Africa Natural Resources:
Let’s do it right this time

Some commentators still talk about the Africa natural resources curse, but with real change happening and talk of a continuing commodities “super-cycle” of sustained growth, others are now optimistic that the many challenges can be overcome and that sub-Saharan Africa can finally lift itself out of poverty. In a series of articles in this Governance in Africa section of the website, I will address these ongoing challenges and the opportunities to grow the triple bottom line (People, Planet, Profit):

  • The Africa Progress Report 2013, entitled “Equity in Extractives: Stewarding Africa’s Natural Resources for all”
  • The Democratic Republic of Congo: symbol of the challenges
  • Botswana, Ghana, Guinea...: symbols of hope
  • China and Africa: 21st century colonialism or a mutually-beneficial partnership?
  • Fair Trade: beyond hot drinks to mobile phones, key users of precious minerals
  • Accountability and Transparency: the Applied Corporate Governance approach and how it can be of practical use to help the mining industry and governments build trust
  • Africa Natural Resources - the ACG Transparency Campaign: launching a new campaign to lobby world business and political leaders and inform the public.

This article was originally published in May 2013

The Africa Progress Report 2013

Africa Progress Report 2013

On 10th May, the 2013 Africa Progress Report was published. Much of the media coverage focussed on the warning of continuing problems of transparency and underpricing in asset tenders given by Kofi Annan, former UN Secretary General, Nobel Laureat and Chair of the Africa Progress Panel, which produced the report. But he also expressed guarded optimism that all the elements are present to break the curse and change the course of history in this resource-rich but currently inequitable region.


Growth in Africa over the last decade has finally brought the continent into the league of high performers, as the graph to the right shows (click for a larger image). With GDP in some countries beating even China’s rate of growth, this must give some hope that if well managed, Africa’s natural resources can finally deliver on their promise to its people.

As I say, there are serious challenges and injustices to address and this website is at the forefront of efforts to bring best corporate governance practice - greater transparency, accountability and responsibility - to business and government around the world. Kofi Annan pointed to one statistic which graphically demonstrates this: 

“Africa loses twice as much in illicit financial outflows as it receives in international aid. It is unconscionable that some companies, often supported by dishonest officials, are using unethical tax avoidance, transfer pricing and anonymous company ownership to maximize their profits, while millions of Africans go without adequate nutrition, health and education.”

At a time when developed Western economies are in recession or at best minimal growth, aid budgets have come under attack. Addressing governance in the way companies exploit Africa’s natural resources would surely be a positive way to reduce the continents reliance on aid while improving the performance and reputation of mining companies and reducing tax evasion. Mining companies and intermediaries (who have made vast fortunes on-selling mining rights) are coming under fire increasingly for the way contracts are negotiated and mines themselves are run. 

Transparency, tax avoidance and undervaluation

The biggest criticism is still the lack of transparency in the negotiation of rights and frequent discrepancy between reported payments made by companies and monies received by governments. Clearly both sides are responsible for ensuring that these figures match and currently in some countries there is still much secrecy in how these deals are made and the sums involved. 

Furthermore, most of the asset purchases are made by off-shore companies. While it is clear that foreign investment is required to exploit natural resources, often the first step is to sell to an off-shore intermediary. In fact, often the intermediary has already lined up or even sold the assets before actually owning them. 

You could argue that is the skill of the intermediary, and the reason they are hired. Dan Gertler is one such intermediary. The billionaire was involved in one of the most extreme examples of alleged asset undervaluation recorded, in the Democratic Republic of the Congo (DRC), engineering the sale of 50% of a local copper mine for a total of $75m, paying just $15m in a transaction that went back-to-back with the sale to London listed Kazakh miner ENRC.

In defending the deal, he told Bloomberg that his expertise lies in maximising value and that if the government “would like to hire my services to maximise value for their stake, they should approach me.”

But the circumstances and timetable of events show at best a lack of sensitivity and social responsibility for the impact on one of the poorest nations on earth. 

Another issue is that many of the transactions involving mining rights and operations are between off-shore companies (after the original interests are sold by state-owned companies), meaning tax revenues stay outside the county - if taxes are paid at all. 

The report estimates that in total, between 2010 and 2012 the DRC alone lost at least $1.36bn in revenues from the underpricing of assets sold to off-shore companies.

Harnessing the power of Africa’s natural resources

When you combine the effects of opaque dealings, sales of local assets between offshore companies with the resulting loss of tax revenue, and undervaluation of assets in the first place, you begin to realise the colossal differential between revenue potential of local assets and actual income received. 

This is before the income is (inequitably) distributed among the population. The report contains many detailed data on the impact of the growth in earnings from Africa’s natural resources, including average income, consumption and the UN’s Human Development Index (HDI), a composite measure of wealth, life expectancy and education. While GDP and average income has grown in all but two of the IMF’s list of 20 “resource-rich” countries, the HDI ranking of these countries has remained flat and in some case even fallen. Democratic Republic of the Congo, one of the richest in Africa’s natural resources, is in last place in the UN’s world HDI ranking.

Over the last decade or so, progress on poverty and human development has been mixed In Cameroon and Mali, increased growth had no discernible effect on poverty and Nigeria and Zambia, according to the report, actually registered small increases in poverty despite increased growth. On the other hand, some countries have made major progress:

  • Tanzania reduced extreme poverty from 84% to 67% between 2000 and 2007
  • Mozambique also reduced poverty from 74% to 59% between 2002 and 2007
  • Ghana reduced extreme poverty by a third between the end of the 1990s and 2005

While overall, the statistics make for sobering reading, there are sufficient examples of positive impact to disprove the “resource curse” theory that there is automatically a widening of the gap between rich and poor and natural resources will never have the power to lift people out of poverty.

Let’s look at a few statistics that show how relatively little, in percentage terms, could do so much with a little concerted efforts by national governments in Africa, mining and oil companies and global organisations like the G8, the IMF and World Bank, the World Economic Forum or industry groups such as the Extractive Industry Group

• Reducing poverty

While it is difficult to measure the opportunity, a simple comparison of current and project mineral revenues* with the implicit costs of eradicating poverty illustrates the scale of the potential, says the report: 

“In many resource-rich countries anticipated revenue flows are very large in relation to the estimated costs of closing the national poverty gap, as indicated by the financing requirements for bringing each poor person up to a poverty line income. In Guinea, Liberia and Mozambique, the average annual revenues projected by the IMF from current natural resource projects could eradicate extreme poverty. Tanzania could halve the poverty gap and Ghana could close the gap by three-quarters.”


See the IMF’s 2012 report on how these are calculated: Fiscal Regimes for Extractive Industries: Design and Implementation

• Education

Unesco also believes the resource curse is escapable if resources are invested in future generations. In its 2012 Education for All Global Monitoring Report, it says that Africa’s Natural Resources, “if turned into government revenue and utilized efficiently, could help many countries reach the EFA goals”. 

Botswana has become one of the wealthiest nations in sub-Saharan Africa thanks to diamond mining, revenues from which it has used to fund education:

“Not only has it achieved universal primary education but its secondary gross enrolment ratio stands at 82%, double the average for the continent.”

It goes on to affirm, of the 17 countries for which revenues for oil, gas and other minerals were analysed, that

“If revenue generated from their non-renewable natural resources were maximized and 20% of the extra resources were devoted to education, more than US$5 billion a year could be generated for the sector. This could fund schooling for 86% of these countries’ 12 million out-of-school children and 42% of their 9 million out-of-school adolescents. Several countries, including Ghana, Guinea, the Lao People’s Democratic Republic, Malawi, Uganda and Zambia, could reach universal primary education without needing any more aid from donors.”

To put that figure into perspective, that $5bn is two-and-a-half times what those countries receive in aid. If that doesn’t give cause for hope and renewed efforts to maximise the benefit Africa’s natural resources can bring to its people, I don’t know what will!

----------

In the next articles I will be looking in more detail at some individual countries, including DRC, Angola, Botswana, Nigeria and Ghana to assess the governance challenges and opportunities to improve the lives of millions from equitable distribution of the revenues from Africa’s natural resources. With China such a major player in Africa as it seeks raw materials for its continued growth, no series on Africa’s natural resources would be complete without a look at the question of China’s influence and its own governance in the region.

To help ensure transparency, accountability and responsibility in this sector, I will also suggest ways in which our Applied Corporate Governance methodology, based on independent research, could be applied to the management of the extractive industries.

I will also be looking at an excellent new initiative from a small Dutch team who have taken the principles of Fair Trade and are trying their best to apply it to the hugely complex world of smartphone production. Since so much of the world’s technology relies on minerals such as cobalt (53% of the world’s supply of which comes from DRC), it is good to see someone trying to open up the supply chain to scrutiny and ensure a fair deal with minimum working conditions. Incidentally here's a larger version of the Africa Natural Resources Map shown above.

Today, 14 May 2013, sees the first tangible results of their labour: the launch of the final specification and pre-orders for the world’s first FairPhone. It’s an excellent device running Android, two sim slots (two numbers, one device) and all the features you’d expect from a modern smartphone. They need 5,000 pre-orders to begin production so please support them! Click here to pre-order (you will need to pre-register first). We will receive no commission on any sales made through this website.

Update (July 2014): almost 20,000 Fairphones have now been sold, showing the desire of many consumers to help drive change. They are about to launch mass manufacturing from their plant in China, where they have a permanent staff overseeing production and workers' rights, including representation, election to which has just closed. As for "conflict-free minerals", they were able initially to secure traceable sources for two minerals used in the phone - Tin (Sn) and Tantalum (Ta) - from mines in DR Congo. They describe what happens from mine to phone in this article

A Final thought

Today I am also launching a campaign to call on leaders of the G8 group of the wealthiest countries in the world to do their part to ensure good governance of their mining companies. I hope to help generate awareness of the opportunities - and our collective responsibility - for Africa, and indeed all resource-rich countries, to lift themselves out of poverty. 

By focussing on poverty, we simply see more poverty. If we focus on the real, tangible opportunities I have begun to describe here, while recognising the size and difficulty of the task, I believe we can achieve real change. First we have to believe it is possible. This means raising our collective awareness, eliminating limiting beliefs and negative thinking and working together for the benefit of all people and the planet. 

To support our campaign please click here to sign the petition, which will be sent to G8 leaders next month, and spread the word to all your friends, family and contacts around the world. Together we really can make a difference! 

Thank you!

Arthur Kendall

Applied Corporate Governance > Governance in Africa > Africa Natural Resources



Search this site:

Subscribe and receive a free ebook!
* indicates required
Don't worry, your email is totally secure - we promise only to use it to send you updates from Applied Corporate Governance.