Extractive Resources have not benefited resource-rich countries in Africa

Interview with European Centre for Development Policy Management (ECPDM) Deputy Manager, Isabelle Ramdoo

By Ronald Chawatama: Animus Sustainability Portal (http://animus-csr.com)

Extractive Resources (ER) have not benefited resource-rich countries in Africa. This trend has been recorded for a while, what interventions needs to be put in place for the countries and their economies to benefit?

The benefits from the extractive sector have not been at-least derived to the expected levels. However, there are differences between countries for e.g. you have countries like South Africa that have managed to do better than others.

It is true that the overall picture is rather disappointing compared to for e.g. resource rich countries like Malaysia and Indonesia. There is therefore a need for policy redress.

Existing types of policy interventions are diverse and complimentary. There is not one type of policy alone that can bring much needed results. If you look at the debates that are currently going on, a lot of focus is now on resource-based industrialisation.

There are two aspects that need to be looked at before governments decide which policies can bring effective results. The first aspect is on adding more value to extracted resources to reduce export of raw materials by goods with higher value added (the downstream side). The second aspect (upstream), addresses the question of how governments can support local private sector to be able to supply inputs to the extractives sector and create more jobs. Both upstream and downstream policies should be part of the overall industrial policy.

However, on its own the industrial policy to me is not sufficient because around this there are systemic issues of business climate coupled with challenges of infrastructure deficits, difficulties in access to finance for companies and SMEs in particular.

Overall, the policy spectrum is thus very large and whichever (downstream or upstream) options a government chose, it has so be comprehensive and encompassing and not focused only on the resource sector.

Experiences from other countries like Malaysia for e.g., shows how they managed to move from depending on oil sector to export oriented sectors including mobile technology.

Overall, It is important for governments to look at their objectives and what they want to achieve, and then ensure the policy they adapt is as wide as possible. Industrialisation in itself is not sufficient. There is need to ensure that the infrastructure is good enough, that trade barriers are low amongst others.

Are countries or governments getting the most out of their minerals or are they losing out to foreign companies and investors?

If governments offer contracts that are extremely generous, companies are likely to exploit the chance. The terms of contracts determines what to expect out of the company in the long term.

If you have a contract that doesn’t incentivise the company to for e.g. source from local inputs and benefit from tax exemptions, you create an environment in which you cannot get what you have set to achieve. Right from the start governments have to make sure that contract negotiations set the tone to what they realistically expect from business.

The second thing is that there is need to understand the resources available. In some cases you have companies that know more about a country’s resource endowments more than the government does.

One of the things that Africa Mining Vision (AMV) is trying to do is to address from the start the geological knowledge that is currently more in the hands of foreigners than in the hands of governments. To me those are two fundamental initial conditions; the rest is up to government to set the right incentives, depending on objectives. If the objectives are to create jobs, the type of policies you would put in place are not the same as those designed for adding value because latter is capital intensive. Sometimes there is need for trade off, one for the other.

China is on an investment drive in most African States triggering concerns from various stakeholders . Is China’s interest and dominance a threat to Africa’s development and specifically the ER sector?

I don’t think China is any different from any other foreign investor. China has been investing a lot in not only African economies but throughout the world. Australians have been doing the same, so as the Canadians.. To me it is not a China question but a question of the kind of terms that we have allowed some companies and businesses. It is only now that you hear countries coming up with the decision to put everything flat and to renegotiate some of the terms of their contracts. If African governments don’t have clear rules, businesses will take advantages of such weakness  leaving them no  recourse against that. Often business engages their ‘competent’ lawyers to exploit the weaknesses in regulations and lack of clarity in rules. Given that China invest everywhere, it is therefore not a Chinese question but a question of our own system that is full of loopholes. This reveals the weakness that our regulatory system and our contracts system have.

A lot of reports have been made regarding the illicit flow of both physical  and financial resources in the ER sector from Africa. What measures can be put to effectively stop this?

The illicit flows argument is very much related to the previous question. The disappearance of physical assets for e.g. has to do indeed with our porous borders. A case in mind is that of movement of conflict minerals from DRC. Such illegal movement is an indication of the extent of challenges we face.

The financial flows are linked to the type of obligations companies have when they come into a country.  Governments don’t always have transparency rules that oblige them to publish what they pay, and even if they publish what they pay, there is difficulty in getting them to publish it by project. Inevitably, companies can easily ring fence or shift profit from one exploitation to the other and from one subsidiary to the other.

African government’s fiscal rules are not strong enough to match the globalisation of the financial systems.  Multinationals have become extremely creative shifting their profit from one subsidiary to the other.  Unfortunately, our regulatory system has not kept up with that. Our financial mechanisms in place are not sufficient enough to compel companies to pay where the production is. This is what the OECD is trying to address.

The companies go by the rules of the host country. The USA for e.g. now has the Dodd Frank that prevent use of conflict minerals from DRC. The fact that such a rule exist means companies operating in USA have to abide by that regulation.

If these rules for e.g. the Dodd Frank were domesticated in countries like the DRC, then all the companies operating in the county would have to follow the law. Where such rules don’t exist for eg the Dodd Frank, we can’t expect the USA to regulate companies operating in some African countries to pay its taxes in DRC.

Moreover if you close the loop from the other side and make sure you also have these types of international regulations then there is no room for companies to manipulate the system. You hardly hear any governments from Africa saying they would like to shape their extractive policies and laws according to what the USA, or EU for eg have. Companies operating in the region will then operate under the same regulations as in the west or east.

Various policy vehicles have been adopted with the latest being the African Mining Vision (AMV) One of the main facets drawn from this, is an emphasis on developing local content and beneficiation. Can we have a generic understanding of what Local Content (LC) involve and how this has been interpreted in different countries.

The good news is that, the AMV is being translated into country Mining visions. Many countries have not waited for AMV to start reviewing their legal framework. There are countries that have also reviewed their legislation or adopted the legislation since 2010.

The adoption or review of legislation will at least ensure that on paper governments are giving the political signal that business should use labour and available suppliers that link up to the extractive sector.

There is a lot of initiatives on the ground and for e.g. countries like Ghana have gone very far. They  have even identified a list of eight specific types of products where supply capacity exist locally, so  companies can source their local procurement from those domestic suppliers. There are also training people to ensure 90% employment, at different levels and skills, so they are really doing this deep analysis in-terms of understanding what the mining sector for eg needs to be able to respond with policies and incentives.

So there are initiatives and a lot that has been happening. This will not happen overnight but will be a long process.

There are known best case studies on implementation of LCs, Norway being the most cited, and I believe in Africa, Botswana is yet another good example. We cant be short of examples yet there is limited evidence to demonstrate replication of such best cases. Some of the emerging ER producers are struggling with the same legacy issues as experienced in other countries including the most widely cited Nigeria Oil Sector.

With the LC, they are two dimensions, sometimes just having a policy is not enough. If we take a look at the Norwegian case, Norway put a lot of emphasis on the upstream part of the value chain building world class suppliers for the oil sector.

They didn’t focus on transforming oil but did put much of emphasis on making sure that they build a world class business. This is what Nigeria is trying to do, what Angola is trying to do, and what Brazil for instance has done well. The upstream part is much more linked to the extractive sector itself. For any policies directed to drive upstream value creation, you have to go as granular as possible.

Blanket policies such as in the case of Nigeria assume that once you have instruments in place its all going to happen by itself. Norway for eg decided they wanted to have services at the beginning. Foreign companies couldn’t do business alone but had to team up with local Norwegian companies, and in process transferred technology and skills. It took about 20 years to develop this capacity.

It is therefore, not a question of Africa lacks anything but that we need to develop granular and specific policies. You will need to monitor policies to ensure they are working, and allowing for any changes if you think the policies are not delivering, for any reasons.

The downstream approach in which Botswana is a case example depends on how far you are connected to the global supply chain. Transformation of raw materials depends on the extent of local demand for the commodity.

By the way Botswana is often seen as the best case scenario for many good reasons but only contributes about 15% to diamond value addition. But if you look at the diamond chain,  if you look at where Botswana stops, 75% of the  resources still lies elsewhere. Hence its not so much value added. The real value added is the jewellery industry.

The upstream or downstream beneficiation thus requires different policies.

Isabelle Ramdoo is the Deputy Programme Manager of the Economic Integration Programme at the European Centre for Development Policy Management. Isabelle leads ECDPM’s work on extractive industries and focuses mainly on how best natural resources can be harnessed to contribute to the broader economic transformation agenda of African countries.

She is actively involved in policy debates in Africa and in Europe and has published a number of studies, focusing on local content, economic linkages and the resource curse, amongst others. Prior to working at ECDPM, Isabelle was a trade negotiator and an economist for the Government of Mauritius, where she served for nine years. She joined ECDPM in 2009.