Status and Challenges of East Africa's Extractive Resource Industry: Towards a better future for the mining industry in East Africa

The current trends in the Extractive Resource Industry (ERI) in East Africa, specifically the discovery of oil reserves in Uganda, Kenya's determination to find and exploit her oil reserves and the impressive mineral wealth of Tanzania should be a source of high expectations for a prosperous future for the region. However the occurrences in many mineral rich developing countries provide a reason for East Africans to worry. SID's report  'The Extractive Resource Industry in Tanzania: Status and challenges of the mining sector' agues that there is hope for new entrants into the mining sector if effort is made to establish and maintain strong and stable institutions, well-formed policies and overall good economic management. 

by Gladys Kirungi 

The current trends in the Extractive Resource Industry (ERI) in East Africa, specifically the discovery of oil reserves in Uganda, Kenya's determination to find and exploit her oil reserves and the impressive mineral wealth of Tanzania should be a source of high expectations for a prosperous future for the region. However the occurrences in many mineral rich developing countries provide a reason for East Africans to worry. This is because mineral wealth in many developing countries for example, Cameroon, Zambia, Congo and Sierra Leone has been associated with complications such as poor accountability mechanisms, intrusive military regimes, forced migration, severe environmental pollution, low Human development indices, and weak democratic institutions that have destined such countries to a future of devastating political conflict and enduring economic decline.

The Society for International Development (SID) recently published a report entitled: 'The Extractive Resource Industry in Tanzania: Status and challenges of the mining sector.' While providing information and an analysis of Tanzania's Extractive resource Industry the report agues that there is hope for new entrants into the mining sector if effort is made to establish and maintain strong and stable institutions, well-formed policies and overall good economic management. These are key to the successful performance of mineral rich countries. On the other hand, countries that do not perform well are often those that are slow to reform and tend to suffer civil strife and unrest.

The main concern of the report is that while Tanzania is endowed with a vast and very valuable extractive resource industry consisting of forestry, petroleum, natural gas and minerals, it is also one of the poorest countries in the world. It is also overwhelmingly donor dependent and burdened by external debt. The history of Tanzania's mining industry is characterized by various management approaches with different outcomes for the country: The colonial leadership started by ensuring state control of the resources. Later private ownership was encouraged where companies were given exclusive rights to manage large mining areas and there was a rise in mineral exploration and income forms the sector. This declined with the advent of the 2nd World War in the 1940's. The Ujamaa period in the 1960's was characterized by socialism, which mandated state control of the mining sector. During this period mining of Tanzania's mineral wealth remained low due to lack of the necessary capacity and technical skill in the country. The post independence-mining act of 1979 combined state management of resources with minimal foreign control and encouraged small-scale artisinal mining. During this period artisanal mining increased rapidly, employing between 500,000- 900000 people at its height and contributing to the growth of some rural economies such as Mwanza and Arusha.

The period of pro-foreign direct investment, which began in 1997 oversaw the privatization and liberalization of state controlled mining corporations and facilitated the entry of foreign mining corporations. While this has had some benefits for Tanzania, including increased FDI receipts, increased foreign exchange earnings, contribution to government revenues and the introduction of some employment opportunities; the exploitation of Tanzania's mineral wealth under this system, is also characterized by increased public outcry as the citizens complain of 'theft' of the country's resources. Other challenges that have come with the increased exploitation of the country's resources include loss of homes and traditional sources of livelihoods as a result of evictions to give way for mining activities, a decline in small scale mining that had previously employed a big number of the population, environmental degradation and destruction and complaints of a disconnect and distrust between local communities and mining companies. Various reasons have been given to explain the resource curse in developing countries, most of which are political and relate to the role of the government. For example, the widening gap between the electorate and the governing class, bad decision making, corruption and rent seeking behavior and industry policies that tend towards import substitution rather than promoting a competitive manufacturing sector. However mining laws remain a common denominator in mining's contribution to positive economic development. In the name of creating an 'enabling environment' the government of Tanzania has been accused of being too generous to foreign investors at the expense of the national interest, by offering fiscal exemptions to mining companies; Mineral Development Agreements are often shrouded in secrecy, while agreements and contracts are often locked by stabilization and freezing clauses which ensure that the existing legal-fiscal regimes at the time of signing contracts do not change over the lifespan of the project and that subsequent legislation does not apply to the relationship between the parties to the agreement. The government is expected to provide compensation if it happens to change these terms in a way that puts the company 'in a worse off situation' than at the time of signing the contract. While such clauses are commonly used in sub-Saharan Africa to mitigate the perceived high investment risk of the host country, they can also be used by companies to justify non-compliance with new laws. Placing the natural resources of the country at the mercy of the foreign investors is another perceived weakness in Tanzania's mining contracts.

The report discusses an instance where an agreement states that in the event that the company deems it necessary to use land lawfully owned and under the care of any third parties, upon the request of the company, the Government is to assist the company in acquiring, renting or being lawfully permitted to use such land. The contracts have also been criticized for excluding conditions to ensure contribution of mining companies to development objectives; for example by ensuring capacity building of the local population, training and employment of Tanzanians, sourcing of local goods and services, adding value to minerals or generally creating forward and backward linkages in the economy to stimulate other sectors. The contracts also omit the issue of ensuring proper closure of the mines by the companies when mining ceases thus ensuring minimum negative impact on local communities. The strength of incorporating such terms into the contract is that it would guarantee contribution of the mining companies to the local communities and failure of the companies to do so would constitute a breach of contract and possibly lead to termination or payment of damages.

Lessons for the region East Africa can aim to be one of the best performers in the management of its resources just like Botswana, Ghana and Namibia. Botswana for example has managed to transform itself from being one of the poorest countries in the world in 1966 to a middle-income country with a per capita GDP of USD 13,3000 in 2008. Mining accounts for over 70 percent of the country's foreign earnings; and 34.2 percent of its GDP. Tax revenues in the country improved from 1 percent at independence to 50 percent currently. Royalty rates calculated as a percentage of gross market value of the minerals are currently 10 percent for precious stones and coal; and 3 percent for other minerals. Botswana's mining policy aims at maximizing the national economic benefit from development and mineral resources. In concluding, the report emphasizes that the negotiation phase is crucial to the performance of the ERI. It argues that negotiation should be treated as an important investment and expert negotiators should be engaged with a mission to ensure that the countries resources are successfully and profitably exploited at a relatively low cost for national advancement. 

Negotiation process should strive to achieve a reasonable and mutually acceptable balance between the interests and concerns of the investor and those of the nation as represented by its government. They should be sensitive to time factors such as market conditions; the host countries current political and economic situation; and should reflect present expectations on how these factors will change in the future. The negotiating teams should thus be very knowledgeable in the various associated fields for instance, law, environment and engineering. Mining companies need to ensure that the universal values of human rights, as well as cultures, customs and values of the population as well as corporate social responsibility are not neglected.

Governments have the primary responsibility for the protection of the human rights of their citizens against abuses by third parties including businesses. Transparency and accountability have also been highlighted as important issues in the successful performance of the industry. This includes disclosure of the terms of contracts and the payments due. Transparency is the key to achieving public acceptance of a contract. It also allows civil society and the public to provide an informal mechanism of checks and balances where formal mechanisms are not adequate. Transparency is the only way to dispel the constant concerns of greed and corruption often associated with mineral contracts and it prevents government officials from agreeing to terms that the citizens may deem unacceptable and subject to constant criticism and attack. 

A condensed version of this article was published in East Africa's premier weekly newspaper 'The East African'.

Download the report.

Gladys Kirungi is Programme Officer at Society for International Development

 

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