Miners in an open pit outside the southern Democratic Republic of Congo copper town of Lubumbashi in this file photo. A report released in Nairobi last week paints a grim picture of Africa’s mining sector. Photo/REUTERS
The massive drop in world metals prices in December 2008 saw copper collapse by up to two-thirds, and gold by up to a third from their peaks in July 2008.
This “perfect storm” not only brought to an end a five-year international metal price boom, it has dealt a blow to the fledgling mining tax reforms undertaken in a few mineral-rich African countries in the past two years that sought to reverse two decades of effective looting of their resources by foreign mining companies.
Emboldened by the metals price boom, governments in Zambia, Tanzania, South Africa and the Democratic Republic of Congo have amended their mining tax legislation or contracts with mining companies to increase the revenue they collect from mining rents.
They were also driven pressure from a public that has seen little benefit from mining tax revenues.
Now, with the global crisis wiping out mineral earnings, they may never recoup the millions of dollars’ worth of tax revenue lost through lopsided deals with the mining companies entered into under World Bank pressure.
A new report released in Nairobi last week, Breaking the Curse: How Transparent Taxation and Fair Taxes can Turn Africa’s Mineral Wealth into Development, paints a grim picture of the continent’s mining sector, saying, “Alleged tax evasion practices by mining companies, have robbed African treasuries of millions of dollars of forgone tax revenue from the mining industry.” The study attributes the huge losses to a lack of transparency and inability by national institutions to audit the accounts of multinational mining companies.
In addition, mining companies have succeeded in “pushing for tax breaks in secret mining contracts, amounting to aggressive tax avoidance…As a result, the citizens of mineral-rich countries continue to live in poverty, and are in some cases subject to violent conflict fuelled by the wealth generated from mineral resources as is the case today in the eastern DRC. “ The report refers to this scenario as the “resource curse.”
The “curse” manifests itself in the fact that countries with the greatest mineral wealth happen to be the poorest and the worst governed. In addition, mineral wealth in such countries as DRC, Angola and Sierra Leone has fuelled and helped prolong bloody internal conflicts.
The irony is that there was a time when African countries actually benefited immensely from their mineral wealth.
In the 1960s and 1970s, mineral prices were surging as a result of the rapid growth in international demand for raw minerals, stimulated by growth in both industrial and industrializing countries. In most countries, mining became a state-directed activity.
By nationalising the industry, governments hoped to capture more benefits from mining through local employment creation, direct spending on social services for mining communities, and higher revenues from having a direct stake.
The report cites Zambia as a case in point. The country’s copper wealth, managed by the state-owned Consolidated Copper Mines Company, ensured that by late 1969, its gross domestic product exceeded that of South Korea and Brazil.
In the 1970s, the copper mines provided two-thirds of government revenue, funding the provision of health and education services for all, as well as investment in development of agriculture and other sectors.
However, come 1989, “mineral taxes were contributing only 16 per cent of government revenue in Zambia, reflecting the dire state of the industry.” Today, while both Brazil and South Korea are global economic powerhouses, Zambia happens to be one of the poorest countries in the world.
How did this happen? During the 1980s and 1990s, slower growth, together with oversupply, led to a slump in international prices.
Many mineral-rich African countries were caught in a debt trap as they no longer earned enough foreign exchange from their exports to fund the repayments of loans they took during the boom years.
Enter he World Bank, which through the International Development Association, not only became a lender of last resort, and used this position to rewrite the mining laws and tax regimes across Africa as part of an overall strategy to reduce the role of the state in development.
The World Bank used aid conditions and other means to cajole unwilling African governments into privatising their mining industries, and attract foreign mining companies into the sector with lowered taxes and various concessions.
The Bank argued that capital for mining was scarce, given low international prices and therefore African countries had to compete with one another and with other mining economies to attract high-risk capital by developing ‘competitive’ tax regimes.
The report also raises concerns over “the quality of foreign direct investment in Africa’s newly privatised mining sector,” pointing out that tax incentives in major mining economies such as Austrialia, Canada and the US to their mining multinationals for overseas exploration, have led to an upsurge in “junior” exploration companies seeking quick short-term profits —Canadian companies now account for more than 60 per cent of all new investors in African mining exploration. These companies, it says, are seen as very risky by institutional investors, and are more likely to ask for special tax deals from governments to help sway potential financial backers.
In many cases, political elites in Africa have negotiated and signed secret mining contracts with multinationals.
The report says that in some cases private companies often ended up doing business with individuals, rather than with public institutions. It says that this happened through secret contracts signed during the 1998-2003 war in the DRC as well as during the 1991-2001 conflict in Sierra Leone.
To drive the point home, the report gives the amounts that countries like Tanzania, Malawi, Ghana, Sierra Leone, Zambia and South Africa have lost since the 1990s through not been keen to impose tax on multinational mining companies.
For instance, it estimates that Tanzania might have lost as much as $30 million each year while Ghana and South Africa lost $68 million and $359 million, respectively.
Congo lost $360,000 each year between 1997 and 2003 while Malawi lost $16.8 million and Sierra Leone $8 million each year.
