Taxing Resources, funding development

Africa is a rich continent. In 2010, the value of natural resources extracted on the African continent was $788 per capita. In comparison, development aid only contributed $30 to the income of the average African.

At the same time, the median income of an African is only $945, suggesting that a large part of the continent’s resource wealth isn’t benefiting the majority of the population. A good example is Equatorial Guinea, a country that has a GDP of $17.7 billion at a population of just 760,000 people, almost exclusively fuelled by oil windfalls. Despite this, 77 percent of the population lives below the national poverty line.

In fact, Africa is estimated to lose between 40 and 80 billion dollars per year to illicit financial flows, e.g. tax evasion, alone. Much of this money probably originates in the resource sector.

For resource rich African countries, answering the question of how to profit more from their natural resources is probably the political challenge with the highest stakes of our time.

The importance of the resource sector for the economic development of Africa will continue to grow in the coming years, thanks to rising prices and new discoveries. “We had a series of major oil and natural gas finds in Africa,” Todd Moss, a senior fellow at the Center for Global Development tells Contributoria. “Basically everybody with a coast has had a discovery.”

The OECD, the African Development Bank and the United Nations Development Programme agree. “With a comparatively high price level remaining for some time and significant expansion of production over the next years,” the organizations write in the 2013 edition of the African Economic Outlook, “Africa faces a window of opportunity to create economic structures that can provide employment and income for all on the back of its resource wealth.”

Read the rest on Contributoria!

Pickaxes into plowshares? Two visions for development in the DR Congo

The Democratic Republic of the Congo is a rich land – in theory, at least. Below its soil lie some of the world’s largest reserves of copper, cobalt, tin, tantalum and considerable amounts of gold and diamonds. It is the type of wealth that is measured in billions of Dollars and which has fuelled the industrial revolution in Europe and beyond.

In practice, the DR Congo is poor. Its population of 66 million produces only an average of 230 Dollars per year and person in goods and services, making it literally the poorest country in the world, if measured by that metric.

Little wonder that many people want to change this unfortunate state of affairs. And little wonder, too, that most of these people are looking at the wealth beneath their feet for a solution. The Congolese government, its people, the international community, international and local business – they all have high hopes for the mining sector. For them, mining, and especially large scale operations, are the ticket to a brighter future for the Congo and its people, not to speak of the profits involved.

But mining brings with it a whole host of problems. Apart from obvious issues with environmental degradation, the incredible amounts of money involved with mining projects have so far arguably done more bad than good for the Congo and despite being a major branch of the Congolese economy since colonial times, most Congolese have yet to profit from the riches that are ripped from their soil every day. Can mining really hold its promises for the development of the DR Congo, or are there alternative, better ways for the government, donors and businesses to invest in a brighter future for the Congolese people?

Read the rest on Contributoria.

Ivory Coast’s cocoa blues

Ivory Coast dominates the market for cocoa beans with a world market share of over 30 percent. But the trees and farmers producing the beans are ageing and the crop is seen as unprofitable by young Ivorians. Alternatives like rubber or palm oil vie with cocoa for the precious fertile land and are in many ways advantageous for farmers. Industry and government initiatives to shore up cocoa production will probably take decades to show their full effects. One way or the other, the Ivorian cocoa sector will undergo a tremendous transformation in the coming years, with dramatic consequences for international business, the Ivorian government and farming communities.

Read the rest on Contributoria!

Can gold save Sudan’s economy (and regime)?

The Sudan has many problems, among them several civil wars and a host of unstable neighbours. But the biggest issue, especially from the perspective of the authoritarian government under president Omar al Bashir, may be the tanking economy.

The trouble began in earnest when South Sudan reached its independence, taking a large share of Sudan’s oil reserves with it. Later, the countries almost went into a full-blown war over the transport fees that Sudan levies on the sole pipeline leading out of the South Sudanese oil fields and Khartoum had to reduce these rates as a result.

The consequences were bitter for Sudan: the country lost more than half of its government income and two-thirds of its foreign exchange earning exports. This contributed to a massive inflation of over 30 percent since 2012. The dire fiscal situation led to deep cuts in government spending, especially concerning fuel subsidies. As a result, the country experienced the biggest anti-regime protests since the last coup d’État more than twenty years ago.

Trying to turn the situation around, the Sudanese government started to look at its considerable and gravely underdeveloped gold reserves. Encouraged by rising gold prices on the world market after the financial crisis in 2008, Khartoum decided to make gold the new oil.

This hope that gold can save the Sudanese economy and by extension the regime in Khartoum still persists:

The government is now consulting with international companies and contractors in an attempt to fill the hole left by lost oil revenues with gold exports.

Sudan’s Ministry of Minerals, which oversees all mining activity and licensing, has contracted BGS International, a company spun-off from the British Geological Survey, to help restructure its own state surveying organisation, the Geological Research Authority of Sudan (GRAS). […]

Gold is already rising in prominence in Sudan’s economic profile. In 2008 the sector represented just 1 percent of exports with a value of $112m, but this year gold will total more than $2bn in earnings, or over 40 percent of all exports. By contrast the value of oil exports has fallen to just more than 20 percent of its 2008 peak. [Gold: a glimmer of hope for Sudan’s economy – This is Africa]

But, especially compared to oil, gold has several disadvantages.

Artisanal mining and smuggling

As This is Africa rightly points out in the article linked above, a large part of the gold mining going on in Sudan happens in the informal, artisanal sector. Small-scale mining activities are hard to regulate and control, especially because many of them are located in areas which are contested between by armed groups.

As a result, the government has only limited direct income from the production and trade of the precious metal. A drive to bring more foreign investors and large-scale, formal mining operators into the country could change that, but this will take years. Meanwhile, hundreds of millions of dollars worth of gold are produced without any government interaction and much of this is probably exported informally as well.

What is gold worth, anyway?

Even if the government is able to channel a substantial part of the gold revenues into official channels, there remains the question how big the resulting pie will be that the regime hopes to distribute to quell dissent and strengthen its support base.

At the time of South Sudan’s independence, the price of gold was near it’s all-time high of 1,900 Dollars per troy ounce. It reached these record heights as a result of the financial crisis of 2008, when private and institutional investors started looking at gold as an alternative to the volatile stocks market. Gold continued to trade at record levels throughout 2012, but went into free fall in 2013, losing more than 35 percent of its value. Today, a troy ounce trades at slightly above 1,200 Dollars.

This poses two problems for Sudan: Firstly, international mining companies are already looking at cost-cutting measures. Mines that were opened or expanded in recent years are getting closed or are experiencing lay-offs in Ghana and Burkina Faso. A continued fall of world market prices for gold will greatly reduce the likelihood that mining companies will invest in Sudan. Secondly, with gold now representing 40 percent of Sudan’s export value, the direct economic impact of falling gold prices for the country is immense.

Out of the frying pan into the fire

With betting on gold after its oil revenues plummeted, the regime in Khartoum may have made a big mistake. Almost certainly, it will not be able to realise the hopes it had for expanding the business with the precious metal in the near term. With oil production in South Sudan (and the corresponding transport fees) threatened by burgeoning civil war there, president Omar al Bashir will likely be pressured to enact further austerity measures. If the pattern of the last year holds, this will lead to further protests, seriously testing his hold on power.

Agriculture in Africa: Great Hopes and Great Challanges

Agriculture in Africa may prove to be pivotal in the continent’s development, much more so than oil, gas or minerals. It has the potential to transform Africa’s role in the international economy and its internal political cohesion. But this potential comes with huge challenges, because before agriculture can be transformative for African societies and economies, it needs to be transformed itself.

“Agriculture is sexy”, at least according to Bruno Wenn, managing director of German financial institution Deutsche Investitions- und Entwicklungsgesellschaft, speaking at the International Economic Forum on Africa in Paris in October. Practically all international organisations tend to agree with that statement, although it is usually framed in more technical terms.

Speaking at the same event, Carlos Lopes, executive secretary of the United Nations Economic Commission for Africa, nicely summed up the reason for everybody’s hopes for the African agricultural sector: “We have the largest reserves of arable land in the world, 60 percent, and the lowest productivity where it is already used. That results in an enormous potential to feed the world.”

A Moral Imperative and Good Business

Feeding the world is high on the international agenda because while we produce enough food for everybody at the moment — hunger is a problem of distribution, not production — this could change over the coming decades. The world population will grow by another two billion people until 2050 and with increasing wealth in countries like China and India, many more people will demand resource intensive foods like meat. While there is enormous potential in reducing food waste, increasing production will likely be necessary to ensure continuous abundance.

This makes developing the agricultural sector in Africa both a moral imperative and lucrative business. Additionally, increasing food production in Africa would have many political advantages for the continent. It would cut dependence from outside powers like the United States for basic foodstuffs, allow for a strengthening of regional trade networks and secure political stability. “Bread riots” due to high prices and governments’ inability to continuously subsidize imported grains are a common occurrence in many countries across the continent.

Apart from foodstuffs, there is also a great global appetite for agricultural commodities. Cut flowers for the European market, cocoa and coffee for the world’s café’s and cotton from West Africa all promise earnings for governments and businesses on the scale of oil and gold.

The development community is also pushing for the transformation of the agricultural sector. Africa’s agriculture is dominated by smallholders and increasing their income potential could contribute enormously to lifting broad sections of African societies out of poverty. Lastly, while economic reserves of “hard” commodities like oil, gas and gold are limited to relatively few African countries, agriculture is possible across the continent and will still be when all current oil fields have long been depleted.

Challenges Not Taken Seriously

But the transformation of the agricultural sector is also fraught with challenges that make the common “resource curse” look like a minor policy issue. And while problems associated with the extraction of hard commodities are commonly accepted and high on the international agenda by now, many issues of the agricultural sector are still treated like second-class citizens in the realm of policy making.

The raw potential of agriculture in Africa is also one of its main weaknesses. The reason for the continent’s low agricultural productivity are decades of neglect and mismanagement, reaching back to colonial times. The necessary infrastructure to develop the sector — roads, storing facilities and ports — are mostly in a desolate condition and rebuilding it will take much more investment and time than constructing that one pipeline or rail track to exploit the latest oil or mineral deposit, due to the decentralized nature of agricultural production.

For example, food worth $4 Billion is wasted in Africa annually due to insufficient processing, storage and infrastructure. This corresponds to enough food to feed 48 Million people.

African states will also need to figure out their individual agricultural strategy. Some, like Côte d’Ivoire, are already major players in producing commodities like cocoa. All countries will have to balance the temptation of producing hard-currency-earning export products with the necessity of providing basic food security for their population. A possible solution to make this policy decision less of a dilemma would be a tighter regional integration of agricultural trade and production, but this process has just started and will probably need decades to come to fruition.

Governments will also need to make policy decision about their place in global agricultural value chains. As little as 40 per cent of the world market price of cocoa makes it into the hands of cocoa farmers, for example, severely limiting the potential profit for countries exporting the raw product. Similarly to recent “local beneficiation” legislation introduced by Botswana and South Africa for hard commodities, developing policies to capture a greater share of value added on “soft” agricultural commodities needs to reside high on Africa’s political agenda to enable a true transformation of the sector.

Betting on the production of soft commodities for export also reintroduces the question of economic independence into the debate. As Bruno Wenn pointed out in Paris: “Whenever we in Europe decide to change regulations [on agricultural production] due to health policies, it might be a nightmare for small farmers in Africa to comply.”

This can turn out to be a real problem, especially because protectionism is well established in international agricultural politics. If the European Union for example decides that it needs to protect its domestic production of fruits from cheaper Kenyan exports, all it potentially has to do is change some of its regulations in a way it knows smallholders in Africa will have a hard time complying with. This type of behaviour is certainly not without precedent and presents an enormous risk for producers.

Another sensitive issue that has already made into the reports of several large advocacy organizations is the practice of land-grabbing. Commonly only discussed in the context of foreign investors buying large tracts of land in Africa for rock-bottom prices, there are also a few famous cases of African elites themselves developing a taste for land ownership. The Kenyatta family in Kenya for example is probably the largest landholder in the country and many open questions remain about the legality of these acquisitions. With prices for virtually all agricultural products set to rise on the world market, we can expect more investors — from Africa and abroad — to develop a taste for land ownership. And because large-scale farming is often associated with increased productivity, although there is no inherent causation in reality — governments and international institutions might be happy to support this process from a policy perspective.

African societies will need to work out for themselves how to deal with this dynamic. In the context of still unclear ownership, pervasive corruption, high level of distrust towards authorities and the emotional component that connects land issues and identity, this is certainly not a trivial task.

Finally, much of the “green revolution” that has made transforming agriculture in India and other developing countries possible over the last decades relies on extensive use of fossil fuels for fertilizing, intensive use of soil and water resources and formerly pristine habitats as well as genetically modified organism. Everything on this list presents serious environmental concerns and using the same methods to develop the agricultural sector in Africa would have profound consequences on local ecosystems.

Charting a New Course

It is about time for African governments, societies and businesses to solve these issues and in some respects, progress has already been made: large sums are invested into infrastructure by those countries who have the money to do so; Countries like Kenya, Ethiopia, Morocco and South Africa are already reaping the literal fruits of successfully positioning themselves as extensions of European agricultural markets; Mobile technology delivers the foundation for an ongoing revolution of financing small-scale farming and homegrown and international banks start to take investing in the sector seriously.

Too much of the debate is still fragmented, though. Issues of finance, poverty reduction and environmental concerns are still treated as different subjects by governments, NGOs and investors. But agriculture, much more than any other human activity, connects social, economic and environmental issues and to successfully transform the African agricultural sector all actors will need to recognize this.

A critical look at Germany’s resource strategy from Africa’s perspective

Germany is not exactly the most prolific investor in Africa’s resource sector. But as an export oriented economy with a solid reputation for world-class mechanical engineering, engine construction and specialised tooling, a considerable share of Africa’s mineral exports wind up in Germany somewhere along their value chain. Additionally, Germany has considerable influence on European Union policy, making the country an important actor in the use of Africa’s resources.

While Germany was a mining country once, today the only “hard” commodity produced on any scale is coal (and even this fuel is imported to satisfy demand). Especially Germany’s once abundant mineral reserves are completely exhausted. Especially over the last years, with world market prices sky high and exporters like China artificially curbing supply, this has resulted in demands from Germany’s industry for political support for securing access to essential mineral resources.

The government’s answer is its 2010 Resource Strategy (pdf, German), which was designed with considerable input from industry interest groups. As official policy from one of the world’s most powerful governments, it is worth looking at possible consequences for resource politics in Africa.

Government supported investment and trade

Two core objectives of the strategy are to diversify Germany’s resource sources and secure favourable trade agreements. While the focus on diversification is positive for Africa’s economies, as Germany has traditionally stronger links to resource producers in Latin America, the emphasis on trade is not. Germany has a long history of pushing the free trade agenda and supports this policy strongly on EU level. Free Trade Agreements (FTA) have been struck with many developing countries on a bilateral level and the German government has also used organisations like the WTO to further this goal.

Of course different opinions exist on the consequences of FTA’s, but I’m firmly in the camp that sees little benefit for developing countries. To often, FTA’s lock countries into unfavourable arrangements with Western companies. Especially clauses strengthening investor’s rights, giving them immunity from changes of law that would impact their investment negatively, often undermine efforts of developing countries to shape their resource sectors to be more profitable and less environmentally damaging. African countries should be very careful when entering into these agreements, ideally avoiding them completely. FTA’s could also limit African country’s efforts to demand a higher local content.

Lip service to human rights and environmental protection

The strategy states that

It is one of [the strategy’s] main goals to further the responsible and transparent handling of resources (Good Governance) and the sustainable use of resources while securing human rights and strengthening internationally accepted social and ecological standards. – p 22

This dedication to securing human rights in the resource sector is probably more lip service than anything else. As much was made clear in a discussion with government officials about this topic during a workshop on the German resource strategy. The government representative made it clear that human rights, environmental protection and corruption are “within the domain of the host country” and not the responsibility of the investing country (Germany).

This low level of dedication is deplorable, because Germany has considerable power to positively influence whole value chains, if it chooses to do so. A good example is the development of a certification system for “conflict minerals” from the DR Congo under the leadership of Germany’s ministry for economic corporation. Here Germany has successfully developed a model that could in theory guarantee social and ecological standards in mineral production (while of course being ineffective in its stated purpose – undermining the financing armed groups). Together with strong EU regulations, this could fundamentally change industry practice in a positive way, but so far Germany doesn’t seem to be interested in playing a constructive role. An interesting test will be the government’s position to the EU counterpart of the Dodd-Frank act regulating the import of conflict minerals. More on this in a later post.

It should also be noted that the German Government didn’t go out of its way to get input from African (or any other) resource exporting countries or civil society. The only interest group consistently involved in the process was the German industry. This is bad for virtually everybody involved. African governments weren’t able to give input on how to design the policy to make it favourable to them, increasing the likelihood that it would actually pay of for German importers; African and German civil society weren’t able to raise social or environmental concerns, increasing possible harm done to African countries in the long run and the German government lost out on the possibility to offset its limited direct influence on African resource markets through innovative policy making.

A civil society alternative

As a reaction to the content and process of the resource strategy, civil society in Germany has asked the Government to review the policy. Its position paper (pdf, German) lists three main demands:

1. Lower consumption of raw materials

2. Human rights and due diligence procedures  for companies

3. Democratize resource policy

I don’t want to go into too much detail on the content of these demands, but I think that their adoption would be in the interest of African countries as well. Reduced resource use in Western countries would decrease environmental damages in exporting countries, without necessarily limiting long-term earnings from resources. Strong due diligence laws and more transparency in the shaping of resource politics in some of the world’s leading consumer markets would have tremendous positive effects on issues like corruption and human rights violations linked to mining. African governments and civil society should engage intensively with policies like the German resource strategy, because they can have tremendous repercussions on the other side of the world – it depends on their design, if these repercussions end up being good or bad for the people facing them.

African Development Bank pushes for shale gas development

A report (pdf) launched by the African development bank finds substantial potential for natural gas extraction from shale formations in a number of African countries:

Several African countries have potentially viable shale gas deposits, which, if developed, could lead to lower gas prices, increased consumption of natural gas, reduced greenhouse gas emissions from power generation and substantial economic benefits to producer countries, finds a report launched today by the African Development Bank (AfDB). – Press release

But the report also cautions the countries analysed, including Algeria, Libya, Tunisia, Morocco, Mauritania, South Africa and the Western Sahara that shale gas exploitation is fraught with environmental dangers. From the executive summary:

The production of shale gas by fracking involves a number of environmental risks, and these continue to be of concern to communities near proposed well sites and groups involved with environmental protection. Four key issues have been identified that governments need to take into account in their decision making and regulations for the sector.
I. The large use of water required for fracking – Each well requires a large amount f water (several thousands of cubic meters, which has to be either taken from local water sources or trucked in. […]
II. Water contamination – The chemicals added to the fracturing fluid may escape and pollute water supplies. This can happen at the surface, where better containment can be mandated, or underground through leaks into aquifers, […]

With all of the countries assessed in the report being largely arid (South Africa’s largest shale gas potential is in the Karoo desert) and already confronted with water crises, this is a major issue.

III. Seismic events […]
IV. Venting and flaring of gas – […] The global warming potential of vented gas is so high that allowing a substantial fraction of the produced gas to be vented would raise the total life-cycle emissions of the gas toward those of coal, […]
The AfDB advises prospective producers to use available regulatory tools to minimize environmental risks. Environmental organisations argue that until now the potential environmental harm that shale gas exploitation could cause is not understood very well and that countries should refrain from tapping their reserves of this unconventional resource because of this. But with the report attesting several African countries potential reserves on “game-changer” scale, appetites will likely overcome caution.

What is your take on the report? What weights greater – environmental concerns or potential profits?

Tanzania plans uranium mines

Several African countries are looking to enter the ranks of uranium producing countries. Tanzania and Malawi are probably furthest along this road, with Niger, South Africa, Central African Republic and the DR Congo all among current or past producers.

For those who want a quick introduction into Tanzanian plans to develop its uranium deposits, this article by Deutsche Welle provides some of the most important facts:

Not far from Tanzania’s capital of Dodoma is the rural area of Bahi. The small village in the heart of the country on Africa’s coast, though, is sitting on a proverbial “gold mine,” one that has raised eyebrows at both the national and international levels: uranium. Tanzania has been carrying out exploratory drilling operations for a number of years so that it might soon begin the real business of uranium mining. People who live in Bahia, however, have reacted to the drilling with skepticism. […]

 

Koczy recalled the risks of nuclear energy, pointing to the nuclear reactor catastrophes in Chernobyl and Fukushima. But she also said there were potential safety risks in Tanzania, which are high during the mining of radioactive ore. Uranium’s utility for Tanzania itself is very limited, Koczy said. The German parliamentarian criticized the fact that the large majority of mining licenses have gone to foreign firms, with the public having no oversight as to the profits secured by these companies.

Tanzanian Minister of Energy and Minerals Sospeter Muhongo views the future brightly, though. For workers, safety risks will not be an issue, he said. […]

 

In southern Tanzania, the uranium is thick and close to the earth’s surface. That brings yet another danger: A gust of wind can blow uranium dust from surface mining operations and into the surrounding landscape.

For CESOPE director Lyamunda and his organization further north in Bahi, the issue is clear: The best thing would be for Tanzania to desist entirely from mining uranium. His group is not alone in that opinion. At a conference in Tanzania that took place in early October, his call was supported by the International Physicians for the Prevention of Nuclear War and the Germany-based Rosa Luxemburg Foundation.

The Tanzanian project is also one of the focal points of the documentary “Atomic Africa“, which is worth seeing in full if you are interested in the topic. What do you think, should Tanzania and other African countries develop their uranium deposits and nuclear energy plants despite the great environmental and health risks involved?

African Arguments: Converting resource wealth to economic development: what role for ‘local content’?

This article is based on research and interviews conducted at the International Economic Forum on Africa in Paris on 7th October and was published in full on the blog “African Arguments” of the Royal African Society.

Few topics were debated as intensively at the recent International Economic Forum on Africa in Paris as the question of local content in the oil and mining industry. Local content is commonly understood as the share of materials, parts, etc. for the production of a given product that has been produced locally (instead of imported.)

For many African governments, it is the holy grail of economic policy: by finding ways to make investors procure more services, labour and materials from local businesses, the reasoning goes, their countries will benefit from resource endowments multiple times. The investors in turn seem to have accepted the concept of local content as important, but are mainly interested in limiting its potentially negative effects on their line of business.

Mozambican vice-minister of mineral resources Abdul Razak Noormahomed set the tone for the debate when he declared: “We want to increase the local content, because we want as much as possible small and medium level companies to be part of the business, providing goods and services to the big companies. And we are asking the support not only of the international organisations, but also from the companies in order to support our small and medium level enterprises.” Noormahomed went on to underline the need for technical and financial capacity building as areas where international investors are expected to support Mozambican businesses.

Read the rest on African Arguments!