capital into other forms of long term capital – to ensure inter-generational equity – and is enhanced by transparency in collection, as well as in use.
“Systems that allocate part of the mineral revenue to communities near mining areas should be designed to ensure lasting benefits beyond the life of the mine,” the study says.
To fully realize the continent’s potential of its mineral endowment, African governments are also urged to come up with policies that promote downstream linkages into mineral beneficiation and manufacturing, side-stream linkages into infrastructure such as power, water and skills development.
The overarching objective is creating mutually-beneficial partnerships between states, the private sector, civil society and local communities.
It is important to create a mining sector that husbands Africa’s finite resource endowment, incorporating both high-value metals and lower-value industrial minerals at both commercial and small-scale levels.
Such an approach should take on board small-scale miners to stimulate entrepreneurship, improve livelihoods and advance integrated rural social and economic development.
“The institution of mining as an enclave was the result of a particular phase of Africa’s history, but should not be taken as an inevitable part of its destiny,” UNECA says.
International mining companies have labeled the current trend in Africa a “the curse of resources nationalism”.
However, Mark Bristow, CEO of Randgold Resources, which has consolidated its presence in the DRC even during the country’s recent volatile history, offered some words of wisdom on the subject at the Denver Gold Forum last year.
“As miners, we are dealing with national assets. Our job is to make sure we distribute returns to all stakeholders, which means our shareholders and other legitimate parties, such as governments.
“I am very conscious of the requirements for partnerships, making sure the value created gets spread around.”