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Securing the Transformational Potential of Africa’s Mineral Resources

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1 Securing the Transformational Potential of Africa’s Mineral Resources
Keynote Address – Monday February 4 – 8:45am Follows welcome to day’s proceedings by Margaret McKinnon, First Assistant Director General, Africa and Community Programs, AusAID Will be followed by second keynote address by Antonio Pedro, Director, UNECA on the Africa Mining Vision adopted by the AU and the new African Mineral Development Centre in Addis Ababa Jamal Saghir Director Sustainable Development Africa Region World Bank Cape Town February 4, 2013

2 The continent’s under developed mineral riches
1 Mining output by value USD386bn in 2009 Africa’s share of mining output is less than 10%, including South Africa … but its share of proven mineral reserves is higher South Africa … and average investment in discovering minerals is just 1/5th of the OECD average Source: Raw Materials Group, Stockholm 2011 Country Primary Mineral Investment, Forecast Investment, GDP, 2010 Burkina Faso Gold 1 8.8 DRC Copper 9-14 13.1 Ghana 7-8 1-1.5 31.3 Guinea Iron Ore 4-5 12-20 4.5 Liberia 3-4 9-12 1.0 Mauritania 2-3 3-5 3.6 Mozambique Coal 6.1 11.6 9.6 Namibia Uranium 4 3.5 12.2 Niger 1.5 5.5 Sierra Leone 1-2 1.9 Tanzania 3 4-6 23.1 Zambia 3-3.5 16.2 Total 132.8 Global mining investment was USD980bn from (RMG) We can start by looking at Africa’s mineral resource base. The map shows the geographical concentration of mining output by value – Africa is overshadowed by East Asia, Australasia, Latin America and North America. Africa’s share of output value is about 10% but much of this is concentrated in South Africa. However Africa’s share of known and measured minerals is higher than this, especially for bulk minerals like bauxite, coal, copper and iron ore and high value minerals like cobalt, diamonds, gold and platinum. Nonetheless that may be just the tip of the iceberg. Africa has received only one fifth of the level of investment in finding minerals in the OECD on average per square kilometer and is well behind Latin America. Global mining investment (both finding and building mines) has been around one trillion dollars over the past decade – over that period Africa’s share has been no more than five percent, although the share is on a rising trend and recently has reached as much as 15 percent. Our own assessment of investment in the main African mineral economies is shown in the table. This indicates that on present indications and assuming no significant downturn in mineral prices the level of investment over the next five years could be significantly higher as new mines are developed and brought into production. Iron ore, coal and copper stand out, in particular. We are, of course, aware that many major mining projects in the region depend on rehabilitated or brand new infrastructure and that this is presenting significant challenges that may take time to overcome, as recent events concerning Rio Tinto’s investments in Mozambique illustrate. Africa’s share of that may have been no more than 5% but is on a rising trend (15% recently according to RMG) Projected investment is quadruple that of the last decade Source: McMahon, World Bank (forthcoming)

3 Three reasons why mineral investments will continue to grow in Africa
2 Fundamentals based on increasing resource intensity of global growth, marked by industrial development in emerging economies, are likely to support high commodity prices over the longer run. This is a thesis supported by McKinsey1 and Chatham House2. Africa’s mineral endowment, coupled with exhaustion, scarcity and barriers to access elsewhere, has already attracted intense competition for Africa’s resources, involving both traditional multi-nationals and newcomers from the emerging economies. The increasingly stable and open economies of Africa are more conducive to investment flows, even though there have been cross-currents generated by more assertiveness by governments on issues of rent sharing and ownership and infrastructure challenges remain immense. Gold Base Other Metal Uncertainty in the mineral industry is undeniable yet there are three reasons to support the idea that mineral investments will continue to grow in Africa over the longer term. First, there are the fundamental drivers of demand for minerals that suggest that global economic growth has entered a phase of increased resource intensity marked by industrial development in emerging economies. This is likely to support high commodity prices on average over the longer term in the absence of viable widespread substitution for minerals by other materials. This is a thesis supported by McKinsey in its Resource Revolution report and by Chatham House in its recent Resources Futures report. Second, Africa’s large mineral endowment, coupled with exhaustion, scarcity of particular minerals and barriers to access to minerals elsewhere has already attracted intense competition for Africa’s mineral resources as we have seen. This involves a mix of traditional multi-national mining houses and many newcomers from the emerging economies. Finally, Africa’s record in the past decade of increasingly stable and open economies, makes for a more conducive climate for investment flows, even though there have been cross-currents as governments have grown more assertive in their dealings with investors especially on issues of rent sharing and equity ownership. And, once more, one has to highlight the immense challenges remaining to overcome the infrastructure deficit for which investors and governments must find joint solutions. 1 McKinsey Global Institute, Resource Revolution: Meeting the world’s energy, materials, food and water needs, November 2011 2 Chatham House, Resources Futures, December 2012

4 The continent’s mineral dependency
3 Let’s now look at the extent to which the continent’s economies are already dependent on mineral resources. Using export share as a measure of mineral dependency, nine African countries, shown in red, are highly mineral dependent with minerals accounting for over half of exports and further twelve, shown in orage, are moderately dependent with that share exceeding 20 percent. A further nine countries are undergoing a wave of mining investment and those among them that are not already highly dependent on oil (e.g. Angola and Congo) could join the ranks of mineral dependent countries within a decade. So, in conclusion there are strong reasons to expect that in ten years time this map will show even more red and orange. Minerals (excl. oil & gas) 2010 > 50% of exports > 20% of exports emerging

5 Tremendous opportunity for mineral-driven transformation on this continent
4 Revenue mobilization through mineral rents can displace aid dependence and leverage commercial finance. Data from IMF reports indicates that on average mineral rent collection in mineral dependent economies amounts to 5% of GDP (with considerable variation) and is on a rising trend. Africa needs USD93 billion per year in infrastructure3. Mineral rents can support public capital programs and mining projects can serve as anchors for road, rail, port, water, power and telecoms investment. This morning’s session will focus on how joint solutions can be found by mining investors and governments. The scale of annual spending implied by mining investment offers opportunities for development of local supply chains, thereby increasing income and job multipliers Where economies of scale, transportation savings and power reliability allow, new downstream value addition opportunities will increase These kinds of linkages with wider economic development must be capitalized upon. This means a clean break with the old model of enclave mining development. How can mineral richness benefit this growing number of African mineral economies. There are tremendous opportunities for mineral-driven transformation. First, the mobilization of public finance through mineral rents can displace dependence on overseas development assistance and leverage commercial finance in international and domestic capital markets. In a recent edition of Africa Pulse data assembled from IMF Article IV reports showed mineral revenues accounting on average for 5% of GDP in mineral rich countries in Africa. Given that tax and non-tax revenues typically amount to some 15 – 25% of GDP on the Continent, this the contribution of mineral revenues is significant. Moreover, several countries are experiencing an increase in this proportion. Second, our Africa Energy Strategy shows an infrastructure deficit amounting to US$93b billion annually. Mineral rents can help support public capital programs. And investments in mining projects can themselves serve as critical anchors for road, rail, port, water, power and telecoms investments. Our session this morning will focus on how joint solutions between governments and mining investors can be found to help close the infrastructure deficit, including those opportunities that lend themselves to resource corridor development that spurs wider non-mineral economic activity. Third, the scale of annual spending implied by mining investment offers opportunities for development of local supply chains for the goods and services needed by mining and ancillary operations. These generate jobs and incomes through multiplier effects. Studies in mining area have shown that income multipliers vary quite widely ranging from as low as 2 to as high as 5 where local linkages are strong. The key is to push this in Africa towards 5. The WBG is working with governments and industry to achieve this – an example is in Zambia where a joint task force has been formed under Zambia’s Vice President. The industry is spending over USD2 billion annually as it expands and capturing even a modest share of that market opportunity could spur small and medium scale enterprise development. Fourth, where economies of scale, transportation savings and power reliability allow, new downstream value addition opportunities will increase, helping to better link the mining sector with the rest of the economy. It is worth highlighting that a very high proportion of the copper in the Copperbelt / Katanga region will in the future be processed to finished copper (compared to Chile which exports most of its copper raw). 3 Africa Energy Strategy 2011, World Bank

6 Evidence of positive human development outcomes
5 Resource economies have fared better than non-resource economies in terms of human development Mineral economies have fared better than oil rich economies in terms of human development 12 Mineral rich Oil rich Angola Chad Sierra Leone Mozambique Sudan Tanzania Nigeria GDP Growth % Ghana Mali Botswana Having considered the opportunities presented by minerals for transformation of the economy what about the opportunities for enhancing human development? Data collected and analyzed for the period since 2000, which is associated with the upsurge in mining activity in Africa, shows some promising signs that mining growth can be associated with improved human development. First, as shown in the diagram to your left, resource economies as a whole have fared better than non-resource economies in terms of the pace of improvement of human development as measured by changes in the Human Development Index. That does not mean human development is high – it does mean that human development is on an upward path in many of these countries. Second, when the data is disaggregated by mineral-rich and oil-rich countries in Africa, we find that it is in the mineral-rich countries on the whole that human development has been improving the fastest. This is an area of research that is underway, both to establish the precise causality and to understand the policy implications. Namibia Zambia Burkina Faso Mauritania Cameroon DRC Gabon HDI Growth % 3.5

7 Better governance platform for mineral resource development
6 Sunday’s program was devoted to the governance dimension of mineral resources development – evidence shows that poor governance is more likely to inhibit beneficial use of mineral resources Sunday’s AUC keynote and the presentation on the role of the Africa Peer Review Mechanism sounded a note of optimism on governance trends, while recognizing governance risks that have to be managed Participation in global good governance initiatives is growing on the continent – several governments have joined the Open Government Partnership and there is a large block of EITI implementers and several are moving beyond EITI There is a proliferation of good practice guidance: Sessions yesterday focused on: moves towards greater disclosure of mineral right holding and contracts wider adoption of budget tracking tools It remains the case that mineral resources are still coveted by rent-seekers, rebels and criminals, policy-making and regulatory institutions are often weak and access to the benefits of minerals is highly uneven in many countries r ICMM Mining Partnerships for Development Toolkit WEF Responsible Mineral Development Initiative Natural Resources Charter

8 Better deals that are better managed for more development impact
7 Fair contracts The benefits of mineral resources will remain elusive if governments and mining companies strike deals that are one-sided and narrowly focused Responsible conduct of mining Even the benefits of fair contracts can be undone if mining is allowed to be conducted irresponsibly Optimal use of resource wealth Ultimately responsibility falls on the Government to ensure that citizens are better off because of minerals are harnessed for sustainable development There is a large body of generic global guidance on how to make best use of mineral resources – the World Bank developed the idea of an Extractive Industries Value Chain as a way of explaining the critical links to convert resource wealth into sustainable development. At the heart of this is the proposition that better deals that are better managed lead to more development impact. The same idea is found in the Natural Resources Charter developed under Paul Collier’s guidance; the World Economic Forum’s Responsible Mineral Development Initiative; and the Development Toolkit of the mining industry representative group ICMM, all developed to guide policy making in resource rich countries. Africa has its own “charter” to harness its mineral resource wealth – The Africa Mining Vision. In the remainder of my talk I will tell you what the WBG is doing to support governments and other stakeholders to achieve better deals, that are better managed for more development impact.

9 Fair contracts 8 Better knowledge of the mineral endowment to underpin policy choices and enhance government’s bargaining position Bank TA on geo-data acquisition, interpretation and dissemination (Uganda, Malawi) African Mineral Geoscience Initiative (meeting this PM) Open and competitive allocation of mineral rights to obtain best terms from the most qualified investors Bank TA on rules based mineral rights management (Madagascar, Mozambique) Advice on design and conduct of mineral deposit tenders (Liberia) Fair and predictable sharing of mineral rent to maximize long-term benefits Bank TA on mining fiscal regime and model mining agreements (Mozambique) Negotiations support (Sierra Leone) Strong government policy making and negotiating capacity EI Sourcebook; Training; South-South exchanges Eliminating opacity and rent seeking that leads to unfair contracts GEI work on contracts database / how to interpret contracts

10 Responsible conduct of mining
9 Good corporate governance and ethics Enhanced home country disclosure requirements (Dodd-Frank; EU Directive) IFC Performance Standards for investees Social contract with the host community Emerging best practice on CSR and community development agreements (Bank guidance on CDAs, IFC’s CommDev) Community engagement support (incl. gender) Preserving environmental, social and cultural assets Strategic Environmental and Social Assessments of mining development and resettlement frameworks now mainstreamed into mining technical assistance; New Africa Trust Fund to enhance local sustainability and address impacts on conflict and communities of mining Effective monitoring and enforcement Capacity building for government regulators (12 Bank TA projects in Africa under implementation worth over USD600mn) Strengthening mineral tax administration (How to Guide for administrators based on West Africa pilot) Enhancing community-based monitoring (under WBI’s GEI) In 2011 SEGOM issued a report on principles and practice of designing and implementing Community Development Agreements between mining companies and mining affected communities IFC’s CommDev works with investees in IFCs portfolio around community engagement and development, demonstrating the business case Bank Mining TAs have a B classification and legal covenants requiring sector-wide SESAs

11 Optimal use of mineral resources
10 Macro-fiscal prudence; managing volatility and Dutch Disease Guidance note on prudent macro-fiscal policies in resource rich countries (forthcoming) New Sovereign Wealth Fund community of practice Using mineral rents to create manufactured and human capital Enhancing public investment management; procurement reform (highlighted on Sunday) Using mineral rents to distribute wealth (spatially/future generations) Sub-national transfers; citizen rent distributions; social safety nets; savings/trusts for future generations Fostering economic linkages between mining and the wider economy Shared infrastructure (IFC study on transport infra under Africa Special Initiative; Bank – Vale Center study on mining & energy) Resource corridors & growth pole diagnostics – focus of today’s first session Supply chain development – planned West Africa regional local content project; Zambia Local Content Initiative Mining skills development – focus of one of today’s session – Africa Centers of Excellence Project; scope for PPPs in educational provision Outcome A vibrant post-mining economy PREMPS is producing the guidance note (global) The SWF community of practice includes focal points from all Bank networks. It was launched in October. It facilitates rapid response to enquiries from governments – already used in Mongolia, Nigeria, PNG and South Sudan. See Monday Session 1 program covering shared infrastructure and resource corridors – Richard Damania will chair the panel discussion

12 An integrated approach at work with partners: Mozambique
11 Fair contracts: Legal support for mining negotiations and gas (LNG) negotiations financed by a global multi donor trust fund (EI-TAF) Front end support to improve mining sector policy framework financed by an AusAid grant to the Bank Functional management review of institutional arrangements for mining and gas financed by a DfID grant to the Bank Preparation of a Gas Master Plan including downstream potential financed by AAPF and Norwegian TF (PGI) Responsible mining: 6yr regulatory capacity building project for both mining and gas going to Board in April 2013 financed by $50mn IDA loan + $10mn DFID co-financing Revenue transparency – support to EITI implementation and CSO engagement financed by global MDTF Demand side governance work financed by Governance Partnership Facility Optimal use of mineral resources: Fiscal policy and revenue management financed under Budget Support Rail and port infrastructure study on mining infrastructure feeding into proposed Spatial Development project Support development of mine supply chain linkages (proposed under new Growth Poles project) The World Bank integrates its wide range of expertise and types of operations to support governments secure the transformational potential of mineral and other natural resources. A critical aspect of this are the partnerships established with other donors. This is illustrated by the program being undertaken with the Government of Mozambique to tackle the critical challenges facing that country during the boom in mega-projects. The range of support being provided or planned is shown under the three themes presented in the preceding slides. Similar integrated approaches are being developed in Guinea, Tanzania and others.

13 World Bank Group Africa Strategy
Scaling up the World Bank’s commitment 12 World Bank Group Africa Strategy Emerging themes for Africa are Energy, Skills/Education, Agriculture/Dry Lands, Social Protection, Women’s Economic Empowerment, and Natural Resource Management Extractive Industries Practice for Africa New Extractive Industries Practice to focus on knowledge and partnerships in Africa: Draw on global knowledge programs in the World Bank like Extractives for Development (E4D), Governance for Extractive Industries (GEI), EI Task Group and communities of practice on topics such as SWFs, PPPs and SESAs Identify joint solutions using analytics, advisory services, technical assistance and capacity building Explore potential partnerships with other donors’ mining development programs: Australia’s M4D; Canada’s CIIEID, Germany’s GeRi; UNDP’s EI for HD, OECDs Policy Dialogue, etc. Seek possible partnerships with institutions in Africa AMDC under the inter-governmental Africa Mining Vision with think tanks and academia (e.g ACET, SAIIA) Collaborate with industry groups: ICMM, World Gold Council and multi-stakeholder alliances: WEF, EITI Secretariat So to conclude, how do we in the WBG see our role in helping move from the vision to action. First, the WBG Africa Strategy treats natural resources management as a key emerging theme calling for scaling up. Second, we have created a new Extractive Industries Practice for Africa. This includes a Practice Leader in the Africa Region management team to lead the development of knowledge and partnerships relevant for Africa. The EI Practice will do the following: Draw on global knowledge programs in the World Bank like Extractives for Development (E4D), Governance for Extractive Industries (GEI), EI Task Group and communities of practice on topics such as SWFs, PPPs and SESAs and tailor advice and guidance tools most relevant to Africa; Identify joint solutions across the World Bank’s networks using analytics, advisory services, technical assistance and capacity building – an example of this is the collaboration between the Sustainable Development and Human Development teams in Africa on the issue of mining skills development Explore potential partnerships with other donors’ mining development programs: examples include Australia’s Mining for Development; Canadian International Institute for Extractive Industries and Development; Germany’s Global Extractive Resources Initiative; UNDP’s Extractive Industries for Human Development program and the OECD’s Policy Dialogue on Natural Resource-based Development. Seek possible partnerships with institutions in Africa: African Mineral Development Centre under the inter-governmental Africa Mining Vision with think tanks and academia (e.g Africa Centre for Economic Transformation, South African Institute of International Affairs’ Governance of Africa’s Resources Programme) Collaborate with industry groups: International Council for Minerals and Metallurgy, World Gold Council and multi-stakeholder alliances: World Economic Forum, EITI Secretariat

14 Take Away Messages Africa is the under explored continent but a growing destination for mineral investment While previous scrambles for Africa’s natural resources conjure up images of plunder and squandered opportunity, the past should not be a predictor of the future This time the chances of better development outcomes are greater – this depends on fairer contracts, responsible conduct of mining and wise stewardship of mineral wealth by the government The Africa Mining Vision offers a roadmap for mining to be better integrated into socio-economic development setting a foundation for sustained growth after minerals are exhausted The World Bank Group’s Africa Strategy is aligned with this vision and together with other partners the WBG will deploy its fund of knowledge, advisory services, technical assistance, development policy lending, investments and guarantees to secure Africa’s transformation through minerals

15 Thank You

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