Policy reform to expand mining investment in subSaharan Africa

Despite recent trends in mineral prices which provide possible grounds for optimism the level of investment for financing mineral exploration and expanding or rehabilitating mines in the subsaharan African region fails considerably shdrt of requirements. The bleak economic conditions make the task even more onerous. The paper discusses the policy reforms that will be required in the region to create an environment for injecting new investment. These include strengthening the institutional structure and promoting investor confidence as well as reorien- tating the management strategy of state owned mineral enterprises to enable them to operate as commercially oriented concerns.

The author is Special Adviser (Economic) with the Technical Assistance Group, Commonwealth Secretariat, Marlborough House, Pail Mail, London SW1 Y 5HX, UK. The views expressed in the paper are those of the author and not those of the Commonwealth Secretariat.

The paper is a revised version of that delivered at the UN sponsored Regional Seminar on Mining Exploration and Invest- ment Promotion of West Africa, in the ivory Coast in December 1989.

Policy reform to expand mining investment in subsaharan Africa

Raj Kumar

The mining industry, like any other important economic sector, influences and is influenced by macroeconomic conditions. For a large number of important mineral producing countries in subsaharan Africa (SSA) the macroeconomic picture is generally one of adverse economic conditions characterized by slow GDP growth, virtually stagnant or declining per capita incomes, balance of payments deficits, sustained inflationary pressures and a relatively high debt service burden. This has resulted in cuts in government expenditure, reduction in essential imports and foreign exchange shortages. These problems are even more intractable for most Of the SSA countries since their underlying economic structure is one of reliance on imported manufactures, oil and even for some, food, and on the generation of foreign exchange from a narrow range of exports of mostly primary commodities whose prices fluctuate erratically. The problems of a high burden of debt service have coincided with depressed mineral prices for most of the 1980s and this factor has put the mining sector under even greater strain in some countries such as Angola, Liberia, Madagascar, Sierra Leone, Sudan, Tanzania, Zaire and Zambia.

Current economic difficulties are not the primary cause of the decline in foreign investment interest in most of subsaharan Africa since the 1960s. Despite the geologic potential, political instability and policies unfavourable to foreign investment, including mining, have shifted the emphasis away from Africa to other regions. Economic problems have forced a large number of countries to reappraise their policies with a view to changing the unfavourable investment climate they offer. The combination of a history of unfavourable investment regimes and the current economic crisis makes the task an onerous one.

Investment in the mining sector could be for the following purposes:

0 for financing new investment in exploration activity and development of new mines; and

0 for expanding or rehabilitating existing mines, including investment in new technology.

The degree of impact of adverse macroeconomic conditions on mining investment will partly depend on whether the investment is carried out by state owned enterprises or by the private sector, either local or

242 0301-4207/90/040242-14 0 1990 Butterworth-Heinemann Ltd

Polk-~ reform to expand mining investment in suhSaharan Africa

foreign. Where the responsibility lies with state owned enterprises the level of investment will be affected by hefty cuts in government expenditure and foreign exchange scarcity. As most state owned enterprises are under the control of the government, it is not uncommon for foreign exchange surpluses generated from mining to be used for general balance of payments support or other social and political goals rather than reinvested in mining. A hard pressed government can be pressurized into using the proceeds at the expense of its mining enterprises’ need for rehabilitation and investment capital. The local private sector, too, will be affected by scarcity of the foreign exchange needed to import essential inputs. The burden in such circumstances is. however, considerably less if the investment is made by foreign companies willing to finance investment from external funds.

The inability of most SSA governments and state agencies to borrow from commercial bank sources, and unpredictable and onerous debt service obligations (assuming borrowing is possible), imply that the SSA country is left with two basic sources for financing investment. The first source is finance from official bilateral and multilateral agencies and the second is direct foreign investment (DFI). The availability of funding on a concessional basis is limited. Projects requiring high technology and those that are risky will have to attract external participation on a commercial basis. Direct foreign investment will be the key means of promoting new, large investment in the mining sector for SSA countries, be it in the form of joint ventures with state enterprises, full foreign ownership, cofinancing with multilateral organizations or any other arrangement. Even if the economies of SSA were not facing balance of payments problems, it would still be necessary to attract foreign participation since mining companies remain the chief sources of technology, management skills and marketing knowhow, including access to international markets.

It needs to be stressed that the focus of DFI does not imply that this is a superior form of investment compared to other methods such as direct borrowing by governments or their state enterprises, or other forms of non-equity investment such as licensing, marketing arrangements and technical consultancy services. For some countries, which have a good local financial market and experienced local mining companies, other arrangements could be optimal. In the case of SSA DFI is discussed as a substitute for direct commercial borrowing by the public sector - which has either dried up or is available only at a very high price - and as a source of technology and access to markets. DFI is also looked to as a means of providing additional investment over and above what would otherwise be forthcoming.

The aim of the paper is to discuss the type of policies and strategies which SSA countries facing adverse economic conditions can adopt to promote mining investment. The role of state mining enterprises, which have become a dominant vehicle for mining in most of SSA, will also be considered. Small-scale mining of the artisanal type and that by small firms for the domestic market is not covered as the issues affecting this sector are different from those affecting enterprises producing output for the international market. The next section will outline the environment for mining investment and the likely trends; the following section will cover host country objectives and the expectations of foreign investors. The key areas where host countries of SSA should focus their attention on attracting new investment in mining will then be taken up

RESOURCES POLICY December 1990 243

Policy reform to expand mining investment in subSaharan Africa

a Supply is defined as production plus beginning of year stocks. ’ Canada, France, FRGermany, Italy, Japan, the UK and the USA. c Covers only Canada, France, Japan, the UK and the USA.

Source: International Monetary Fund, Primary Commodities Market Development and Outlook. World Economic and Financial Surveys, July 1989.

‘For further details on the declining share of Africa in mining see Peter M. Fbzzard, ‘Mining development in Sub-Saharan Afri- ca’, Natural Resources Forum, Vol 14, No 2, May 1990, pp 97, 105.

244 RESOURCES POLICY December 1990

Table 1. Price movements of minerals and metals and related economic indicators, 1982-88 (annual percentage change).

Prices of minerals and metals

1982 1983 1984 1985 1966 1987 1986

(in US$) Index of world consumption

-11.8 4.9 -5.2 -5.9 -5.9 19.0 48.2

of metals Index of production Index of supplya Index of closing stocks Economic activity in major

4.2 3.5 5.7 -0.6 2.8 3.7 2.0 -6.2 1 .o 6.0 0.9 -0.3 3.3 4.5 -3.3 5.0 5.2 -0.7 -0.8 1.2 1.1 19.8 -0.9 -10.0 -4.7 -7.7 -20 7 -3.5

industrial countrie&’ Real GNP Industrial production Housing starts’ Automobile production

-0.4 2.9 5.2 3.4 2.7 3.4 4.2 -3.8 3.7 6.1 2.6 1 .o 3.3 6.0 -5.1 26.0 -0.3 2.3 6.5 5.0 -1.8 4.3 12.0 1.8 5.2 0.6 -0.4 2.9

and the strategies state mining enterprises can adopt will be considered in a further section. A summary comment will be made in the last section.

State of the mining industry

For the world mining industry the period between 1988 and the first half of 1990 has been a great improvement on the previous decade, with robust mineral prices and virtually full order books. Metal companies have enjoyed good profits after almost a decade of slump. The increase in prices has been largely due to a depletion of stock levels as a result of companies honing down their capacity during the recession. A physical shortage has also been aggravated by strikes at key production centres, notably in Peru and Canada. Table 1 summarizes the movements in prices of minerals and metals and related economic indicators for 1982-88. The level of exploration activity, particularly for gold, increased but for most other minerals was in the doldrums. By and large, at least in the developed countries and in some developing countries where the private sector has been the primary owner or manager of the mining enterprises, the recession in the industry in the early 1980s has forced rationalization and reduction in excess capacity. With this increased efficiency the industry should be able to live with a relatively lower level of prices than those prevailing at the beginning of the decade. However, in the case of state mining enterprises performance has varied and a large number in SSA remain inefficient. Some are propped up by subsidies.

For SSA countries the serious shortage of new investment, which for most countries began in the 196Os, has resulted in a decline of SSA’s share of the world’s minerals and metals market. Between 1960 and 1987, for instance, SSA’s share for gem diamonds fell from 70% to about 40%) for copper from 26% to 16%, for chromite from 17% to 9% and for tin from 13% to 1%. However, for bauxite and uranium there has been an increase and some of this, particularly for bauxite, has been attributed to selling the product in the market at a huge subsidy. When compared to mineral production in other developing country regions such as Asia and Latin America, the World Bank estimates that SSA’s share of developing country mineral production, in monetary terms, has fallen from about 23% to 10% in the last forty years.’ This is partly due to depletion of resources but mainly to a lack of investment.

In terms of mining investment in SSA World Bank figures indicate


that exploration investment between 1983 and 1987 was at an annual level of US$115 million against some $2500 million in Canada during the same period. This is substantially below the US$400 million to US$700 million that is called for.’ About 50% of this amount is concentrated in four countries: Zimbabwe, Zaire, Ethiopia and Gabon. A comparison made between exploration expenditure and the value of production suggests that, with the exception of Ethiopia and Madagascar, there was underinvestment in exploration. These figures include a relatively prosperous country like Botswana and major mineral producing countries like Zambia and Guinea. For instance, in the case of Zambia exploration expenditure only amounted to about 1% of value of production in 1987. Even in Zimbabwe the ratio for exploration expenditure and value of production was only 2.5%.

The low level of investment in SSA is not too difficult to explain and it has nothing to do with the lack of mineral potential. Political conditions, weak institutional structures and a lack of managerial competence have produced an environment that is not conducive to long-term orderly investment. There are also other constraints. For a given population the domestic market of most SSA low income countries is relatively small and has little attraction for foreign investors. A country with a low natural resource endowment, an underdeveloped infrastructure and a small internal market may not attract DFI even with the most liberal regulations and generous incentives. General experience has suggested that foreign investment is self reinforcing, being attracted to places where development is already rapid and successful. Some governments have chosen the strategy of undertaking investment with their own state mining enterprises. However, the experience of such enterprises has not generally been very promising, for various reasons.

Ways of raising of capital for mining projects have also undergone changes. Mining projects can expect to obtain funds from capital markets that have become global and have introduced novel financing techniques to benefit the industry. These techniques include commodity bonds, gold loans, debt equity swaps, leverage buy outs and various new ways of raising equity. The mining sector, like other industries, may have to cope with the vagaries of exchange and investment rate fluctuations but the opportunities available to it in terms of financing have never been as globally spread and varied - in terms of financing instruments - as they are now. The source of raw materials, operating supplies, management personnel and technology is also becoming global. For the first time in many years capacity and demand are close to equilibrium. A reasonable environment exists and if the prospects for mining are good, financing will not be a problem.

‘Ibid.

Table 1 shows that recent price increases in metals were associated with the effects on consumption of a sharp acceleration in the growth of industrial production and domestic fixed investment in industrial countries. Despite the upturn in prices producers have been reluctant to undertake substantial expansion of existing capacity or reactivate pre- viously closed facilities because of uncertainty over how long world economic expansion will continue. OECD forecasts for the industrial economies show that economic growth will continue in the next few years, albeit at a lower rate than for the past seven years, thus producing the longest period of continuous growth since the Second World War.

Technology is another area of rapid change and the ultimate survival weapon of industry in SSA will be injecting new methods to reduce


Policy reform to expand mining investment in subSaharan Africa

costs. Competition from oil based substitutes is likely to continue, particularly if the price of petroleum continues to be depressed. With developments in the field of material engineering, the minerals and metal producer will essentially become a ‘materials supplier’ competing with engineering plastics, ceramics and composites as well as other specialist metals and minerals like beryllium and germanium.

Objectives of host country and investors

The key objectives of SSA host countries for the mineral sector are to maximize the extraction of economic rent, in terms of government revenue through taxation and generation of foreign exchange, and to use the consequent economic growth to promote greater economic linkages between the various sectors of the economy. For some countries with high unemployment mining is also expected to generate employment, though the scope is somewhat limited given its capital intensive nature. The aim is to reap the full potential of the rent from mining in such a way that the proceeds and outgoings in terms of foreign exchange integrate into the overall macroeconomic policy of the country. Booms and slumps in the mining industry should not be destabilizing.

The expression of the sovereignty of the state over its mineral resources, however, has to take into account the economic and political realities of today’s world. Given their economic problems SSA countries have been set a very difficult task in attracting and maintaining scarce investment in a capital intensive activity. In attempting to attract this investment a country is competing with other states in a similar situation. In a number of countries state mining enterprises are under pressure to restructure amid growing competition. Internal funding to achieve this is becoming difficult to find and a private oriented strategy is becoming inevitable. Investment from external sources will necessarily be a substitute for borrowing.

The key factor for any investment in minerals is, of course, the geological prospects and adequacy is determined by the exploration that is economically warranted by the geologic knowledge gained at each step in the process. The decision to proceed with additional exploration outlays will depend on accumulated knowledge, costs and estimated probabilities of success. International investors are attracted to exploration in a particular country only if a certain amount of geological knowledge has been accumulated and the results of the preliminary investigations are promising. Once the technical factors are right the other criteria that will attract DFI will be the political and economic environment and the contractual terms. The objectives of investors vary: some are interested in fast payback of the investment or a minimum threshold rate of return; others in maximizing profits over time by maintaining a long presence in a country; still others in ensuring uninterrupted supplies by diversifying their sources for their worldwide operations. There could also be interest in minerals that are of strategic importance. The focus will inevitably be on exports rather than domestic consumption, given the market structures in SSA.

A recent survey of multinational mining companies showed that

geological potential, followed by political stability, were the most %harles J. Johnson, ‘Ranking countries 7 - for minerals exploration’, Natural Re-

Important criteria in investors selecting countries for mineral explora-

sources Forum, Vol 14, No 3, August tion. Other factors of less importance included infrastructure and 1990. utilities, geographic location and past experience.”


Policy reform to expand mining investment in suhSaharart Africa

Policy and strategy for attracting direct foreign investment

Countries seek foreign investment to assist the balance of payments through injection of capital in the short run and the generation of a net surplus of foreign exchange in the long run (after allowing for foreign expenditure in terms of imports and outflow of dividends). There is a cost to DFI and in principle this is no different from other capital service costs, although debt service has to be carried out irrespective of the profitability of the company (unlike dividends on equity). There will inevitably be some loss of national sovereignty, which is unavoidable in today’s asymmetrical location of capital and knowhow; but this can be mitigated through joint arrangements. The bottom line is that the investment should be of net benefit to the host country. However, it needs to be pointed out that a simple calculation of financial net transfers understates the benefits of DF1.4

Foreign investment should induce greater stability than would be obtainable by other means. Depending on government objectives and the host country’s circumstances the strategy should be to influence the climate to selectively attract new flows to countries whose size, location and resources and history would otherwise not appeal to investors. Direct investment is project specific and even in the most unpromising country situation it is possible to have good projects and promote mutually acceptable arrangements with investors, as has been the case in countries like Mozambique and Angola.

A long list of factors needs to be considered when attempting a strategy of attracting foreign investment. We will look at what are considered to be more important from the point of view of the SSA countries. These are:

0 institutional infrastructure; 0 geological studies and their promotion; 0 general business climate and investor confidence: 0 contractual terms; 0 foreign exchange policy; l aspects relating to the environment; and 0 transfer of technology and training.

4A good discussion on general investment issues is taken up in Vincent Cable and B. Persaud, eds, Developing with Foreign ln- vestment, Croom Helm, New York, 1987. See in particular G.K. Helleiner, ‘Direct foreign investment and manufacturing for exports in developing countries: a review of the issues’, pp 67-83.

Institutional infrastructure

Although an area well discussed in the literature and mining seminars, it still needs stressing that an effective institutional structure for monitoring, regulating and controlling the form which mineral development takes place is a precondition for any new investment. Unfortunately for a good number of SSA countries such as Sierra Leone and Zambia the institutional infrastructure has deteriorated over the years. It is necessary to iron out constraints in existing investment and mining legislation to ensure that provisions are flexible enough to meet the changing needs of mining. Access to land and mineral rights needs to be eased and where rights have already been farmed out there is a need to ensure that production work is done to prevent speculators sitting on land. Idle land or reserves kept in the name of sovereignty or handed over to state enterprises unable to invest in them will not benefit the nation, particularly when there is a pressing need for development.

The institutional machinery of the mining sector requires moderniza- tion to respond to the challenges of mining. Processing of applications has to be swift; monitoring of on going work needs strengthening; roles



of officers need to be clarified and staff need to be properly trained and motivated. In other words, there is a need to have a strong administra- tive foundation to take on the tasks of managing mineral resources which may be worth millions of dollars of foreign exchange. The management style of the ministry and the state enterprise concerned should be similar to those required by a multimillion dollar operation in the private sector.

There is no perfect institutional scheme which will apply to every country, and technical assistance in institution building is already available from various agencies. In recent years countries like Ghana, Tanzania, Ethiopia and Madagascar have implemented reforms which are slowly beginning to attract investors.

Geological studies and their promotion

It needs to be reiterated that the resource base is not the limiting factor in SSA; it is rather information about the resource base. A large part of Ethiopia and Sudan is relatively unexplored. Even Nigeria - oil apart - has been relatively underexplored. Recently Ethiopia and other countries like Burkina Faso, Sudan and Mali have recognized the need to create a geological infrastructure. The efforts made by Ghana in this direction are noteworthy and recent revised exploration activity suggests that the additional gold potential is good. Exploration efforts in Guinea will soon enable it to be the second largest producer of iron ore in the continent. In these countries government bodies may be con- strained in pursuing an adequate level of exploration by a lack of funds or technically trained personnel. But technical assistance in this area is available from various bilateral and multilateral sources.

Once the information is available it may be helpful to publicize it to as many companies as possible, particularly if the initial assessment shows high potential. Potential investors should be allowed access to geological maps and other associated reports. Promotional shows in key areas, of the kind used in promoting petroleum exploration, can reap interest. Apart from the usual centres in Europe, Japan and the USA it may be helpful to also focus attention on new growth centres in East Asia such as South Korea, Taiwan and the ASEAN countries. A considerable degree of ignorance about Africa exists in some of the newly industrializing countries, which have substantial surplus funds waiting for opportunities for investment. Market intelligence in identifying projects of interest to investors, backed by sufficient geological information, can instil confidence that the government is serious.

General business climate and investor confidence

Geological prospects aside, generating a political and economic climate which instils investor confidence is probably the primary factor in attracting foreign investment not only in mining but also in other sectors. There appears to be a perception, whether real or imagined, that SSA is a riskier place to invest than other areas, including the developed and developing countries. This implies that the rewards to compensate for the perceived risk have necessarily to be high when compared to a similar investment in another area. If the intention is to promote DFI the task of achieving business confidence has to start at the individual country level.

The country’s overall attractiveness ultimately depends on the government’s general economic policy, particularly in relation to finance,


Policy reform to expand mining invesrmenf in subsaharan Africa

taxation and trade, and the seriousness with which structural adjustment to meet economic problems is being undertaken. In fact investment and trade policies should be considered jointly as they set the price level in relation to the rest of the world. A common feature of East Asia - although countries like South Korea, Indonesia and Hong Kong have pursued different strategies - has been the orientation of trade policy, with only a few exceptions, to world prices. Hughes and Dorrance’ comment that public revenues in the newly industrializing countries were used to improve the basic infrastructure for business directly throughout the region, the overall effect being to provide the best investment climate in developing countries. Foreign investment was not simply correlated with growth and investment climate but reflected policies adopted towards transnational corporations. Botswana is an example that other SSA countries can emulate.

To further allay political risk it has become necessary to provide guarantees against nationalization without compensation and to protect the repatriation of dividends and capital on reasonable terms. (The latter issue is taken up below.) Further, in a large number of agreements investors demand guarantees that the regime negotiated will not be changed, even to the extent that they should be exempt from general taxation or other general legislation. These aspects are dealt in what are referred to as stabilization clauses in mineral agreements. These stipula- tions need to be handled carefully, especially since they can impinge on sovereignty issues and sometimes even on the constitution of the host country. Investment guarantee agreements among governments have almost become a tangible expression of welcoming DFI. Efforts being undertaken under the Multilateral Investment Guarantee Agreements and some efforts by the World Bank are steps in the right direction.

Another point to note is that while a few individual countries in SSA may proceed faster than the rest, growth will ultimately depend on how fast the region as a whole can grow. Collaboration among the region in joint mining ventures can go a long way to boost general regional confidence. Dispersed and uncoordinated investment activities in a variety of mining ventures in the region may generate excess capacity, poorer terms of trade and eventually losses. Collaboration can take the form of promoting regional transport and communication, harmonizing tax and investment regimes, tariffs and other forms of cooperation which can attract regional projects. Some initial steps in this direction have been taken by the Economic Community of West African States (ECOWAS) and the Southern African Development Coordination Conference (SADCC), but the impact has so far been negligible. Agencies such as the World Bank and the African Development Bank should attempt to identify and fund such joint projects.

5H. Hughes and G.S. Dorrance, ‘Foreign investment in East Asia’, ibid, pp 44-66. 6A detailed discussion on this can be found in G.W. Walrond and Raj Kumar, Options for Developing Countries in Mining De- velopment, Macmillan, London, 1986 and Thomas W. Walde, ‘Third World investment policies in the late 1990s: from res- triction back to business’, Mineral Proces- sing and Extractive Metallurgy Review, Vol 3, 1988, pp 121-182.

Contractual terms

Because of the complex structure of the mining industry and the different needs of countries, the last two decades have seen a large variety of contractual arrangements in the form of equity participation, production sharing, management contract and the traditional concession.6 From the host government point of view the aim is to see that the exploitation of the mineral resources is tailored to the national economic development strategy, the foreign enterprise being used primarily as an agent for the realization of national economic and social goals. Acceptable conditions for direct investment by mining trans-


Policy reform :o expand mining investmenr in subsaharan Africa

nationals involve a number of issues apart from the government take. These include minimum exploration expenditure, the work programme, infrastructure development, downstream processing and training. To some extent any of these can be traded off with the fiscal regime. The government interested in receiving continuing direct investment should be careful to formulate a fiscal package that assures it high revenue but simultaneously meets the requirements of transnationals.

Taxation is not just an economic issue; it is political in the sense that the policies applied often come to be seen as an expression of the relative strength of government and foreign private interests. Taxation as an expression of sovereignty thus becomes a tool for the assertion of government power, and the form which policies take acquires an importance of its own quite separate from the revenue gathering capabilities of the policies in force. There is a view that even though economic rationality may dictate the application of taxes to correspond closely to profitability, governments should try to match their taxation regime to their supervisory capabilities. As Khong succinctly puts it, the more complicated the system the more favourable it is likely to become for the companies, no matter how severe the overall effects on paper, because supervisory resources on the government side are finite.7

Looking more broadly in terms of fiscal incentives, various studies have pointed out that tax. advantages, be it in terms of tax holidays, investment allowances or subsidies, are not the main influences upon investment in developing countries. Their contribution to the decision to invest is a modest one. Fiscal incentives cannot offset high costs of production or the lack of markets, and are even volatile. Competition among countries offering more or less the same incentives implies that investment incentives do not always influence location decisions. Yet some may argue that if one country were to abandon incentives this would affect geographic patterns investment.

A survey of leading mining companies has shown that adequate guarantees for the explorer of the right to mine are a critical factor in determining a major exploration programme. Other factors include guarantees of repatriation of after tax profits and management control.

A few countries recently have taken positive steps to evaluate the investment regimes for mining and the Commonwealth Secretariat is currently assisting in Botswana, Mozambique, Namibia and Tanzania. Ethiopia and Zimbabwe, too, are in the process of making reforms, particularly in foreign exchange, to which we now turn.

Foreign exchange policy

Though part of the contractual terms, foreign exchange policy has been singled out as having a significant bearing on foreign investment. A common feature of SSA has been the existence of exchange controls which, for various economic and social reasons allow countries to maintain exchange rates different from those that would operate in a free market. In some cases controls are intended to meet criticism of excessive returns, and sometimes they are intended to prevent the

‘C.B. Khong, ‘Host government policy to- exploitation of economic rent by foreign investors. To a large extent

wards the oil industry in East Asia’, op cit. they have a general impact and often affect the freedom to remit Ref 4, pp 245266. See also Raj Kumar, dividends and repatriate capital. These are guarantees demanded by ‘Government fiscal strategy for mining to 2000’, Natural Resources Forum, Vol 13,

transnationals, although many SSA countries are trying to attract DFI in

No 4, 1989, pp 275-264. order to escape balance of payments difficulties. In most cases there is 80p cit. Fief 3. usually a previous history of exchange restrictions and control. It is not

RESOURCES POLICY December 1990

Policy reform to expand mining investment in suhSaharan Africa

only the remittance of profits and capital that is at issue; there are a host of other foreign exchange items that will have a bearing on investment. These include the import of foreign currency, foreign currency revenue and expenditure, maintenance of foreign currency accounts outside the host country, domestic currency usage and expatriate personnel foreign currency arrangements.

Restrictions on foreign exchange, particularly on remittances. usually form the basis of most negative business perceptions of what may be a promising mining venture. Recently a large number of SSA countries, including Ghana and Tanzania, have found it advantageous to ease such controls on export oriented companies that are self sufficient in foreign exchange and which also generate proceeds for the country. Escrow accounts outside the host country established by a reputable international bank in consultation with the host government to handle foreign exchange transactions provide a mechanism for facilitating these arrangements. There are usually strict reporting obligations to the monetary authorities of the host country, which will monitor foreign exchange transactions through the account. A balance between unres- tricted offshore retention of funds and what should be compulsorily repatriated to the host country will have to be worked out, depending on the country’s circumstances. An interesting arrangement was worked out in the case of SNIM, Mauritania’s state owned enterprise, ensuring that the government’s short-term foreign currency needs would not hamper SNIM’s payments of operating costs in foreign currency.’ Zimbabwe, too, has announced the easing of foreign exchange restrictions for vital equipment.”

Exchange controls also affect the state owned enterprises’ access to foreign exchange (even though such enterprises may have generated the foreign exchange in the first place) unless there is some form of export retention scheme. Approval of foreign exchange to finance import or other expenditure is not automatic and can be denied if a country is under pressure to use the funds for other essentials. In some situations surrendering foreign exchange receipts from exports may penalize mining enterprises, especially if the exchange rate is undervalued. In other situations the rapid devaluation of the local currency has a marked impact on the profitability in local currency terms of the enterprises, especially where the market is domestic and prices do not keep pace with the devaluation. Exchange rate policy and monetary policies have to be formulated in the context of the impact they are likely to have on mining investment, especially if this is a key source of revenue.

Another point to note is that an overvalued national inconvertible currency and shortage of foreign exchange can lead to a situation where precious minerals such as gold and gems take on the role of national currencies as a medium of current and future business transactions in the parallel or black economy. This situation creates an environment of underdeclaration of mineral output, and of corruption.

Environmental issues

‘Oliver Bornsell, ‘Competitiveness and Mineral exploration cannot be conducted without some disturbance to

prospects for the African mining industry: a the environment, though prudent methods can minimize damage. The case study of the Guelbs complex in debate on environmental issues that is now eoine. on will have imnlica- Mauritania’, Natural Resources Forum, Vol

v v n

13, No 4, 1989, pp 285-293. tions for mining in terms of increasing costs if translated into action in

“See ‘Zimbabwe easing constraints’, Min- the next decade. Both host countries and investors are facing increasing ing Journal, 25 May 1990. pressure to take account of environmental factors when pursuing their



developmental objectives. For SSA countries the problem is a complex one in terms of balancing the need for development with environmental concerns. Nevertheless, it will be advantageous to governments to force mining companies to take heed of environmental concerns in ‘accord- ance with good mining practices’. The aim is to minimize environmental damage and to ensure adequate compensation for injury to persons or damage to property caused by the effect of mining operations. So as not to frighten away investors the demands should be reasonable and no more than local companies would have to comply with. Nevertheless, there is a need for governments to maintain contractual provisions which explicitly require the contractor to acknowledge government’s jurisdiction over pollution and safety.

There may also be a temptation to attract the relocation of mineral processing plants from developed countries where strong antipollution requirements may force companies to look to countries where standards are much lower. There may be a short-run benefit in taking advantage of this but a prospective host country should, as circumstances warrant. take a long-term view. There may, however, be isolated and non- populated areas which could be possible sites for such operations.

Aspects most relevant to mining concern waste disposal (both hard- rock and softrock), mining and processing methods. Other aspects requiring consideration are the capacity of the location to physically accommodate the project and continue to provide arable land for a growing local population; the capacity of streams and surrounding oceans to assimilate wastes from the project; and the effects of the project’s land requirements and discharges on natural ecological values and the subsistence and commercial resources used by local people.

For virtually all projects funded by the World Bank and African Development Bank an important evaluation criterion is the impact of the mining project on the environment. Even in cases where such funding is not involved, countries like Zimbabwe and Botswana are taking steps to evolve appropriate frameworks for considering environmental issues in mining. The Commonwealth Secretariat, too, has embarked on work on an operational strategy for evolving what is becoming known as ‘ecological mining’ ie mining operations which pay due regard to the environment.

Several benchmarks have been set in environmental concerns. One is the obligation of the contractor to restore the mined out areas to their original state to the greatest extent possible. Another is making an environmental impact survey a prerequisite before any offshore or onshore mining operations take place. An environmental impact state- ment is basically a cost-benefit analysis of potentially positive and adverse effects from exploration and development on fish, wildlife and air and water quality.

The impact of environmental concerns on the marginal project should be particularly monitored and costs relating to environmental concerns should be clearly identified to enable appropriate policy measures to be taken. It is also pointless to impose various environmental obligations unless there are adequate statutory provisions and environmental monitoring machinery with enforcement powers. In most cases assess- ments of the likely impact on the environment are predictions, not established facts. Those impacts that do occur should be properly monitored to minimize their adverse effects.


Policy reform to expand mining investment in suhSaharan Africa

Transfer of technology and training

This again could be a component of the contractual terms, but it is singled out for further discussion as technology and training are

instrumental to the host country gaining eventual control over the management of mineral exploration. something which has worked well in countries like Brazil and Malaysia. Technological developments in the mining sector relate to innovations and adaptations in various stages of mining operations, such as exploration, refining and processing. In a large number of cases, while the investor assumes the risk of the project, specialist companies are largely used as contractors. These companies concentrate only on certain operations or on particular equipment or in providing specialized engineering services. Hence transfer of technology from the investor to the host country is indirect and often diffused unless there are special contractual provisions.

It is helpful to have clear provisions with respect to the following:

employment of local personnel whose skills are available locally, and welcoming expatriates where this is not the case; training of local personnel in various operational aspects - with training programmes clearly defined and stipulated; where feasible, provision to set apart a small percentage of profits for research and development within the country; provision to use the most up to date equipment, which might require financial incentives to use ‘high-tech’ processes; provision for reversion of equipment once the agreement is terminated; and ensuring as far as possible local sourcing of materials, equipment and other inputs, which is useful for developing local production capability for parts and components and for various auxiliary products.

Apart from operational technology, which is generally transferred to local personnel in exploration operations, it is important to have provisions for local personnel to take an active role in various operational decisions. A large part of technology transfer will also depend on the initiative taken by the national company and its absorptive capacity. The recipient enterprises need to ensure that the number and quality of personnel and time period for training specified are adequate for technical absorption of the processes.

Strategies for state mining enterprises

This is a well discussed subject” and the aim of this section is discuss the role of state mineral enterprises in SSA countries which are unable to respond the investment challenges required of them. The difficulties of state mining enterprises preceded the debt crisis and the current economic problems of SSA countries and are partly due to the recession in the industry for most of the 1980s. Apart from this there are fundamental structural problems which need to be dealt with if these enterprises are to be able to compete with the private sector. The state

“See United Nations Department of Tech- enterprises in Zambia, Sierra Leone and Mauritania are cases in point. nology Co-operation and Development, In today’s interdependent world industry in the SSA countries will have ‘The role of state enterprises in the solid minerals industry in developing countries’,

to operate at costs which are at or below those available elsewhere, as

Proceedings of seminars in Budapest, well as matching the mining and processing technology of the developed October 1987, Stockholm 1989. countries. Some of this has been achieved by competitive devaluations


Policy reform IO expand mining investment in subSaharan Africa

‘2Peter Claver Acquah, ‘State mining company and mineral sector development - the case for Ghana’, op tit, Ref 11, pp 153-l 61 and K. Danyi Darfoor, ‘The concept of management contract in mine rehabilitation: the case of the State Gold Mining Corporation in Ghana’, op cit. Ref 11, pp 199-206.

of the currency and other forms of subsidies. This may work in the short run but in the long run the answer lies in reducing excess capacity, rationalizing operations, investing in new technology and operating like a private concern, even though state owned. The cost curves of the industry in developed countries have moved downwards as a result of such restructuring - partly forced by the downturn in the industry - and the less developed countries will have to do likewise.

To achieve this the state mining enterprise should be allowed to operate on an arm’s length basis in a manner not dissimilar to a private concern. Non-commercial objectives, where they conflict with financial efficiency, will have to give way to a more commercially oriented structure. This means that interference from government should be minimal. This is not something easy to achieve, given the history of the enterprises and the pressures currently facing cash starved governments; but it will be necessary for the long-term survival of mining enterprises. One form that is currently taking shape is a state enterprise operating as a holding company with participation in both nationally owned and partly foreign owned operations. An osmosis of skills and technology can take place among the companies. Wherever feasible the state owned operations can focus their efforts on the domestic market leaving the foreign owned enterprise to generate exports.

The reduction in government control will be meaningless unless the state mining enterprises themselves adopt a corporate attitude to the industry. For a large number there will have to be managerial changes and proper staffing by technocrats to deal with the problems of low productivity, rising costs and underinvestment in general. Some of the enterprises will require financial restructuring, including working with new participants providing a fresh injection of equity. There is usually a constraint on mining enterprises to work in one industry within the country; this will have to give way if diversification is viewed as commercially beneficial.

The initiatives taken in Ghana to rehabilitate the State Gold Mining Corporation (SGMC) are an example which some countries may wish to follow. Rather than resorting to consultants who had no responsibility for implementing their recommendations, the Ghanaian government hired a running company to manage SGMC. i*

It is unlikely that there will be complete privatization in the case of SSA, where the savings rate is low and where insufficient equity capital is available from citizens. Despite a reinterpretation of the concept of sovereignty over mineral rights, the environment in SSA is not yet ready for a complete transfer of ownership from the state to the foreign private sector; nor would this be desirable. The form that is likely to emerge is a partnership with foreign companies, either in joint ventures or by assigning long-term management and marketing to foreign companies or selling some mines to the private local and foreign sector. The underlying trend, whichever method is used, will be improvement in the financial and technical efficiency of the state owned enterprises through injection of foreign technology, knowhow and marketing skills, and expanding investment.

Summary comment and conclusions

The presentation has focused on the direction of future investment in subsaharan African countries, taking into account the following elements:


po[icy reform to expand mining investmem in subsaharan Africa

0 After a long period of slump, despite continuous world economic

growth, some optimism in the mineral industry is reflected in recent price rises, and investment opportunities are bright given

the projections in OECD growth during the next two years.

0 The economic problems of SSA, particularly in terms of balance of payments deficits and constraints on new borrowing, will make the task of new investment a difficult one if reliance is placed on internal generation of funds to acquire new technology.

l There is a need for SSA countries to foster foreign investment in new exploration, rehabilitate existing operations and to inject new

technology. 0 The SSA is perceived as a relatively risky place for investment

compared to other developing countries, and governments have to meet the challenge of changing the climate for foreign investment.

It was noted that the concept of a coutitry’s sovereignty over its natural resources is a valid one, but will require a reinterpretation in a context where technology and marketing knowhow continues to be largely dominated by industrialized countries. Some countries have found it beneficial to distinguish sovereignty from operational management of the industry. In this context there is a need to reorientate the management strategy of state owned enterprises, the dominant form of ownership in the mineral sector, in such a way that they are able to operate as commercially oriented concerns fulfilling the objectives of economic growth. This structure should also allow the formation of new kinds of relationships which lead to a partnership between local and foreign

capital. The paper also discussed the strategies which host governments could

adopt in creating the right institutional structure to respond quickly to the growing needs of investment. Other aspects considered were the building up of basic geological knowledge, investment promotion and the elements of an acceptable investment regime with a liberal foreign exchange provisions in respect of remittance of dividends earned and capital. The issue of plugging in environmental concerns to the investment strategy was also discussed.

One important element of the strategy is the transfer of up to date technology and training as a means of reducing dependence on external sources. This implies that the conditions for absorption of the technology will largely depend on the number and quality of local staff deployed in the entire operations. As such the management of the industry in the host country will be a crucial determinant of the future progress of mining in SSA. The management should be of the highest quality, unconstrained by politicians, and given a considerable degree of auton- omy, backed by accountability, to ensure that the operations run on a commercial footing. Bad management leads to bad mining practices. Even if a country has the right mining and investment regime, a mediocre team of managers, unskilled in negotiations with foreign contractors, will prevent the country getting a balanced deal. This is an area to which SSA countries should give serious consideration.

With political developments taking place in South Africa and Eastern Europe, the competition for investment funds and market share will be even greater. Given the long gestation period in mining investment, decisions made today will show results that will determine the impact of mining on SSA’s economic growth in the early 21st century.


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Policy reform to expand mining investment in subSaharan Africa