Mining boom - a gain for Africa?

The current mining boom sweeping through Africa is bringing in millions of dollars in investment from a range of funding sources. But, as Charles Abugre and Thomas Akabzaa write, the gains of this investment for African economies and mining communities are suspect. Without more attention given to regulating the social and environmental impacts, and ensuring clear economic gains, the mining boom could even worsen Africa's condition in the long term.

by Charles Abugre and Thomas Akabzaa

THE 1990s have marked a major departure from the recent past in the African mining sector. State controls and ownership in the sector have been dismantled substantially and an investor-friendly environment put in place. By the close of 1995, at least 35 African countries had radically revised their mining codes, redefining the rights and obligations of investors, enhancing the incentive framework, and deregulating and privatising the sector. Enhanced incentives include reduction in taxation levels, liberal import-tax exemptions for equipment, liberal immigration laws for expatriates and revamping geological data. As a result of these measures, exploration in West Africa, for example, doubled between 1993-95, and several new mines have been opened.

Companies active in exploration and mine operations employ any variety of funding instruments to finance their operations. Some companies have raised funds internally (own-funding), others by rights issues, and still others through bank loans, often with the participation of the International Finance Corporation (IFC) (loan and equity) and the Multilateral Investment Guarantee Agency (MIGA) (providing political risk insurance). The Lome Convention has also financed exploration campaigns (e.g., the discovery of Mali's Sadiola gold deposits) and geological and geophysical surveys (e.g., in Botswana, Namibia and Burkina Faso). Several US companies have financed their operations through loans from the Overseas Private Investment Corporation (OPIC), which provides, among others, political risk insurance.

There is also a growing use of international equity markets, mutual funds, pension funds, and gold loans supported by a variety of forward selling and other hedging techniques. In 1995, GT of Britain launched an African Mutual Fund which will invest in Ashanti Pioneer Goldfields in Ghana.

The international equity capital market, in particular, is becoming a major source of foreign direct investment (FDI) flows to the African mining industry. About $8.4 billion has been raised from these markets since the mid-1980s. Southern and West Africa are the biggest destinations of these flows.

Tony Frizelle, chairman of Mutual Resources (VSE), believes that Ghana, for instance, is set to attract external investment in the gold sector of up to $1 billion by the close of the 1990s, in new mine development and expansion. Indeed, gold (and, to some extent, diamonds) is experiencing the greatest rush, due largely to the development of cheaper methods (especially surface mining and processing technology). A gold mine also takes less time to reach production stage than, for example, a copper mine and is much less dependent on the quality of the transport infrastructure than most base minerals.

Attracting investment

Companies at the exploration stage, especially juniors, have far more difficulty attracting investment capital compared to the senior mining companies (majors). Similarly, projects at mine development or expansion stages attract less capital, understandably due to the high risks associated with the exploration stage. Consequently, juniors tend to target older abandoned properties, waste dumps or already known occurrences. They are usually attracted into areas being worked by artisanal miners or semi-mechanised ones operated by local companies, hence the tendency for frequent collision with indigenous small miners.

Most majors already established in Africa, for example, Rio Tinto (formerly RTZ), Anglo-American, Lonrho, DeBeers etc., on the other hand, have relatively less difficulty mobilising funds.

Major regional shifts have occurred in exploration spending over the last five years. Latin America, Africa and the Pacific have been surging in terms of the total receipt of worldwide exploration expenditure. Africa's share of worldwide exploration expenditure increased from 5% by the close of the century. A combination of more mature exploration environments (rather than emerging ones) and government policies is responsible for the shift of exploration dollars to these regions.

How has Africa gained from this increase in investment? According to the Economic Commission for Africa (ECA) of the United Nations, 'the African mining sector is still not making a decisive contribution to the social and economic development of Africans. The sector needs re-shaping to ensure that it: i) supplies essential needs to the people, ii) sustains other sectors of the economy, iii) intensifies regional integration, iv) consolidates the financial position of the producer country.'

Gains are suspect

Indeed, besides the foreign exchange objective, the contribution of mining to economic development in Africa, so far, has been suspect. For example, export earnings from mining have overtaken cocoa as the main export earner in Ghana, rising from $107.9 million in 1992 to $682.2 million in 1995. However, the effect on the current account of the balance of payments (BOP) is less clear. Imports of both capital and consumer goods enjoying tax and tariff concessions ballooned, leading ultimately to a deterioration of the current account deficit in 1995 and 1996.

Similarly, the bulk of the investment in the mining sector goes to metallic and precious minerals. There is very limited investment in the non-metallic ores such as lime, phosphate, clay products and salt, all of which require relatively little capital to process but which have the greatest horizontal linkages to, and a higher multiplier effect on, the domestic industry.

What role for FDI?

The role of FDI in general, and FDI in the mining sector in particular, in promoting development (employment and per capita income growth) and macro-economic stability (contributing positively to the BOP, gross savings, and interest and exchange rate stability) remains an area of contention. It is worth questioning the rationality of a single-minded FDI-led development strategy, especially when it is held up as the answer to the low domestic savings and investment rates experienced by most African countries.

The effect on technology diffusion is equally suspect. Mining operations are predominantly surface operations, requiring heavy earth- moving equipment and minimum innovative technology. Namdeb, the Namibian Diamond Company with significant DeBeers interest, owns the largest fleet of earth-moving equipment in the whole of the Southern hemisphere. Processing is minor, and where, as in Zimbabwe or Ghana, some intermediate technology potentially useful for small- and medium- scale miners has been developed for secondary processing purposes, its distribution and assimilation within the mining community is limited. For example, the technology behind a diesel-powered wet processing machine for alluvial gold ores developed in Zimbabwe and exported to Ghana is yet to diffuse to the small-scale mining community.

The diffusion of other technological innovations has been severely constrained by patent rules and capital shortage barriers. Most of the ores are exported in raw forms, denying African countries both value-added (derived from processing) gains and technology.

The contribution of mining to employment generation is equally mixed, and mostly marginal. Whilst average real wages in mines, as in other TNC operations, are often higher than the national average, the impact on overall unemployment is limited compared to other sectors (industry, services and agriculture). This is largely due to the capital-intensive nature of the mining operations. For example, in spite of the massive injection of capital into the mining sector in Ghana, it employs no more than 20,000 workers (including small and artisanal miners) or only 5% of total formal-sector employment. Some researchers argue that the net impact on employment may in fact be negative if one factored in the massive displacement of small miners to marginal sites. Also important is the abandonment of agriculture as a source of livelihood in favour of small-scale mining.

Retrenchment, a policy almost uniformly opted for by privatised mines, erodes the employment effect of mining even further. For example, in spite of no obvious strain on profitability, Namdeb plans to retrench 40% of its workers within five years. The company further plans to divest itself of the important social services it used to provide to the community, including the running of the mining town. Such actions are commonplace throughout the continent.

The greatest concern over the mining rush is in the areas of social development and environment management.

Tensions with communities

The tensions arise from several factors: the eviction of communities and small mines from concessions and their relocation to marginal sites, with inadequate compensation and, in some cases, without resort to the due course of law; brutal treatment by mine security of 'encroachers'; land- use and ownership conflicts; socio-economic disruptions; and a minimalist approach by mining companies to the provision of social services to the resettled communities or neighbours. There have been reports of racist attitudes of South African miners, in particular, operating in Ghana. When conflicts arise, the public perception is that they will ultimately be resolved in the interest of the investor, thereby generating mistrust between citizens and governments. The struggle over environmental resources and social justice tends to intertwine.

Many governments, supported by multilateral and bilateral agencies, have developed guidelines to regulate these practices, which tend to require mining companies to prepare Environmental Impact Assessments (EIA) in the case of new mines and Environment Management Plans (EMP) for old mines. However, these assessments and plans are often not enforced for several reasons: few national governments (let alone local authorities) have the capacity to enforce them.

Capacity problems include inadequate or non-existent independent, baseline data which can serve as benchmarks to enforce standards; technology and human resource problems; and the absence of a legal framework, and the enforcement of same, which adequately provides for the rights of communities. Many governments also consciously relax the enforcement of regulations in a bid to strengthen their attractive positions for investors. Chambers of Mines, the private sector lobbies, have grown in immense influence whilst public lobbies or regulatory agencies are weak or non-existent.

Abuse of impact assessments

Social impacts are the most abused. More often than not, communities are not involved during the baseline studies, nor do they have the capacity to conduct such studies independently. Consequently, the companies end up prescribing compensation and relocation schemes which usually do not take sufficient account of socio-cultural circumstances.

Many communities lack the capacity to negotiate. Communities may not be well organised around a leader or a civic movement and are therefore often unable to collectively negotiate. They are even weaker negotiating as individual families. Some companies exploit this weakness by insisting on negotiating with individuals who often end up getting a raw deal. This is usually a route to future conflicts. These tensions and conflicts are beginning to litter the African mining landscape.

Other social problems arising from mining operations are numerous and well documented. They include the pollution of groundwater, soils and air with little remedial measures or compensation, poorly planned and financed resettlement schemes, and the loss of livelihood from farming and wildlife harvesting. The use of poisonous chemicals (such as mercury and cyanide) banned in developed countries remains prevalent in many parts of Africa, with the chemical either being used directly in large mines or illegally imported and sold to small miners by companies that service large mines.

Some companies incite hostility from surrounding communities by the militaristic manner in which their security personnel police concessions. 'Encroachers' are frequently treated with maximum cruelty. These intimidating acts sometimes succeed in deterring communities from investigating genuine suspicions of pollution spillovers and having their grievances addressed.

Few mining companies adopt programmes that take anticipatory actions to minimise the health hazards derived directly (e.g., pollution-related) and indirectly (e.g., the pull effects of the spread of STDs, HIV/AIDS) from mining activities. Consequently, mining centres are also areas of concentration of STDs, HIV/AIDS as well as diseases associated with water and air pollution.

Unfortunately, it is rare to find national mining and investment laws that pay adequate attention to the rights of communities nor other measures that seek to enforce the corporate social responsibility of mining companies. Consequently, some company managements make no effort at voluntarily complying with social and environmental good practices. Especially when the cost of buying off officials is relatively inexpensive.

Social and environmental accountability can be instilled in several ways: voluntary compliance (with a code of conduct), legal and official regulation, public pressure or a combination of these. Companies organised under various lobbies prefer voluntary compliance, arguing that this is more effective because it allows changes to take place without affecting profitability (e.g., by employing more socially and environmentally sensitive technology). Companies argue that being green or socially sensitive enhances a company's image and buys for it opportunities. Bureaucratic controls, on the other hand, it is argued, are difficult to enforce, wasteful and distorting.

Environmental campaigners have done a lot to expose the limits of voluntary compliance/restraint as largely 'corporate makeovers', serving a public relations objective more effectively than actual practice. They argue that image is not always important for a company's balance sheet, and that companies are constantly altering and making their rhetoric more sophisticated. Profits - not environmental standards or community development - are a stronger motive to reform operations.

This tendency is also seen in corporate attitudes towards labour. Only by setting down basic standards for companies to adhere to, coupled with regulation ensuring the standards' enforcement, will labour rights be upheld. Legislation should clearly lay down the cost of non-compliance.

Whilst legally enforceable codes of conduct are indispensable, often they are inadequate. Laws change more slowly than businesses in a dynamic and competitive world. Laws are enforced by officials whose interests cannot always be expected to be in consonance with the public's and who, in many countries, are too few and too poorly resourced to effectively regulate practices. For a regulatory framework to function requires, among others, a conscious public opinion and public pressure, organised countervailing interest groups, and mechanisms for arbitration.

Suggested actions and policies

The following suggestions combine the need for better regulation with the need to support communities, labour and local governments in mining areas to strengthen them and to exert pressure and to lobby. Among others:

  • Investment Codes should be formulated to appropriately reflect the importance of corporate accountability to communities and responsibilities to the environment. A polluter- pays principle, extended to social costs, should be at the centre of Investment Codes. Social harmony should be correctly appreciated as a valuable input into sustaining investor interest.

  • Social Impact Assessment Indicators should be developed to monitor social effects over the entire cycle of the mining project. The ADB Guidelines for Mining Projects offer a useful beginning. The formulation of Social Impact Assessments should be done with the participation of stake- holders, i.e., labour, local government, communities and affected persons.

  • The guidelines for EIAs and EMPs should explicitly require effective community involvement in baseline studies and the adoption of study methodologies which are participatory and easy to digest.

  • Environmental Protection Agencies, which often experience difficulties dealing with the state and the mining lobby, require the capacity to generate independent baseline data, and to provide technical and organisational support to affected communities.

  • In some cases, tribunals are necessary to handle persistent conflicts between small/medium miners on the one hand and large companies on the other. Whatever form it takes, the establishment of such a body could be a reassuring development for both large and small miners.

  • It should be a requirement that the mining company bears the cost of preparing a community for an EIA hearing, to enable them to ask the relevant questions in the hearing. Standard training packages for mining communities will be a useful complement to the EIA guidelines.

  • Donors and NGOs could make a useful contribution in helping communities and labour groups to organise and to negotiate effectively. There should be an international bench-marking exercise which independently investigates and monitors compliance with environmental and social good practices (including voluntary codes), as suggested by researchers of the Mining and Environment Research Network.

  • Finally, a new set of priorities needs to be proactively nurtured by governments and their partners in the mining sector in Africa. In particular, priority ought to be given to those mining investments with a high processing and technology-transfer potential, such as limestone, clay and ceramics, phosphates, etc. This requires a discriminative incentive framework and investment in infrastructure, including energy. Herein lies a role for those bodies with an interest in financing and stimulating investments that have a development impact.

The value of corporate responsibility appears to be poorly appreciated and promoted in Africa in recent times. Consequently, the developmental consciousness that used to guide the practices of companies in the 1960s and 1970s is giving way to narrow short-term profit-driven attitudes. It is worthwhile promoting strongly the concept of corporate social accountability among companies as an essential value and condition for doing business. (Third World Resurgence No. 93, May 1998)

This is an edited version of a paper entitled 'Social and environmental accountability issues in foreign direct investment flows to Africa: a focus on the mining sector'. It appeared in African Agenda, issue 15, 1997. Charles Abugre is the coordinator of the Africa Secretariat of Third World Network, with which Thomas Akabzaa, a geologist, also works.