The roots of inequality: Mining profits soar, but Africans are still poor – by Yao Graham (Embassy Magazine – November 14, 2011)

This column was first published by Embassy, Canada’s foreign policy newsweekly.

Yao Graham is the co-ordinator of Third World Network-Africa, a pan-African policy research and advocacy organization based in Accra, Ghana.

Profits have ballooned in recent years, but African states haven’t seen their fair share. It’s time to look beyond the woefully inadequate compensation of voluntary corporate social responsibility actions by mining firms in Africa.

In 2009, African heads of state adopted the African Mining Vision. Its key objective is the transformation of Africa’s mining sector into a catalyst of broad-based growth and development and a key component of a diversified, vibrant and globally competitive, industrializing African economy.

The vision foresees Africa moving away from being a source of unprocessed minerals, towards the production of value-added goods from its mineral resources. It also recognizes that the governance of Africa’s mining sector must improve. It must become more environmentally friendly, more inclusive in sharing its benefits, more socially responsible and be accepted by surrounding communities.

The African Mining Vision also calls for an increased share of mineral revenues for African countries. In short, the African Mining Vision offers a more equitable future of economic relations between Africa and the rest of the world.

It is Africa’s response to the disappointing developmental outcomes of two decades of mineral policy. From the late 1980s, amidst economic crisis, faced with low mineral prices, and under the heavy influence of western aid agencies, African countries liberalized their mining sectors. State mining companies were privatized, sold off to foreign investors, and new concessions awarded under very generous investment conditions. These involved low royalty rates, tax exemptions, long-term freezing of tax rates and freedom to retain a high percentage of earnings abroad.

The argument was that resource royalties to African governments, along with the voluntary community development activities of mining firms, would be adequate developmental returns.

Except for a short-lived dip from 2008 to 2009, the demand for and price of minerals have been rising. Between 2002 and 2007 the average prices of minerals and metals rose by 260 per cent—and with them, so did the profits of mining firms. According to a PricewaterhouseCoopers study, the top 40 mining firms enjoyed a 1,900 per cent cumulative increase in net profits in the six years between 2002 and 2007!

But very little of this additional income and profits went to the mineral exporting African countries, thanks both to the lopsided fiscal terms enjoyed by mining firms, and to their use of tax avoidance schemes such as doing business with shell companies in tax havens.

Voluntary CSR is woefully inadequate compensation

The case of Zambia, for which copper makes up about 80 per cent of export earnings, is a good illustration of the asymmetry of power and benefits between mining companies on the one hand and African states on the other. Zambia levies a derisory 0.6 per cent royalty on copper in some cases.

In 2004, with copper prices averaging $2,868 US per tonne, it earned $8 million US in budget revenue from 400,000 tonnes of copper exported by foreign mining companies. This is a mere fraction of the $200 million US it earned in 1992, before privatization, from the same volume and similar price of copper. In the meantime, with the quadrupling of copper prices between 2002 and 2008, firms operating in Zambia such as the Canadian company First Quantum Minerals, have seen sharp jumps.

Over the past decade, a lot of international attention has been focused on ensuring extractive-sector revenue transparency in developing countries so as to limit corruption and the misapplication of public monies. Citizens’ access to information about public finances is extremely important, and is a key element of good governance.

However, the limits of revenue transparency for ensuring an adequate share of mineral revenues for African countries is highlighted by the wildly disproportionate returns to mining firms and African governments since 2002. Completely corruption-free and optimum use of their tiny royalties would do little for Zambia’s development prospects.

For communities in Africa’s mining areas, the promised development outcomes of the mining boom remain illusory. Human rights violations, tensions and conflicts between mining companies and communities are persistent and widespread. Voluntary corporate social responsibility interventions by mining firms have been woefully inadequate compensation for the disruption of livelihoods through dispossession of lands, pollution of waters and heavy-handed policing in support of the mines.

The African Mining Vision exemplifies the growing consensus in Africa that the harmful race to the bottom to attract mining investment has to end. The race has inflicted a ‘winner’s curse’ of gaining investment, but at the high price of lost revenues and reduced policy options for broad-based and dynamic development.

African countries want to re-negotiate mining contracts and review fiscal regimes so as to increase their share of mining revenues. International co-operation is needed to curb the use of tax havens by transnational firms, including those in mining, which deprive all jurisdictions, especially developing countries, of tax revenues.

Africa is the continent with the least industrial capacity, and increased revenues from Africa’s mineral wealth could and should help transform that reality. Communities expect a much stronger accountability framework for the human rights, environmental and social responsibility of mining firms. These and more should set the benchmark for support of Africa’s development efforts by countries such as Canada.