In Search of the Real Deal

Transforming the continent’s wealth into reality

Windhoek ‑ African economies should climb up the value addition chain of mineral processing and manufacturing if the continent is to unlock the full potential of its natural resources and benefit during cycles of commodities demand price boom.

The Africa Progress Panel, which is chaired by former UN Secretary-General Kofi Annan, in its 2013 Africa Progress Report, bemoans the continent’s inability to extricate its citizens out of grinding poverty despite abundant mineral wealth.
The report underscores previous assertions made even by the African Union that governments are failing to use mineral wealth to transform societies.
It also points out that many of the continent’s resource-rich countries such as Angola, Zambia, Nigeria, among others, are leaving the poor behind.
Countries such as the DRC, Mozambique, Chad and Niger – despite holding immense deposits of some of the world’s most sought-after minerals – are at the bottom of the Human Development Index.
The 2013 Africa Progress Report urges African economies to value add, without which they will continue to perpetuate the problem of unemployment.
African economies have seemingly been failing to establish value addition chains on the domestic market and countries such as the DRC, the world’s largest producer of cobalt, still exports the mineral in unprocessed ore and value is added in smelters in China and other importing countries.
Guinea’s exports of bauxite are processed into aluminium abroad, while Angola and Chad still export low value-added crude oil while importing high value-added petroleum and petroleum-based plastics and fertilisers.
“Impressive as the region’s export growth figures may be, Africa still accounts for just one percent of global value-added manufacturing, the same share as in 2000.
“Ironically, the rapid growth in exports of raw materials to China has decreased the already limited share of manufactured goods in Africa’s exports,” the report says.
“So while natural resource exports have boosted economic growth, they have also deepened Africa’s integration into low value-added areas of international trade, which could ultimately reinforce the region’s marginal role in emerging patterns of globalisation.”
Rising global resources appetite has seen mineral endowed Africa becoming a theatre of international mining capital.
The continent’s known mineral reserves account for 30 percent of the world’s mineral reserves and an even higher proportion of deposits of gold, platinum, diamonds and manganese.
But unless African economies come up with an active industrial policy, much of the perceived benefits from the natural resources will continue to be elusive.
“Active strategies are needed that attract investment in skills development, increase technology transfer and strengthen links between mining and local economies,” the 2013 Africa Progress Report says.
The report urges African governments to adopt a “healthy dose of cautious realism” with regards to over-reliance on commodities exports.
The continent is, therefore, urged to attract quality foreign investment in the minerals sector.
“Quality in this context refers to investment that is geared towards the sustainable development of resource wealth over the long term, building linkages with local markets.”
The report also slams the veil of secrecy surrounding multinational companies benefitting from the continent’s resources.
“The presence of offshore registered companies in the ownership chain limits public disclosure requirements…the involvement of subsidiaries and affiliates as conduits for intra-company trade creates extensive opportunities for trade mis-pricing, aggressive tax planning and tax evasion, enabling companies to maximise the profits reported in low-tax jurisdictions,” the report says.
The report goes further to say that the “opaque practices of foreign companies and the extensive use of offshore companies actively facilitate and support the illicit diversion of public wealth into private bank accounts”.
According to the report, the situation plaguing the DRC’s minerals sector illustrates the culture of secrecy, informal dealing and corruption.
The report says that a forensic analysis of deals signed between the DRC’s state-owned mining company, Gecamines, and British Virgin Island-domiciled companies shows that between 2010 and 2012, the country lost at least US$1.36 billion in revenues from the under-pricing of mining assets that were sold to offshore companies.
Assets valued at US$1.63b were sold to offshore companies for US$275 million and the beneficial ownership structure of the companies is unknown.
“Unravelling the deals involved in concession trading in the DRC is enormously difficult.
“The complex structures of interlocking offshore companies, commercial secrecy on the part of major mining companies, and limited reporting by state companies and government agencies to the DRC’s legislators, creates what amounts to a secret world ‑ a world in which vast fortunes appear to be accumulated at the expense of the DRC’s people,” the report says.
These same sentiments were expressed in the African Mining Vision, which admitted to a “widespread sense that Africa has not obtained commensurate compensation from exploitation of its mineral resources”.
One way through which Africa loses out is through transfer pricing, a practice through which companies overstate the prices they pay for imported technologies and technical services.
“Tracking value added through a maze of interconnected companies linked through shell companies, holding companies and other intermediaries registered from the BVI to Switzerland and London is challenging for even the most developed tax bodies…
“Attempting to estimate the overall losses associated with mis-pricing has been described as an exercise in night vision,” the report says.
The report urges African governments to come up with sound policies, which can transform the continent’s wealth into meaningful benefits for the majority citizens.
“Africa has never suffered from a ‘resource curse’. What the region has suffered from is the curse of poor policies, weak governance and a failure to translate resource wealth into social and economic progress.
The favourable market conditions created by global resources constraints provide no guarantee that the growth of extractive industries will lead to improvements in the lives of people.
But if governments seize the moment and put in place the right policies, Africa’s resource wealth could permanently transform the continent’s prospects.”

May 2013
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