The Sierra Leone mining sector: An opportunity or a lasting national shame?(Part 1)

11 April 2009 at 06:20 | 2220 views

By Engineer Pierra Lightfoot-Boston, USA.

The Sierra Leone Mining Sector is at a crossroads, a road that could lead to a prosperous Sierra Leone, but,on the other hand, the alternative road could maintain the status quo, the status quo which specifically refers to a mining sector that has deeply, profoundly and consistently failed to reach its full potential, which has ultimately caused the good people of Sierra Leone to remain in abject poverty.

The Sierra Leone Mining Sector currently has a huge window of opportunity to reinvent itself to become an effective an efficient sector, the window of opportunity specifically refers to the fact that there is a relatively new government, which has articulated the need for the sector to reform, a new Minster of Mines and a growing sense of awareness by Sierra Leoneans at home and abroad.

Abroad, I would like to mention two individuals who have continued to work tirelessly to raise awareness and enlighten the good people of Sierra Leone about the mining sector. These two individuals are Amadu Massally and Patrick Bockari. My aim in this piece is twofolds: Firstly, to emulate the two very good citizens of Sierra Leone--- Amadu Massally and Patrick Bockari by shedding light on this issue and lastly to do an in-depth analysis of the mining sector which will ultimately provide a comprehensive understanding with regards to the different dynamics at play within the Sierra Leone mining realm.

Post Colonial Era and Mining

There were many valid reasons for most African countries to pursue independence from their respective colonies. One of the main reasons for the mineral rich countries like Sierra Leone was to take full control of their minerals, in terms of exploration, extraction, marketing and profit generation.

Prior to Independence, it should be noted that in 1935 De Beers Selection Trust gained complete prospecting and mining rights for 99 years and that unfair and highly unproductive agreement with De Beers came to an end when Siaka Stevens became Prime Minister in 1968. He single handedly nationalized the diamond mines and De Beers SLST by creating the National Diamond Mining Company. This was condemned as a dictatorial move by his opponents, but what many people failed to point out was that Stevens was a very shrewd and savvy politician and he was also the first politician to connect the diamond mines to political power and profit, and he encouraged illicit mining to gain political power.

During the 1960s and 1970s, the newly independent mineral rich countries all expressed hopes to develop, diversify and industrialize their economies based on the mining industry. In most African countries, mining became a state directed activity. For instance, the NDMC( National Diamond Mining Company) was given the task to prospect, explore and extract diamonds in the country. By nationalizing the industry,governments hoped to capture more benefits from mining through local employment creation, direct spending on social services for mining communities, and higher budget revenue from having a direct stake in the business. This was not the case for Sierra Leone. Under Stevens,legitimate diamond trading dropped from more than two million carats in 1970 to 595,000 carats in 1980 and 48,000 carats in 1988.

The 1960s and 1970s was an era of high mineral prices which was due to the rapid growth of international demand for raw minerals, stimulated by metals based growth in both industrial and newly industrialized countries. In Africa, specifically Sierra Leone, most mineral exploration and extraction operations were run by state owned enterprises and many of them were previously privately owned before being nationalized. Given state ownership of the rents earned from mining activity, mining revenues provided a large share of government revenue, and were used in more developmentally oriented states to finance national development.

Backed by high international commodity prices, Zambia’s gross domestic product in 1969 exceeded that of South Korea and Brazil. In the early 1970s revenue from all copper mining operations, run by the state owned Zambia Consolidated Copper Mines Company, provided two-thirds of government revenue, funding the provision of health and education services for all, as well as investment in development of the agricultural and other sectors. In 1989, income from mineral extraction contributed 35% of government revenue in the former Zaire and 58% in Botswana---largely through state equity in mining operations. During the 1960s and 1970s in Sierra Leone the mining sector provided the country with 70% of foreign exchange earnings, 20% of gross domestic product and 15% of fiscal revenue. However, due to rampant corruption and inept leaders the good people of Sierra Leone did not benefit from the economic boom of the 1960s and 1970s.

However, despite the high hopes and many African governments’ political declarations, mining failed to stimulate the industrialization of the continent’s economies, with the possible exception of the apartheid regime in South Africa. Nevertheless, in countries such as Botswana and Zambia, copper and diamond activities did bring significant income and local development benefits to the areas where mining took place, whereas in Sierra Leone, specifically Koidu and Tongo areas, the people remained dirt poor after decades of mining operations.

Low Prices and Low Taxes

During the 1980s and 1990s, slower international metals-driven growth, together with oversupply led to a slump in international prices---with the exception of the period between 1990 and 1997, when prices rose. Many African mineral-rich countries were suddenly faced with a sovereign debt crisis as they no longer earned sufficient foreign exchange from their mineral exports to fund the repayments of loans they took during the boom years . The World Bank, through the International Development Association, became a lender of last resort, and used this position to rewrite the mining laws and tax regimes across Africa.

These tax reforms, coupled with tax incentives offered by some of the major mining companies, such as those in Australia, Canada and the U.S to their mining multinationals for overseas exploration, have led to an upsurge in ‘junior’ [A junior mining company has no mining operations and is essentially a venture capital company. It must rely on almost entirely on the capital market to finance its exploration activities] exploration companies obtaining mining licenses and trading their concessions or attempting to make quick short term profits.

For example, Rex mining company which currently operates in Sierra Leone, is a ‘junior’ company. Their business process is quite straightforward; it normally consists of a group of investors or sole ownership, the company scouts underdeveloped mineral rich countries with lax mining laws and entrenched corruption. After scouting they acquire mineral rights to an area/areas they find economically attractive and after acquiring the mineral rights they then sell it to the highest bidder, which in most cases is another ‘junior company which does not want to deal with government officials.

It might strike most readers that this is a very exploitative process, but it seems to me as if these junior mining companies have taken advantage of the lack of mining entrepreneurial skills among Africans. It should be noted that these companies are mostly seen as very risky by institutional investors and are most likely to ask for special tax deals from government to help sway potential financial backers. It is imperative to note that this upsurge in these types of investors has compromised the quality of foreign direct investment in Africa’s newly privatized mining sector. Junior companies require huge tax subsidies to help them finance an operation or find partnerships. They need to turn their profits faster as they are not in the business for the long-term and they are less sensitive to the need for corporate social responsibility. Sadly, it should be pointed out that all the foreign mining companies in Sierra Leone are junior companies.

World Bank and IMF Intervention in African Mining Industry

Before the 1980s the World Bank group’s main involvement in mining development was to finance mining projects undertaken by public or private sectors in developing countries. At this time, it was the only source of finance available to operators. However, since the mid 1980s, it shifted its focus to support for the reform of mining development programs in developing countries. It started providing financial support and technical advice to its client countries to help them stimulate greater private sector participation in the mining industry through ‘competitive’ tax regimes. From the mid 1990s onwards, it played a key role in the formulation of new legal mining frameworks in a umber of African client countries with less institutional capacities, including Sierra Leone.

In 1992, the World Bank published its ‘ strategy for African Mining.’ This was part of a World Bank process across the globe to define what it saw as its role in enhancing the role of mining in development. At the time, commercial scale mining was taking place in 20 countries in Africa.

The main purpose of the World Bank’s strategy for mining in Africa and in other developing countries was to attract ‘ high risk capital’ to invest in exploration for new mineral deposits and to take over Africa’s stagnating state-owned and operating mines. The Africa strategy states explicitly that ‘ the overall drive of the Bank and donors should be directed at reducing ‘ country risk’ for the investor.

The world bank’s advice centered on the premise that foreign direct investment in the mining sector was essential to revitalize the industry, which was partly ravaged by bad management and corruption dating from the era of state-owned enterprises, and needed capital technology, which was not available in African countries.

This drive to reform African mining regimes to attract foreign investment was part of an overall strategy to reduce the role of the state in development. It was also linked to the need for African governments to earn foreign currency with which to pay back expensive loans taken out during the earlier boom times. The World Bank used aid conditions and other means to cajole unwilling African governments into privatizing their mining industries, and attract foreign investment into the sector, often at the cost of foregone revenue that could be spent on development.

The justification for a shift to lower tax rates and other tax concessions offered to foreign mining companies was that capital for mining was scarce, given low international prices; therefore African countries had to compete with one another and with other mining economies to attract ‘high risk capital by developing competitive tax regimes.’ According to the strategy, investors require competitive terms and conditions and iron clad assurances that the investment environment will be stable and that the rules of the game will not change. Interestingly, while emphasizing the risks of mining to companies, the Bank’s strategy said nothing about the significant risks faced by communities living close to mining activities, which include the loss of livelihoods, homes, health, and natural resources. Today, ironically, the World Bank is at the forefront of advocating strong environmental policies as one of the pillars of a modern legal mining framework.

In Sierra Leone, the World Bank is funding $6m technical resistance project that seeks to ‘accelerate sustainable development of extractive industries through strengthening the policy, fiscal and regulatory framework and thereafter to attract investment in large scale mining to continue sector growth. The World Bank expects that this project will lead to increased payments received from the extractive industries by the government ‘ by strengthening the assessment and collection of royalty payments and enforcements of payments from small and large-scale mining.

The Bank has also used ‘ triggers’ (which simply means manipulative tactics) for release of highly indebted poor countries’ debt relief and aid to push for mining tax reform that would attract private investment into Sierra Leone. This has become the government’s key objective in its 2003 Core Mineral Policy. One of the 10 current triggers for the government to receive a $10 million World Bank loan is changes to the mining tax regime in line with recommendations from the IMF. Some of these recommendations, made in 2004, will help increase mining tax revenue and transparency in the mining sector. However, the Bank also recommends that the government implements the terms of a secret Memorandum of Understanding with Sierra Rutile, which gives the company huge tax exemptions.

Watch out for part 2