How to help Africa’s resource sector

The recent acceleration in growth rates across much of sub-Saharan Africa may not be purely commodity-driven, but for many of the region’s economies macro-economic stability is still dependent on prudent management of natural resources. For this reason, a strategic shift is required to shield African economies from commodity boom-burst cycles.

For much of the last half century, the dominant political economy model of natural resource management in Africa was this: states received royalties from mostly private mining companies and then were supposed to invest in public goods such as roads, hospitals, and schools. Private mining companies, for their part, would pick up the slack whenever states failed. Most of the time this happened through corporate social responsibility (CSR) initiatives, as a way of buying the social license needed to operate in specific communities.

This model has proven to be a complete failure in nearly all resource-rich African states, for a number of reasons.

Opacity and leakages inherent in revenue management chains, short-term electoral calculations, and the lack of accountability of governments all have led to the misuse of royalty revenues. This has left many private companies holding the bag with regard to community development projects. And since mining companies are not development agencies, most CSR initiatives have focused on low-hanging-fruit projects whose long-term developmental impacts remained spotty and unlikely to scale up to the national level.

Furthermore, the royalties-focused strategy has encouraged the evolution of export-oriented enclave economies around natural resource sectors. These exports have contained little to no local content and related production processes generated negligible value addition.

As a result, the exploitation of natural resources in Africa has failed to create jobs, instead fueling inequality as a few politically connected interest groups benefitted from resource rents.

A new initiative by the African Union—the Africa Mining Vision (AMV)—has set out to change this. At the core of the AMV is the push to de-enclave the Africa’s resource sector and link it with other sectors in the economies of resource-rich states. Doing so will help to ensure that resource exploitation in Africa results in sustainable, job-creating growth and development.

How can this be done? It will center on two key strategies: regional integration and spatial development initiatives (SDIs).

Currently, intra-Africa trade accounts for little more than 12 percent of the region’s total trade volume. Greater regional integration can help grow this number and attract new investment. Informed policy harmonization can also set local content provisions, help create economies of scale, increase local value addition, and improve governments’ bargaining position vis-à-vis mostly foreign mining companies.

SDIs will aim to create growth corridors within resource-rich regions that cut across state borders. These corridors will be built on multi-use, shared infrastructure—roads, railways, regional power pools, and harmonized resource management policies.

But while these goals are laudable, significant challenges remain.

First, the biggest challenge will be to square the domestic political economy of the resource sector in many African states with the regional goals of a more rationalized and efficient natural resource sector.

As is documented in the 2013 Africa Progress Panel Report, governance gaps are a key challenge to the successful management of the resource sector in Africa. Annual illicit flows from the region, much of it from leakages in the natural resource sector, amount to US$25 billion. Trade mispricing, still largely involving commodity exports, adds another $38.4 billion. Given the large sums involved, significant domestic interests exist that will resist any regional attempts at policy harmonization. Reform efforts must therefore not assume that domestic political interests will necessarily embrace the potential benefits of regionally harmonized policies regarding taxation, local content, environmental management, and other areas.

Second, local content and value addition policies will have to be matched with aggressive investment in the development of capacity among local firms. Many resource-rich countries lack firms with sufficient capacity to provide both direct and indirect services to mining companies. Capacity development ought to include technical training, loan facilities, and amendment of procurement laws to boost the competitiveness of local firms.

A good example is the Nigerian Content Act of 2010. The Act created the Nigerian Content Development and Monitoring Board and the Nigerian Content Fund, designed expressly to increase the level of participation of indigenous firms in the oil and gas sector, boost capacity of local firms, and encourage greater integration of the petroleum sector within the rest of the economy. For smaller resource-rich countries in Africa, such efforts are likely to succeed if implemented at the regional level in order to enable local firms to benefit from economies of scale.

Third, because strong states make for strong regions, any regional initiatives to improve the management of natural resources in Africa must not be seen as substitutes to the hard work of reforming domestic institutions in resource rich states. Beyond addressing the governance gaps discussed above, investments will be required in enhancing the capacity of line ministries directly related to natural resources, finance ministries, and ministries in charge of regional cooperation. These domestic reforms will ensure that regional initiatives remain rooted in domestic institutional and political realities in a manner to make them sustainable in the long run.

As the case of the Pilbara Region in Australia shows, even under the best of circumstances the boom-burst cycle of resource exploitation poses real risks to economic stability in resource-rich regions. One way of mitigating this risk is to ensure that the resource sector generates a significant amount of jobs in both directly and indirectly related sectors. Such a process is critical for the development of skills that can then be shifted to other sectors during downturn periods without resulting in significant job losses.

The previous model of linking the mining sector to the wider economy primarily through public expenditures has failed because of significant downside risk during periods of commodity bursts. It is time to take seriously the less risky alternative model of de-enclaving resource sectors through local content and value addition.

Published in collaboration World Bank

Author: Ken Opalo is a Consultant for the World Bank.

Image: An aerial view shows pools of mineral-coloured water gathered on salt flats in holes dug by salt collectors on the Senegalese coastline near the border with Gambia. REUTERS/Finbarr O’Reilly