Africa’s Mineral Wealth: Eternally Cursed?

2013-03-26T20:09:18Z

Africa’s so-called ‘resource curse’ is a paradox that has endured. How is it that states enjoying a rich bounty in oil, gas or minerals can end up with worse economic growth and poorer development outcomes than many countries without this natural advantage? The Democratic Republic of Congo (DRC) may be mineral-rich, for example, but it sits at the very bottom of the United Nations (UN) Human Development Index at 187th, while oilrich Nigeria accounted for a scandalous 11 percent of the world’s deaths in 2010 for children under five years old.

Much has been written about this phenomenon, whereby natural resources disrupt an economy and create incentives for wide-scale corruption and even conflict. The effects of the resource curse need not, however, be viewed as inevitable. Political choice is key. Botswana – a frequently cited example – used its mineral wealth to develop into a stable, middle-income country. More recent producers such as Ghana, Liberia and Sierra Leone appear to be making good governance decisions so far. It is an exciting moment for the region. Emerging markets, especially China, continue to ramp up demand for the continent’s commodities, offering a once in a millennium opportunity for African governments – whose resource endowments, after all, are finite – to lift millions of people out of poverty.

From Ghana in the west, to Uganda and Mozambique, African leaders have critical choices to make about how best to manage their countries’ non-renewable resources. The international community, big business and civil society must also assume responsibility. Transparency – essentially the transparency of contractual arrangements struck between governments and extractive industry companies – and accountability are critical. The most practical and credible form of becoming ‘transparent’ – a deceptively complex notion – is the Extractive Industries Transparency Initiative (EITI). Being ‘EITI compliant’ means a government explains clearly and openly the revenues flowing from its extractive sector so that any party can see how much the country in question receives from oil, gas and mining companies.

So far, ten African governments have been judged compliant. In 2010, for instance, Nigeria became one of the first countries to achieve this status. Greater transparency around Nigeria’s oil accounts has placed a spotlight on deficiencies and corruption, while triggering vibrant public debate. This has not been sufficient in itself for Nigerians to benefit immediately. But it does mark the beginning of a process that will ultimately allow more citizens to share in their country’s oil revenues, worth more than $50 billion in 2011 alone. To date, 72 of the world’s largest oil, gas and mining corporations have chosen to become EITI supporting companies.

Despite resistance from some quarters, transparency has strong benefits for all stakeholders. Host governments win because when they make contracts available for critical analysis, the terms will inevitably improve. With little experience of the extractive sector until recently, many states have found it difficult to negotiate with major international companies enjoying decades of accumulated practical knowledge. Most deals have traditionally delivered unfair benefits to big business. When contracts are published online, however, observers have the opportunity to highlight inequitable financial deals or insufficient provision for the protection of the environment or human rights.

At the same time, private sector actors also win due to the way transparency builds trust and long-term stability. As oil, gas and minerals become harder to reach, projects increase in duration and become more expensive. In the process, this multiplies a project’s exposure to political risk. In Nigeria, failure to build trust with the Ogoni people led to theft, violence and pipeline damage. Contract transparency can be critical to building confidence at a local level.

Finally, the international community wins because long-term social and political stability means a secure supply of important commodities – essential to the smooth functioning of our global economy. Clearly, real life is more complex. Individual leaders or ministers do not always act in their government’s best interests. Some companies still win business by paying bribes. The international community may have more pressing priorities. And perhaps unsurprisingly, we still see resistance to greater openness and accountability.

The American Petroleum Institute, a United States (US) based lobby group, is pushing back against new regulations. Some G8 and G20 countries – such as Canada, Russia and Australia – could do more to enforce contract transparency. Most notably, by shepherding through legislation requiring companies headquartered in these jurisdictions to be more open about their offshore business activities. Similarly, some non-G20 countries – such as Switzerland – could likewise have a greater influence if they enforced higher levels of transparency from major commodity traders like Glencore and Trafigura.

But the situation is clearly shifting. Liberia’s 2009 EITI Act requires the public disclosure of all resources contracts, which are uploaded in full on a specially-created website. Sierra Leone, Sao Tome & Principe and Guinea have all embedded contract transparency requirements in oil or mining sector legislation. The DRC has made the country’s most important petroleum contracts publicly available. Meanwhile, executives at Rio Tinto and Newmont have spoken out in favor of contract disclosure. The International Council on Mining and Metals, which includes 17 of the largest mining companies globally, requires that its members “engage constructively in appropriate forums” to improve transparency. Recent regulation in the US and European Union is similarly cause for optimism.

Meanwhile, a host of related issues will also be critical if Africa’s diverse populations are to benefit from the continent’s latent resource wealth. Firstly, quality of contracts is key. The DRC received just €100,000 from mineral rights in 2006 – a tiny amount compared with the €760 million estimated value of its exports annually. Capacity to negotiate with major extractive companies may be critical to a country’s success. This is not just about having the best lawyers, but also about enjoying equal access to key information. For instance, do both sides have a joint understanding of the available geological data?

Equally, while business may be primarily interested in negotiating over revenues, a government must also consider the social and environmental impacts of an extractive project. How will a company manage pollution and waste? How will it clean up at the conclusion of the project? How will it take care of the local environment?

Secondly, economic diversification is a preferable route to job creation. Nigeria and Angola, sub-Saharan Africa’s two largest oil producers, have hardly made a dent in their poverty levels since beginning to produce substantial quantities of oil. More than half of Nigeria’s 160 million people still live on less than $2 per day. With the world’s fastest growing population from a regional perspective, Africa must generate jobs quickly in order to prevent youth unemployment from rising. Indeed, this may represent the most significant threat to political stability.

The oil, gas and mining sectors are notoriously poor when it comes to job creation. An offshore platform tapping deep-sea reserves will create few, if any, positions for locals. Only recently, protests were reported outside Rio Tinto’s QMM mineral sands operation in the south of Madagascar due to high local unemployment. The best way to convert natural resource wealth into jobs is to take the proceeds and invest in other, more labor-intensive industries such as agriculture or manufacturing.

Finally, governments must also figure out how else to benefit from natural resource projects underway on their territory. Is an oil company shipping food for its employees from London, or is it buying from local farmers? When a mining venture builds a railway to transport precious ore, can nearby populations use that infrastructure too? These and other issues will be discussed in a report to be prepared by the Africa Progress Panel, a ten-member group chaired by former UN Secretary- General, Kofi Annan. The report will contain a series of policy proposals on how Africa’s mineral wealth can better benefit current and future generations. Africa has many lessons to offer drawn from the experience of its oil, gas and mining sectors. There is no reason why the continent’s citizens should not capitalize on the value of these commodities. The resource curse should be a relic of the past.

By Caroline Kende-Robb, Executive Director, Africa Progress Panel

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Africa’s Mineral Wealth: Eternally Cursed?