The sun has not set on oil and mining industries in Africa

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The sun has not set on oil and mining industries in Africa

11:01 CAT | 09 May 2016

Mining and oil is not a sunset industry in Africa. The sector holds great promise — Africa has a big comparative advantage in its store of mineral wealth and human capital. But unlocking this needs policies that encourage long-term, generational investment, not shortsighted resource grabs.

Identifying the “right” policies was the wellspring of a dialogue on the banks of the Zambezi River hosted by The Brenthurst Foundation, which I chair. The participants, mainly mining experts and investors, cohered around legislative certainty, the provision of reliable services, a stable and attractive tax regime, a predictable and transparent legal system, policy cohesion, a reliance on administrative regulation rather than political discretion, and honest and competent officials.

To establish such a framework, a new narrative of the value of the industry to Africa is necessary. This narrative has been defined by conspiracy and mistrust. We need to move towards a shared dialogue based on mutual dependency and endeavour, underpinned by a clear belief that government needs investors and vice versa.

The main outcome of our meeting is the Zambezi Protocol, which offers a path for government, business and other partners to chart a fresh, positive future for mining in Africa. The urgency relates to the state of the mining sector in Africa: it’s in crisis. A lack of trust between mining companies, governments and the nations they lead has taken hold. Failure to tackle this will have adverse implications for economic growth and employment prospects when the continent’s needs are increasing rapidly.

Most African governments recognise that much more needs to be done to diversify our economies, but we mustn’t lose sight of how dependent most of us are on the extractives sector. It comprised 28% of the continent’s combined gross domestic product in 2012, 77% of total exports and 42% of all government revenues. Studies by the International Council on Mining and Metals show that for every $1 generated by mining, at least $3 more is generated elsewhere in the local economy, and that for every direct mining employee, as many as 15 more jobs are created elsewhere in that economy.

The end of the commodity super-cycle has negatively affected most of Africa, which had become accustomed to sustained economic growth rates of above 5%.

Economic growth across sub-Saharan Africa, especially in countries reliant on commodities for export and government revenue, is predicted to drop to 3.3% this year. Things are set to become a lot more challenging.

In this new, more competitive and austere environment, governance and policy attractiveness will become increasingly important differentiators in the performance of African countries. Just as important will be the regulatory and administrative processes needed to ensure decent and diversified growth. These factors will be vital determinants for attracting investment and growth in mining projects.

As the World Bank has noted, after geological factors, governments are the biggest determinant of where mining investments flow globally.

Negative perceptions in African societies of the value and role of mining are amplified in environments in which there are few other opportunities. The narrative on mining is about big profits at the cost of the population. Paradoxically, the communities around mines are heavily dependent — cradle to grave — on the firms, to whom the state often abrogates its responsibility. Yet often, the firms bringing this development have to deal with interference, corruption and rent-seeking, reflecting the difficulty of managing a fixed, immovable asset where there is little going on in the economy.

Rather than engage the industry as a long-term developmental partner, playing to popular public pressures and desperate for revenue, some governments have sought to target the sector with high tax regimes and other redistributive mechanisms including calls for beneficiation and value-addition. Yet the health of the sector is intrinsically in the interests of government, not just for reasons of long-term revenue, jobs and the prospects of industrialisation, but because many governments hold a direct stake in mining operations.

While the success of mining demands a partnership of common interest and Africa’s young population demand jobs and growth, policy instability has planted the seeds for a vicious cycle. The Zambezi Protocol seeks to improve trust between parties to ensure longer-term investment horizons and improved competitiveness for Africa’s mining sector and thus, jobs and revenue for mining nations. As a first step to a wider consensus, we focused on investor requirements. For this initiative to be successful, we need to integrate the voices of government and civil society into the protocol.

Solving the crisis in mining requires an acknowledgement that the sector is beset by tensions between government and business. The African narrative on mining is fuelled by sentiment, emotion and a lack of information, manifested in the role of personal discretion in determining outcomes, rather than administrative processes, which invariably increases uncertainty and invites corruption. Instead of negotiation to moderate and arbitrate regulation and policy, this results in a tendency towards litigation.

All parties need to recognise as a matter of urgency the inevitable outcomes of the current cycle — the gradual deflation and downsizing of the industry — and the losers: current and future workers, governments, populations, and the mining companies.

Such a strategy will need to build on a number of existing initiatives, but with much greater cohesion and commitment. Agreement will have to be reached on what a successful mining industry looks like. There must be recognition that mining is an inherently risky and long-term endeavour.

For success, risk needs to be reduced, by all parties, as far as possible. But this needs to comprise more than an enlightened business case. Mining needs to understand the problems government has to tackle and make a strategic contribution to wider issues (enterprise development, water, land, education and so on) in an atmosphere of collaboration, not confrontation.

All parties must recognise that trust has broken down. For the sake of our economies and our people, it needs to be rebuilt.

By: Olusegun Obasanjo

• Obasanjo, a former president of Nigeria, chairs the Brenthurst Foundation

Source: Business Day Live