The stakes for Africa in Mineral Resources Development

The Stakes for Africa in Mineral The Stakes for Africa in Mineral Resources DevelopmentResources Development

by Antonio M. A. Pedroby Antonio M. A. PedroDirector, SRO-EA- Kigali, RwandaDirector, SRO-EA- Kigali, Rwanda

ObjectivesObjectives

Share perspectives and views on mineral resources development in Africa

Review relevant mineral policy options and strategies including key African policy initiatives and processes (The ISG and the AMV)

The issueThe issue

Transformation in business and financial organization, education, research and knowledge development, human capital accumulation, and infrastructure expansion were key to harnessing the potential of natural resources endowments in Canada and Australia (Power, 2002): This is seminal to our discussion today!

Can Africa equally harness the potential of its NR endowments? What are the imperatives for it?

Profiling the Sector Profiling the Sector

Disputed accounts on miningDisputed accounts on mining

Mining is bad camp: Enclave, capital intensive, Dutch disease, lower growth, corruption, conflict, rent-seeking; etc

Mining is not bad camp: Nothing intrinsic with mining, non-conclusive statistics, mixed performance, important natural capital

The “mining is bad” campThe “mining is bad” camp

The sector is capital-intensive, foreign-owned and forms enclaves with little linkages with other sectors of the economy

Learning-by-doing potential is lower than other sectors, particularly manufacturing

Creates illusion of plenty, leading to “political underdevelopment (Mick Moore, 2000), weak, inefficient, or corrupt government institutions

The “mining is bad” camp (2)The “mining is bad” camp (2)

Rent seeking rather than rent creation prevailsFinancial discipline is usually low and reckless

budgetary practices are commonPublic income is squandered by political elitesIll-advised and profligate social and infrastructure

spending are a normVolatile short-term commodity prices lead to

volatile revenues, increased uncertainty, less investment, lower economic growth

The “mining is not bad” camp The “mining is not bad” camp

Negative outcomes of mineral economies are case-specific

Economic performance is mixed Statistical evidence is not conclusive to allow

generalisations

The “mining is not bad” camp (2) The “mining is not bad” camp (2)

The problem is not with the mineral resources, but with political and economic governance

Detractors of mining do not provide alternative strategies

If mining is excluded, growth rates of many countries would be even lower

The “mining is not bad” camp (3)The “mining is not bad” camp (3)

Mining generates positive macroeconomic impacts and fosters growth through:

-Fiscal flows (Royalties, taxes and other levies)

-Foreign exchange generation

-Associated economic and tertiary development

-Opportunities for SME development

-Upstream and downstream opportunities (minerals cluster development)

-Job creation

-Technology acquisition and skills creation

-Infrastructure creation

Harnessing the Potential of Natural Harnessing the Potential of Natural Resources: A Daunting Challenge Resources: A Daunting Challenge

for Policy Makers for Policy Makers

The ChallengesThe Challenges

The irreversibility challengeThe creation challengeThe investment challengeThe distribution challengeThe governance and macro-economic challengeThe capacity challenge

The irreversibility challengeThe irreversibility challenge

How to balance the relative costs of access and the choices/preferences of the present relative to the future?

What set of policies should be put in place to ensure sustainable exploitation of mineral resources in a manner that is inter-generational equitable?

How to manage resource stress (1-Malthusians: Scarcity leads to war; the honey pot of abundant resources may be a focus for greed and elicits a scramble of gold diggers. 2-Cornucopians: Scarcity leads to adaptation. 3-Anti-globalists: Scarcity is the consequence of the structural violence of an inequitable global system) Jeroen Warner 2004

The creation challengeThe creation challenge

How to create and sustain mineral wealth that is consistent with social preferences for environmental quality and social and cultural considerations?

How to ensure an efficient, equitable and predictable legal, regulatory and fiscal regime that encourages mineral creation?

How to be a competitive mining destination, but avoid a race to the bottom?

The investment challengeThe investment challenge

Once you create mineral wealth, which is transient, how to transform it into permanent wealth?

How to create a stream of wealth that outlasts finite mineral resources?

How much ought to be saved and how much should be invested?

Who should invest?In what?Where?

The distribution challengeThe distribution challenge

How to share benefits from mining equitably (e.g. local vs national)?

What is fair? -Aristotle and Proportionality (Outcomes are allocated in

proportion to each party’s contribution)

-Jeremy Bentham and Utilitarianism (Outcomes are distributed so that the distribution creates the greatest good for the greatest number)

-John Rawls and his Theory of justice (Outcomes should be such that the least well-off group in society be made

as well off as possible)

The distribution challenge (2)The distribution challenge (2)

What form should the allocation take?What are the eligibility criteria? Who has the

highest priority?How to reconcile conflicting interests (e.g. The

1999 Nigerian 13% Derivation Principle vs the Nigerian Supreme Court decision on ownership of

offshore oil)?

The macro-economic and The macro-economic and governance challengegovernance challenge

How to address externalities such as declining and unstable commodity prices?

How to address the Dutch Disease? How to enhance the public interest in wealth

conservatism? How to avoid rent seeking and corruption?What social compact to pursue (APRM NPoAs)?

The macro-economic and The macro-economic and governance challenge (2)governance challenge (2)

How to manage revenue out of mining?How to enshrine and operationalise the right to

access to information and ensure that decisions are taken with participation of affected stakeholders (The Aarhus Convention)?

How that ensure accountability (Oversight committees, parliamentary watch dogs)?

How to ensure that right institutions are in place to monitor compliance of obligations?

The capacity challengeThe capacity challenge

How to balance aspirational goals and the reality?What set of policies, laws, standards, guidelines

should countries formulate which are congruent with their capacity to enforce them?

How to bridge capacity gaps and asymmetries between host countries and TNCs [ contract negotiations; transfer pricing

How to address capacity gaps at sub-national level (decentralisation)?

What should inform policy What should inform policy responses?responses?

The development paradigms: They The development paradigms: They shiftshift

Nationalizations in the 1970’sReforms in the late 1980’s and 90’s: The

Washington Consensus21st Century: The search for a new social contract

for miningFrom “market/institutions fundamentalism” to more

policy space for experimentation and the rebirth of the development state: Goodbye Washington Consensus, Hello Washington Confusion (Dani Rodrik, 2006)?

Stage of the development in a Stage of the development in a minerals cycleminerals cycle

Nascent mineral economy: Requires mineral investment flow

Youthful mineral economy: Rapid mineral expansion, Dutch Disease

Early-Mature: Slowdown of mineral output, promote sectoral diversification

Late-mature: Decline in mineral output, boost skills acquisition

Policy responses to a minerals-Policy responses to a minerals-driven cycle driven cycle (Richard Auty)(Richard Auty)

Stage Character Macro effects Policy response

Nascent Mineral investment flow Exchange rate pressure Create rent tax, build capital funds, establish revenue stabilization funds, grant Central Bank independence

Youthful Rapid mineral expansion Exchange rate appreciation, Dutch Disease effects

Sterilize windfall rents, expand domestic absorptive capacity

Early-Mature Slowdown of output mineral Growing tax and foreign exchange constraints

Substitute new tax sources, encourage domestic savings, promote sectoral diversification

Late-Mature Decline in mineral output Persisting tax and foreign exchange shortages, rising unemployment

Depreciate real exchange rates, boost skills acquisition

Local contextLocal context

Culture and mining historyCapacity to administer the sector, and manage and

restructure the economyStrength of private sector, CSOs, CBOsThe learning curve process followed by a countryLocal politics and power game, expectations and

social bargains (Bomani Commission in Tanzania)The country’s bargaining powerIn short: There is no universal recipe!

What characterizes the new What characterizes the new paradigm?paradigm?

Environment and miningEnvironment and mining

Environmental obligations are gaining increasing importance particularly EIAs/SEAs (Mining is not always the best land use option)

Growing environmental consciousness among CSOs, CBOs, etc

Informed environmental watchdogs (NGOs, etc)Industry self regulation: ICMM leading the packMinimization of risks and hazards being addressed

ConsultationConsultation

Policy formulation and making: Mostly realm of governments but multistakeholders fora are being championed

Public consultation for project approval common requirement But, consultation still more with private sector (e.g. Chambers of

Mines) and labour and less with communities Growing limits to state power: The State is not always pars pro toto

and its interests are not always the interest of the people CSOs have a limited role in monitoring and enforcement, but there are

interesting developments (e.g. Mining Ombudsman in Australia) Growing pressure from lenders (Equator principles) on project

promoters

Corporate social responsibilityCorporate social responsibility

The sensitive new age miners : A growing trend From “strictly business”, “we do the best we can”,

“benevolent benefactor”, “manage and measure” to “practical partnerships” and more holistic corporate development approaches

Success by triple bottom line i.e. financial success, contribution to social and economic development, and environmental stewardship

ISG: Broadening the concept of CSR and considering voluntary vs mandatory options

Managing revenuesManaging revenues

Mostly a realm of governments New schemes: Independent oversight committees

(Failure in Chad ?) EITI: Acceptance, but there is a call (Big Table 2007) for

more (Alba’s working paper on “Extractive Industries Value Chain”)

Permanent Fund in Alaska: An example? (Jonas Hjort, 2006 questions the financial development and institutional capacity of developing countries to implement and operate such funds)

Botswana, have they succeeded?

Allocations of benefits from miningAllocations of benefits from mining

Most centrally controlledProblem areas: Capacity in local communities to

make wise investment decisions; legitimacy; and magnitude of payments

Good examples to follow: Impact and Benefits Agreements in Canada

Infrastructure provision and local procurement: Broadens the concept of benefits

Equity and other forms of Equity and other forms of participationparticipation

Free carried interest for government participation: A thing of the past? State Mining companies in Mz, Tz, SA

Debswana: A success case of a joint-ventureThe Royal Bafokeng Nation: An example of a

community in businessThe Broad-based socio-economic empowerment

and charter and scorecard (South Africa): The future? Original provisions are being revisited

Integrating mining in local Integrating mining in local economieseconomies

Countries want to retain more wealth by having more local processing and value addition: NTBs a problem

Lack of local capital constraints participation of local entrepreneurs

Minerals clusters and Spatial Development Plans (e.g. NEPAD SDP) can spearhead more value addition

Artisanal and Small-scale Mining: Low entry barriers facilitate participation, but…

Mainstreaming mining in PRSPs: Very important! 2nd generation PRSPs: Opportunity to raise profile of mining

Looking ahead: Can The AMV Looking ahead: Can The AMV Deliver for Africa?Deliver for Africa?

Is it a wish list?Is it a wish list?

The Africa Mining Vision :The Africa Mining Vision :“Transparent, equitable and optimal “Transparent, equitable and optimal exploitation of mineral resources to exploitation of mineral resources to underpin broad-based sustainable underpin broad-based sustainable

growth and socio-economic growth and socio-economic development”development”

The processThe process

Task Force: AUC, ECA, AMP, AfDB, UNCTAD, and UNIDO and UEMOA

Draft informed by outcomes of several meetings and initiatives: JPoI, Yaounde Vision on ASM, AMP SD Charter and Mining Policy Framework, 2007 Big Table, ISG, SADC + UEMOA harmonization efforts

Discussed at the First African Union Conference of Ministers of Mines in October 2008

Endorsed by AU Summit in Feb 2009

The tenetsThe tenets

Recognition of important role of MR to Africa’s economies

Transform finite NR capital and transient wealth into lasting forms of capital beyond the currency of mining

Broader understanding of “benefits”From comparative to competitive advantage: A

developmental, transformative, knowledge-driven and integrated mining sector with downstream, upstream and sidestream linkages

The tenets (2)The tenets (2)

A sustainable and well governed sector: resource rents are well managed; distributed and smartly invested; intergenerational equity, environmental and material stewardship and CSR respected; safe, healthy and advanced; and stakeholders empowered

Mining as a key component of a diversified and globally competitive economy

Unbundle the “minerals complex” (from exploration to fabrication, markets and mine closure) to bundle: Entry points for localization identified

Tenets (3)Tenets (3)

A sector that anchors the development of a competitive infrastructure base through local and regional economic linkages

Optimal exploitation of finite resources at all levels (large and small-scale) and of all types (high and low value)

A sector that puts Africa geo-politically and strategically at its right place in the global international capital and commodity markets

Why the AMV ?Why the AMV ?

Need to have an African common voice Resource endowment: Comparative advantage to harness Top producer, but most minerals exported as raw materials:

Potential for mineral beneficiation is great More favourable political economy:“Failure” of the

Washington consensus opens room for more policy space Merely regulatory role for the state being questioned:

Return of the “developmental state”

Why the AMV (2)?Why the AMV (2)?

Although RBIs are not a new mantra in Africa (Lagos Plan of Action), in general, mining has not delivered broad-based development: We can learn from successful RBIs (e.g. Nordic countries)

Despite swings in commodity prices, resource intensity theory (resource use flattening at US$16,000/GDP) suggests that demand for minerals might continue to be strong if China and India (and other emerging economies) continue to grow: This and other factors might support prices (Gold is up!)

Why the AMV (3)?Why the AMV (3)?

Other sectors don’t have the same rents: Better resource rents in the mining sector can catalyze growth of other less competitive sectors

China and India: Reshaping the ball game ( more competition for Africa’s acreage strengthens the continent’s bargaining power)

Resource nationalism and assertive governments: Pendulum can swing to host countries, but don’t kill the goose that lays the golden eggs

Governance gains: Growth of non-state actors (CSOs) democracy, APRM, less monopoly of the policy space

Why the AMV (4)?Why the AMV (4)?

Tri-sector partnerships and public participation: Being mainstreamed

New age miners: Embracing developmental and transformative approaches; triple bottom line (financial success, contribution to social and economic development, and environmental and material stewardship)

Scholars are championing for a better mining sector (e.g. Paul Collier’s Natural Resources Charter)

Why the AMV (5)?Why the AMV (5)?

China’s environmental concerns: Cannot continue to be the only world’s factory; this offers opportunities for relocation of downstream and upstream activities to Africa

Strategic stockpiles: A fashionable concept again (New European non-energy raw materials strategy). Can Africa’s bargaining power be strengthened?

Tacit endorsement of the “Angola” model (???): (Zoellick “The end of the Third World? Modernising Multilateralism for a Multipolar World”) can validate and mainstream the SDP approach

Despite disputed accounts, there is a better profiling of mining: Was not there for the last 20yrs

Overall: Africa has more chances now to bargain for better deals than in the days of the Lagos Plan of Action and the AMV can be realised!

Entry pointsEntry points

Resource rents: Invested to improve physical, human and social infrastructure

Expanded physical infrastructure: to open up other resource potential (agriculture, forestry, tourism) and access zones with lower economic potential (densification, SDP)

Downstream value-addition: To establish resource-processing industries that could provide the feedstock for manufacturing and industrialization

Entry points (2)Entry points (2)

Upstream value-addition: To develop resource supply/inputs sector (capital goods, consumables, services)

Technology/product development: To incubate niche technological competencies in the resource inputs sector that can migrate laterally to other sectors to produce new products for other (non-resource) markets (e.g. Atlas Copco)

The strategiesThe strategies

Improve the level/quality of Africa’s resource potential data (gm and mineral inventory): It strengthens the continents’ bargaining power

Fight for more fiscal space: Robust, but flexible tax regimes that are responsive to economic circumstances; beware of stabilization clauses, BITs/IIAs (Institute for Policy Studies)

Innovate licensing schemes to boost competition: Go beyond “First come and first served” and explore auctioning through differentiation of terrains

The strategies (2)The strategies (2)

Boost Africa’s capacity to negotiate contracts and extract better deals (ALSF, UNDP, GTDF Crans Montana)

Enhance the capacity to administer [auditing, illicit financial flows (Global Financial Integrity) monitoring, regulating, fomenting linkages] the sector and build robust institutions

Audit, review and renegotiate (if required) existing mining agreements: GTDF Crans Montana Action Plan

States and businesses embrace value chains as a result of altered trade flows (Borrowed from Jan Klawitter): Alba’s paper

The strategies (3)The strategies (3)

Manage mineral wealth better (APRM, oversight committees, stabilization funds, prudent spending)

Develop junior resource companies Unbundle the “minerals complex” (from exploration to

fabrication, markets and mine closure) to bundle Address infrastructure constraints (Resources

forinfrastructure deals, SDP, DCs) Promote mineral clusters and support SMEs to enter the

supply chain

Yaounde Vision: the right framework for ASM

ImplementationImplementation

Shared vision, but phased (Short, medium and long-term actions) and context specific action (There is no “one size fits all”)

Phases are not mutually exclusive: Implementation can be fastened depending on internal and external factors (Auty)

Political will and proactive government action: KeyImproving natural resources governance: CriticalCollective and concerted action/The African voice:

Indispensable

Implementation (2)Implementation (2)

Capacity building, R&D: FundamentalPartnerships and buy in: Essential (Talking with

ICMM)Policy space and ownership of the development

process: The cornerstone!Coordinated action between public, private and

community stakeholdersM&E (AUC):Indicators of achievement and

scorecards need to be developed

Implementation (3)Implementation (3)

The “minerals complex” (from mining/extractive industry to a minerals industry): New institutional mindset, break silos and departmental rivalry

Deepen work of the ISG :Phase II (Auctions, institutions, trade agenda, industrial policy,etc)

Regional integration and common voice: EU Raw Materials Initiative, ACP, AU-EU Mining Initiative

The game changes fast (“Super cycle”, gone….?)

Resource Exploitation & infrastructure phase

Resource Consumables & HRD phase

Resource clusters, R&D, cap. goods & services phase

Lateral migration & diversification phase

Resource Exploitation

Resource Beneficiation (value-addition, market access)

Resource Infrastructure

Densification/generic (SDP) Infrastructure

Unskilled resource labour

Rents from Resource diversification industriesDiverse tax baseResource rents (tax)

Fig 1: Schematic Resource-based African Industrialisation Phasing (relative economic importance)

Resource Inputs production & Lateral migration(diversification)

Increasing skills intensity (HRD) & capacity building

Import of Resource Inputs

Phase 1 Phase 2 Phase 3 Phase 4

Resource R&D. high level skills and tech development

Import of Resource Tecnologies

Policy space, Complex regulation, M&E, governanceContract Law

Contract/license resource & infra (PPP) governance

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In ConclusionIn Conclusion

There is nothing wrong with mineral There is nothing wrong with mineral resourcesresources

Mineral resources are part of the stock of natural capital that can spur Africa’s development

Mineral economies are diverse (geographically, per capita income, growth, life expectancy, adult literacy)

Some nations have high growth rates, others have negative growth. Some nations are the poorest in the world, others are the richest

There is nothing inherent in mineral resource abundance that condemns countries to either growth or unsustainable development

To mine or not to mine?: Wrong To mine or not to mine?: Wrong question!question!

The appropriate public policy question is not whether to mine or not to mine, but where should we mine and how to ensure that mining contributes as much as possible to growth and development

Poor performance is not inevitable. Mineral resources are finite, hence should be invested to generate new wealth and used to create forms of renewable capital such as human, social and physical capital, beyond the currency of mining

This requires improvements in governance, strengthening of institutional capacities and competencies, prudent management, trilateral partnerships, and smart investments

The AMV is a credible instrumentThe AMV is a credible instrument

It provides a good rallying pointIt was endorsed at the highest possible level in AfricaIt has some buy in internationally: CSD 18The moment is right: There is policy space and willingness

to partner, good economic fundamentals and market opportunities

Social compacts to govern are becoming a norm: APRM

Interventions of the different actors need to be coordinated to maximize impact

But, there is no easy panacea and But, there is no easy panacea and universal recipe. However, for sure, universal recipe. However, for sure,

without sound governance the without sound governance the wealth generated by mining is wealth generated by mining is

unlikely to be deployed effectively.unlikely to be deployed effectively.

The devil (if any) will be always in The devil (if any) will be always in the detail!the detail!

Thank You!Thank You!