With an estimated population of 1.3 billion, Africa is affected by COVID-19 at a time when several of its countries, despite the challenges of underdevelopment, are on a path to emergence, while others continue to grapple with terrorism.
The struggle underground
New discoveries and rising demand from Asian economies are encouraging African governments to adopt a more robust line on taxation and revenue sharing with international oil and mining companies.
Get the October-November issue of The Africa Report for case studies of mineral deal making and breaking in Africa. Read about Kinshasa’s contract competition in the Democratic Republic of Congo, Guinea’s master plan and the first act in Ghana’s long drama.
The mineral money-go-round is under fire in Africa. Governments across the continent – in Ghana, Uganda, Guinea, Democratic Republic of Congo (DRC) and South Africa – are demanding higher shares of revenue and more fiscal accountability.?
Such calls are backed by civic activists who want multinational companies to publish their tax accounts in each country where they operate. Reducing the obsessive secrecy surrounding contracts and negotiations will cut both ways: it will also reduce the scope for corrupt officials to offer tax and environmental concessions to companies in exchange for covert payments.
Several governments are reviewing old contractual arrangements in the wake of sweeping changes in global markets, to the increasing discomfort of mining companies. How African governments negotiate resource contracts over the next five years could determine their economic growth prospects for decades. Investment banks such as Goldman Sachs and Renaissance Capital talk of a bull market for African resources for 30-40 years but have less advice, publicly at least, on negotiating positions.
For decades, Africa offered the bolder oil and mining companies the best deals globally on taxation and royalties, to boost inward investment. But the concessions and the investments have not translated into bigger revenues or the tens of thousands of jobs the continent needs.?
Faced with rising socioeconomic demands and inadequate incomes, African governments are stepping up the pressure.
Nigeria and South Africa have rewritten their oil and mining laws to secure a greater share of the investments and profits, although relations between state officials and company executives are becoming more problematic.?
Civic activists in Lagos and Johannesburg fear the main beneficiaries of the tougher laws will be the governments’ capitalist cronies. Certainly, strong independent scrutiny of the resource industry is essential if governments are to secure a bigger and more sustainable share of revenues.
Former head of research at the World Bank and now professor of economics at Oxford University, Paul Collier talks about “a one-off resource bonanza for African producers”. But he warns that the continent’s record – both in negotiating good terms for resource extraction and managing the revenues alongside other economic activities – suggests governments will have to change tack radically.
Addressing a conference of diplomats and aid officials in Paris in June, Collier said forthcoming revenues from natural resources in Africa could overshadow all its other economic calculations. If mishandled, they would represent a gargantuan missed opportunity.
Collier pointed out that the value of subsoil assets in OECD countries was $114,000 per km². Contrary to most opinion about Africa’s abundance of natural resources, the average square kilometre in Africa has just $23,000 in subsoil assets. From this, Collier argues that as the figures refer only to the known resource endowments and so far there has been far less resource prospecting in Africa than richer regions, the region’s resources are grossly underestimated. He says that both technical progress (in deep-water and deep-underground prospecting) and stronger global demand may mean a fourfold increase in Africa’s known natural resource base.
Rethinking tax codes
Up until now, new mining discoveries in Africa have been badly handled by both governments and companies.
This time around, the big companies cannot count on international institutions to take their side. For example, the IMF has advised President Ernest Bai Koroma’s government in Sierra Leone against offering huge tax incentives to foreign mining companies, as a local political row develops over the favoured treatment of the shadowy company ?African Minerals.
Sierra Rutile, the second-largest mineral exporter in Sierra Leone, won extraordinary tax concessions via three agreements with the government in 2001. It had set royalties at 3.5% of total sales and tax at 3.5% of turnover, rates which were enshrined for 25 years. Since coming to power in September 2007, the Koroma government has pushed back and won some amendments to the tax code. Significantly, the World Bank – once the proponent of low tax regimes to lure investors – backed the government’s renegotiation efforts.
In Zambia, the IMF took the same line, supporting President Rupiah Banda’s attempts to raise mining taxes and royalties. Sierra Leone raised its mining royalties at the end of 2009, and Ghana, which is Africa’s second-largest gold producer, wants to double royalties in the face of entrenched opposition from AngloGold Ashanti, the biggest company on the Ghana Stock Exchange.
Rethinking tax regimes has partly been prompted by the rise in resource demand from Asia, which enables governments to reassess the market value of their resources and win better returns. That is only if the newer entrants to Africa’s resource markets accept the higher standards for revenue disclosure. “The key point is that Africa gets more value from its resources as competition increases,” says Shanta Devarajan, the World Bank’s chief economist for Africa.
That is harder than it looks, as China has proved an astute buyer and is unwilling to get into public bidding wars with Western companies. Last year, the China National Offshore Oil Corporation (CNOOC) started talking with officials about buying a stake in Ghana’s Jubilee oil field, but backed off after ExxonMobil secured a “confidential and binding agreement” to buy the stake owned by Kosmos Energy.
Exxon’s lawyers sent letters to CNOOC and other would-be bidders warning they would face action for “tortious interference” against trade in the Houston courts. Because almost every international oil company has to do business in Houston, Texas, the threat had real weight.
Yet the global shift eastward in economic power has changed both the resource markets and the modes of finance, according to international accountants Ernst & Young. They assessed the effects of the 2008-9 financial slowdown: “At this stage of the cycle, Asian investors have emerged as the new buyers, cash-rich and ready to take advantage of the opportunities that abounded as valuations dropped and struggling companies became the target of bargain hunters.”
Ernst & Young’s assessment that Chinese and Indian demand will automatically promote a sellers’ market for resource producers is clear enough but they caution that the US financial crash of 2008 has “fundamentally changed the way the industry will be financed in future.” Equities and initial public offerings will play a bigger role, they suggest. That should mean higher reporting requirements from the resource companies and should help African negotiators based on the not-emphatically proven-principle that more information about companies and markets produces fairer contracts.
Yet Ernst & Young and many financial institutions admit they do not have much knowledge about the mechanics of China’s countertrade and offset deals in the financing of resource exploitation. And that is a concern for analysts such as the World Bank’s Devjaran and Stephen Chan, professor of international relations at London’s School of Oriental and African Studies. But it is even more exercising for some officials in Africa trying to boost public revenues.
Others, such as Guinea’s mines minister Mahmoud Thiam, are convinced that China’s brand of unorthodox financing can bring development dividends to a country that has a clear strategy mapped out. Thiam used the China International Fund (CIF) which has ties with Angola’s state oil company Sonangol, as leverage to diversify companies in Guinea. Investors now range from the Hong Kong-registered CIF to Australian/British Rio Tinto to Brazil’s Vale and Russia’s Rusal.
For Thiam, this strengthens the government’s position, allowing it to play one source of technology and financing against another. Having transferred 50% of Rio’s iron ore mining concession to Vale, Thiam insists he is playing for keeps: “Nothing we have done is reversible,” he tells the The Africa Report in Conakry.
The upside for Guinea, says Thiam, is not limited to fiscal terms but extends to getting the finance to build new transport links essential for national development. Thiam says mining companies must agree to build a new railway to transport ore from Simandou in the southeast to Guinea’s Atlantic coast.?Former prime minister and current presidential candidate Cellou Dalein Diallo said the project was politically essential: “I believe the Trans-Guinean railway must be part of our patrimony, it will be a monument to the independence of this country.”
*The Plundered Planet by Paul Collier (271pp, Allen Lane, London, 2010)