New rules for Africa’s resource scramble

by Jim Cust

Natural resource extraction in Africa is a big deal. Particularly when it comes to sub-soil assets such as oil, gas and minerals. Between 2000 and 2008, ODA flows to sub-Saharan Africa increased from $12bn to $36bn per year. In contrast the value of natural resource rents rose from $39.2bn to $240bn. And this is just the beginning. Paul Collier and Anke Hoeffler’s much-touted estimates (based on the World Bank’s 2006 Wealth of Nations research) put the value of known sub-soil assets in SSA at only one-fifth of those of the OECD ($25,000 per sq. kilometre versus $125,000 per sq. kilometre in the OECD). It seems likely then that much of Africa’s wealth is yet to be discovered. This is consistent with what we know- that many countries remain only partially explored. For example, the Zambian government’s most up-to-date geological survey reportedly date from the 1950s!

Getting better public geological information and incentivising exploration are just the first in a chain of complex decisions facing many of these countries. Even once you know what you have, and it’s coming out of the ground, opportunities for abuse and mismanagement are rife. Securing the full value of resource rents for government remains challenging. Gold exports from the Eastern DRC have been estimated to be around $1bn per year. In contrast treasury receipts from these exports reached only around $20,000 in 2008. This is an extreme example, but this story is all too familiar.

Money, evidently, goes missing. One part of the problem is a lack of scrutiny; governments need to be held to account by their citizens and companies by their shareholders. For this kind of scrutiny to take place, transparency in operations and disclosure of payments is important. It is for this reason we should all welcome the UK government’s recent announcement.

The Observer newspaper reported yesterday that George Osborne and Vince Cable are working together towards EU legislation requiring all extractive industry companies to disclose any payments made to resource rich governments. It is hoped this legislation will cover all companies, European or otherwise, listed on European markets. Osborne made this case for decisive legislative action before a meeting of G20 finance ministers in Paris on Saturday.

The movement to strengthen governance in extractive industries has seen a succession of victories in recent months. The inclusion of disclosure provisions in the Dodd-Frank financial reform legislation, passed in July 2010, requires all extractive companies to report all payments made to governments in each country they operate in. Furthermore this extends not just to U.S. companies but to any company publicly listed in the States (for example BP). More recently in December it was announced the EU will seek to implement equivalent legislation by the end of 2011. At the end of January this year Nicholas Sarkozy, in response to an open letter from Bono of the ONE Campaign, pledged French leadership and support for this process. Furthermore, Sarkozy has put the future of Africa at the heart of his aims for France’s chairmanship of the G20 this year.

These breakthroughs come on the back of work by initiatives such as the Extractive Industries Transparency Initiative (EITI), which has led the implementation of voluntary country-by-country disclosure, and the Publish What You Pay coalition, a network of civil society organisations, who have lobbied G20 governments to take action.

However there is work yet to do. Many companies operating in Africa will remain uncovered by these reforms. Canada’s parliament recently rejected by a narrow margin a Bill that would have extended similar provisions to the many important (and many smaller) mining companies listed in Toronto. Furthermore an important minority of the new players in the extractives sector, particularly those operating in Africa, originate from outside the OECD. Other G20 nations such as Brazil (home to Vale, the world’s second largest mining company) plus China and India should be encouraged to take similar steps (Hong Kong already has a form of these rules in place).

The international community has a vital role to play, to establish global governance around extraction companies and flows of funds out of resource-rich countries. Such actions can also bolster the efforts for reform from within these resource-rich countries.

The recent announcements create real momentum to level the global playing field in transparency and can galvanise the G20 nations around a clear development agenda. This agenda may not be built on aid flows or debt relief, but may prove to be more important for the future of Africa. Transparency is a good place to start but would be the wrong place to stop.

Jim Cust is a PhD student in Economics at the University of Oxford. He works on the Natural Resource Charter:

Outside the sample

Extrapolation can be a tricky business

Reflecting on the recent news that Afghanistan is sitting on a large hunk of mineral wealth, Paul Collier warns of the many pitfalls that the country must avoid if it is to benefit from the new find. It’s a good read for those interested in good, natural resource policy. One thing bothered me though: Afghanistan is in central Asia, but all but one of Collier’s examples are from sub-Saharan Africa (brief excerpts below), the sole exception being Malaysia:

  1. “Consider how in Sierra Leone diamonds enabled the Revolutionary United Front to evolve from a protest movement into a lethal diamonds racket.”
  2. “In eastern Congo, $1 billion in gold is being extracted and exported annually, yet because the government lacks control over the territory the revenues for the national Treasury last year were a mere $37,000.”
  3. “Nigeria is a prime example of what happens when the local population pays the price for extraction without reaping the rewards.”
  4. “To avoid such fallout, Afghanistan should follow the example of Botswana, which has used diamond revenues to build roads, power lines and schools, raising the economic standard of the country from very poor to upper-middle income.”
  5. “Malaysia, likewise, has used revenues from tin and oil to diversify its economy and create jobs — building, for example, a manufactured exports zone in the impoverished region of Penang.”
  6. “Here a cautionary example is Zambia, where a copper boom has been a bonanza for Chinese companies, but copper exports of around $3 billion a year generate a mere $100 million in tax revenue for Zambians.”

There are some fundamental things that all natural resource-based economies need to get right, and Collier touches upon them here, but perhaps these fundamentals interact in interesting ways with geographically-correlated attributes. Most of Collier’s academic work on the subject has been limited to Africa, so there is a little bit of extrapolation going on here.

Places like Sierra Leone and Nigeria offer powerful examples, but perhaps we can reap even greater insight by looking at Afghanistan’s similarly-endowed neighbors like Uzbekistan and Turkmenistan, or perhaps nearby Kazakhstan?