Mineral sector reform has brought mining back to Africa – aided by price rises in the early 2000s – mpacting on investment, growth and poverty reduction. And there are no indications that price trends will decline to previous levels. For the sector to have a sustainable impact on poverty in Africa, governments must convert non-renewable capital into skills, infrastructure and business development. The success of this will be underpinned by improvements in governance.
At the macro level, the mining sector has never played as important a role across Africa as it does now. This is due partially to the rise in mineral prices since the early 2000s but more to the success of many mining sector reforms in the late 1980s and 1990s. Many African countries view this sector as a possible engine of sustainable development. They want mining developments, rather than taking place in an enclave fashion, to increase linkages to other economic opportunities, directly or through better integration of associated infrastructure. They also want a larger share of the sector’s rents, particularly when mineral prices are high.
Most African countries nationalized their mining sectors in the 1960s or 1970s. However, by the end of the 1980s the trend had reversed, partially due to market liberalization but also due to the weak performance of state-owned mining enterprises. Further, to attract additional Foreign Direct Investment (FDI) into their mining sectors, African countries often called upon the World Bank – which, with the IMF, was often involved in structural adjustment programs that began in the 1980s – to support the design of mining policies and laws that would make countries attractive destinations for FDI. This all occurred at a time when mineral prices had been very low for nearly 20 years (and would remain so for another 15 years).
The focus of mining sector reform in the 1990s was revitalization, as state control of the sector had scared away both new developments and exploration. State-owned companies typically suffered from underinvestment, as profits were mostly brought into the countries’ general fiscal revenues.
Hallmarks of these reforms were revisions to mining laws and regulations. These included transparent and non-discretionary procedures in allocating exploration and production rights; exploration rights allocated on a first-come, first-serve basis and subject to minimum work conditions; according finders the automatic right to exploit a deposit, subject to certain conditions, or to sell the right; stable fiscal terms – although not necessarily fixed as discussed later – throughout the lifetime of the operation (or for a welldefined period); well-defined property rights and, subject to commitments being made, no expropriation.
Mining reform, investment, and growth
Table 1 illustrates the impact on private mining investment in several African countries that undertook mining sector reform with World Bank support. These rather spectacular results were similar in other countries around the world (e.g. Argentina, Mongolia, Papua New Guinea).
This investment contributed to large increases in GDP growth in many African countries, as shown in Table 2. Average growth rates for 12 mineral-dependent countries in Africa rose from 0.3% in the 1990s to 5.7% in the 2000s. Mining sector reform was just one of several major reforms undertaken in these countries, and they benefited from high average prices. Nevertheless, the mining sector led the growth spurt in all of them.
Whether these growth spurts will lead to a higher growth path remains an open question given the relative recency of the reforms and the difficulty in separating their impacts from the high prices of recent years. The true, difficult to measure, test of the contribution of the mining sector is whether it leads to sustainable development.
Long-run growth and sustainable development
A large mining sector can have a strong impact on the long-run sustainable development of a country by, first, being an engine of growth through the spin-off firms and industries t creates and opportunities opened up by non-dedicated infrastructure, such as roads, railways, ports, and power stations, and second, by using fiscal revenues generated by natural capital to produce other forms of capital.
Mining is the only sizable industry for many African countries. It is usually valued for its ability to kick-start economies and for its fiscal revenues. This is particularly the case for coal or base metals like copper and iron ore, which require substantial infrastructure that can be used for other purposes. The infrastructure may be paid for entirely by private mining companies – usually the case in Africa – or funded through public-private partnership, as frequently happens in higher-income countries. There is a strong tendency in Africa for new mining contracts negotiated between central governments and large mining companies to emphasize infrastructure provision. Mozambique, Madagascar, Guinea, Democratic Republic of Congo, Sierra Leone, and Liberia are among the countries that require private companies to finance non-dedicated infrastructure in large mining projects.
Considerable staff training is required to take advantage of the opportunities afforded by mining operations, particularly to provide goods and services to mines. Most new mining contracts in Africa require companies to provide training to increase the percentage of nationals working in the mining operation; many require efforts to build the capacity of domestic SMEs to subcontract to mines. Many companies do this willingly, partly to develop and keep good relations with their host communities, the citizens of which often benefit the most from these programs.
While it is too early to tell whether income and job creation3 related to the growth of mining sectors has had a significant impact on poverty in African countries, the HDI of all the countries in Table 2 (columns 5 and 6) improved significantly in the 2000s, with an 18% increase on average. This suggests that the benefits of a mining boom are more broad-based than commonly believed.
The fiscal question
In principle, goods provided in mining contracts could be provided by the state, with mining revenues, if these were adequate. This implies that tax (including royalty) rates are below what they should be to maximize governments share of natural resource rents. While taxation could be higher without damaging the industry, there are a number of qualifiers to this statement.
First, tax rates were low because metal prices were low over an extended period, and political risk was high in most African countries. In many countries, political risk has not diminished significantly. Second, large tax increases will eventually result in less exploration and less investment in the sector, which means fewer direct benefits from mining. Third, some proposed new tax instruments, such as super-profit taxes, would be difficult to administer in many African countries. Fourth, provision of infrastructure and community services is often preferred over higher taxes, at least in the shortto medium-term, as it helps overcome governance problems in many countries.
Is there an optimal fiscal regime for mining? Clearly, one with fixed rates is not optimal. At best it leads to contract renegotiations and negative knock-on effects for future investment; at worst it leads to civic strife, violence around mining operations, and even nationalization. However, it is important that flexible regimes are stable, so that potential investors know how rates vary with prices and/or profits. It is also important that taxes can be collected, suggesting that in low-income countries, royalties, which are paid even if a mining company is losing money, will play a much larger role than called for in theory. Income tax, which depends on profitability, is the preferred method of taxation, as royalties could result in closures. However, as most mining production is exported and must cross borders, it is easier for governments to determine the value of production than the profitability of operations.
The way forward
Evidence suggests that recent mining sector expansion has had positive impacts on growth and poverty reduction in African mineral-rich countries. Two questions arise though. First, is there an optimal legal, regulatory and fiscal mining regime that is more likely to lead to these results? Second, under what circumstances are these results most likely to be sustainable?
On the first question, for a mining regime to be considered ‘optimal’, first, mineral legislation, institutions, and the tax regime must be sufficiently attractive to induce investment. Second, the regulatory framework must be clear and comprehensive, with adequate monitoring and enforcement capacity. Third, fiscal revenues should be collected in a transparent and efficient manner. In recent years, adherence to the Extractive Industries Transparency Initiative (EITI),5 in which both companies and governments report to independent auditors what they have paid and collected, has been the main governance tool for increasing fiscal transparency. Fourth, governments must be able and willing to manage and allocate fiscal revenues efficiently and in a manner that contributes to sustainable development. It will be important to simultaneously build capacity to manage the large increase in revenues and overcome political economy factors that tend to drive resources towards private hands. Fifth, increased experience and training should lead to more linkages being developed over time. Sixth, a portion of natural capital should be transformed into infrastructure, underpinned by mining developments.
Most African countries are moving towards an optimal mining sector regulatory regime, as the experience and lessons of other countries on the continent and around the world have had a snowball-like effect. While investment and economic growth have been predominant, significant progress is being made in skills development, creating linkages, fiscal transparency and taxation, and infrastructure provision. Yet most countries still lack in their ability to monitor environmental and social performance, as well as the broader macroeconomic goals related to budgeting, sustainable investments, and creating conditions for developing other sectors.
On the second question, while companies, regulatory institutions, local governments and other stakeholders (including NGOs) are primarily responsible for the social and environmental sustainability of mining operations, the sustainability of economic benefits is primarily a macro problem related to governance improvements. National governments are responsible for ensuring that mining synergies are captured through regional development planning, shared infrastructure, and capacity building for workers, SMEs and local governments. They are also responsible for ensuring that the capital captured in the fiscal revenues is turned into renewable capital. If these revenues primarily become a new source of rent-seeking for the political elite, there is a strong possibility that after closure mining regions will sink into another ‘hundred years of solitude’.
However, causality does not extend only from the center to the mining regions. Given its importance, the mining sector can strongly influence the center. If mining regions are experiencing broad-based prosperity du
e to the actions of private companies, there will be pressure on national governments to change traditional patterns of behavior. Moreover, new stakeholder and interest groups will be created who perceive development differently. These can impact strongly on the political economy of a country. Of course, mining companies cannot do this alone. Civil society, local governments and international agencies have a large role to play. Innovative programs, such as EITI, are also essential in modifying historical ways of governing.