Monday, September 1, 2014

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Knowledge is Power: World Bank to Chart Africa's Minerals in 'Billion Dollar Map'

Africa loses vast sums of money by underpricing its resources. Can a map help change that?
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An area of northern Uganda from the sky. Photograph by Rick Scavetta/US Army Africa.

Nairobi, Kenya:

Last month, the World Bank announced an ambitious new project aimed at helping African governments earn a better price for their natural resources and accelerate the pace of mining across the continent.

Dubbed the 'Billion Dollar Map' for its meteoric price tag, the decade-long initiative will scour a century of historical research into the continent’s mineral makeup and collate it in a public database. The project will then finance governments to conduct exploration to fill in the gaps.

The need for better research into the continent’s minerals is clear and urgent. When it comes to negotiating contracts, knowledge is power, and African government's uncertainty over the levels of the resources they possess has contributed to them signing some hugely unfavourable deals.

According to a 2013 report by the think tank Global Financial Integrity, African countries have lost between $600 billion and $1.4 trillion in net resource transfers over the past 30 years. Often, governments sell their assets for cheap to foreign investors, who immediately re-sell the resources for as much as five times the original price.

Sometimes the mark up is even more extreme. For example, in the mineral-rich Democratic Republic of Congo (DRC), where these trends have been particularly pronounced, Reuters reported in January that the Israeli oil and minerals tycoon Dan Gertler sold oil assets at 300 times the price he bought them.

As a report by the transparency NGO Global Witness notes: “Since early 2010 the Congolese state has sold off stakes in six prize mining projects…in secret and at vastly undervalued prices, according to commercial valuations by several internationally recognised brokerage houses. Those stakes were divested to offshore companies, most of which are associated with Mr Gertler but whose precise beneficial owners are not known.”

The DRC's vast reserves of copper, cobalt, oil and other minerals mean it has a huge opportunity to profit. But it is also means that when resources are undervalued or subject to nefarious transactions, it has a lot to lose. A 2013 report by the Africa Progress Panel sadly observes, “Between 2010 and 2012, the DRC lost at least US$1.36 billion in revenues from the underpricing of mining assets.”

Because these deals often involve offshore shell companies, it is unclear who is ultimately profiting from them and whether kickbacks are being paid to Congolese officials or businessmen for facilitating the transactions. But what is clear is who is losing out from all of this: the Congolese government and the people it represents.

Knowledge is power

One of the reasons Africa's wealth can been so easily exploited and relocated to wherever that foreign mining company is listed is the fact that African countries are often unaware how much of a resource it has. This means governments are poorly placed to negotiate and that the public is unable to assess the value of any particular deal.

“A mining company comes to you and says ‘this is what we’ve found, this is the reserves, so this is the total value’…and that’s all that you have," says Gerhard Graham, a scientist at South Africa's Council for Geoscience.

This is the exact problem the World Bank’s Billion Dollar Map hopes to resolve. “This data gives you insight into…what is there, and you can determine what is ultimately the value so you don’t sell a ton of talc [a mineral used in ceramics and steel] for $1 billion that is actually worth $10 billion,” says Graham.

Paulo de Sa, manager of the gas, oil and mining unit of the World Bank’s Sustainable Energy Department, argues that if the Billion Dollar Map had already existed, some mispriced deals of the past might have been avoided. In the DRC, for example, he claims that the state mining agency Gecamines is selling its own properties well below the market price. "If that data was publicly available," he says, "the public would have been able to contest that transaction.”

The same is true in Kenya, where Martin Nyakinye, a government geologist, praises a $70 million initiative to conduct aerial mineral surveys of the whole country, a project that the Chinese government has offered to finance. “This should have been done a long time ago,” he says. “The only way to assess and evaluate the real potential of the lands which we occupy is by knowing − locating every mineral occurrence.”

To achieve that, Nyakinye says Kenya must first take advantage of the mineral information it already has.

“The fact that Kenya is underexplored is not entirely due to lack of data…companies have come in and done some very good work, detailed mineral exploration, and they have either gone away with it after the expiry of the license or the data is lying somewhere and people are not aware. If this project is going to help dig up such data and then put it in a format that everything is accounted for, then that is going to be very good for Kenya.”

Looking a trillion dollars

As well as ensuring that governments are well-prepared to negotiate when foreign mining companies come calling, mineral maps can also encourage investment in the first place, and one hope is that the Billion Dollar Map will encourage exploration. Mining companies are often reluctant to invest unless they are confident that they are likely to find considerable deposits. And while exploration may be costly for some African governments, the returns are usually worth it.

“Typically for every $5 spent from a regional survey − the World Bank type of survey − you can grow about $1,000 of investment into mining in the country,” says Graham. Once the potential for a deposit has been demonstrated, he explains, mining companies will be attracted to come in and start drilling, which is a far more expensive part of the operation. "A country that suddenly has access to this data for a large area can use that data to leverage a much higher level of investment,” he says.

De Sa similarly notes, “The private companies are interested. Initial exploration is very costly and the success rate is very very low. If the companies have good maps, good information, they can much more easily target their investment to the areas with the best potential.”

So far, the mapping project is only expecting to raise around $65 million in financing before the project’s intended start date this July. But De Sa expects other governments to begin buying in soon and that mineral exploration investors will follow suit. After all, while the map may cost a billion dollars to make, its real worth for governments, citizens and mining companies could eventually measure in the trillions.

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Comments

This is a complete waste of World Bank money and effort. It is going about the problem of extractive investment all wrong. To wit:

“The fact that Kenya is underexplored is not entirely due to lack of data…companies have come in and done some very good work, detailed mineral exploration, and they have either gone away with it after the expiry of the license or the data is lying somewhere and people are not aware. If this project is going to help dig up such data and then put it in a format that everything is accounted for, then that is going to be very good for Kenya."

Yes, many exploration companies over the years have invested time and money in exploration across Kenya (and many other countries). The problem is not that they don't find anything, the lack of development is the symptom of the always changing fiscal, taxation, regulatory, political, infrastructure, and "it's our turn to eat" problem that Kenya, among many others, face. It took over 20 years to develop the Kwale Mineral Sands (titanium) project, and as soon as the project was to start production, the Kenyan government changed the ownership and royalty regulations governing mining (which the company eventually fought off in the courts, but the uncertainty KILLED the prospects of future exploration or developing in Kenya for most other companies). Rather than governments focusing on the rentier aspects of extractives, they should focus on the long-term expansion of the sector in terms of employment, linkages, and corporate tax base, with well regulated environmental and community protection efforts. We all know there are LOTS of under-explored and under-exploited extractive resources in Africa; the perennial problem is not geological, it is all the above-ground risk stuff that matters.

This misguided effort to try and grow the portion of a few properties/projects that accrues to the government is completely anathema to the prospects of vibrant, growing, environmentally and socially responsible extractive industries that drive employment, local and international linkages, and grows the whole economic pie rather than the slice of a smaller pie for what, unfortunately, has not proven to be the most efficient provider of public goods, African governments. Spend a fraction of the money on assisting African Geological Surveys and revenue departments to improve their professional staffing levels, incentive structures, environmental and revenue modelling and audit capabilities, community engagement and education, etc., but don't waste a billion dollars on generating more high level, geotechnical data (which will all go to contractors who mostly are not African-owned firms). Technical data is NOT the problem...fix the regulatory and fiscal disincentives for investment in these sectors, and the investments will flow. Note they were flowing pretty well until about 2010, when nearly every African government decided to re-visit mining codes and fiscal arrangements. There is never an exact, technically determined ore reserve. An economic reserve is viable given the conditions of its development (from market prices and fiscal terms to production costs, etc.) which change over time, but which have to be highly attractive to stimulate initial investment. Governments need to create the best possible conditions for production and not put all their eggs in the basket of upfront costs (including high royalties) that reduce reserve sizes and thus economic attractiveness. There is a problem of secretive government deals to insiders, but this problem is not central to the whole problem of extractive development in Africa, and lingers where countries have tried to get too engaged in ownership and production under authoritarianism. I could go on, but the inanity of the WB gets worse over time, not better. And all Africans are poorer because of this misunderstanding and malinvestment.

Interesting points Chris. But at what point does the greed of the international companies doing mineral expropriation in Africa come in as a limiting factor?It's all very good and proper to point to the fluid legal and tax regulatory environment that slows down investment, and very correctly the "it's our turn to eat" culture in countries like Kenya, but to miss out the greed of the international mining companies is the fly in your ointment.Congo, which has a far more fluid legal and tax environment, and, I venture, a far greedier politcal and business elite that Kenya, (clearly depicted by the fact that though its potentially far richer than Kenya/most of Africa, the elite in that country have sold their minerals for a song and driven their citizens to poverty) has so many international investors flying in to mine its rich earth.Is the regulatory environment slowing them down in DRC, far worse though it is than Kenya?International mining companies, as the article correctly points out, do their reputation no favours by the way the structure their extraction of wealth in many parts of Africa. I actually hold that international companies would rather a corrupt but in control dictator who allows them to mine to their fill - so long as they bribe him (such as Teodoro Obiang Nguemo of Equatorial Guinea). Than an effective democracy that asks questions and works to winning the highest value for its citizens, which is what, warts and all, Kenya is striving to become.

"The World Bank Group's initiative to improve access and quality of geodata in Africa follows a study it commissioned, and which found that over half of 70 industry leaders in Africa described current access to geodata in the region as poor, or unacceptable. Still, this is only part of a broader effort needed to mobilize extractive industries for Africa's economic growth and development. It is being complemented by governance programs, many of them also supported by the World Bank, that work on strengthening a stable regulatory environment, increasing transparency, increasing linkages to the local market, strengthening social and environmental regulations and investing in capacity building for local technical and government personnel. At the same time, work on increased access to geodata is crucial so that African governments do not lose more opportunities when it comes to negotiating mining concessions. The Africa Progress Panel cites that, “Between 2010 and 2012, the DRC lost at least US$1.36 billion in revenues from the underpricing of mining assets.”

The Billion Dollar Map's added value is that it decreases risk for both the government and the private sector, while increasing transparency, both of which contribute to creating a stable investment climate. The governments' capacity to ensure that they obtain a fair deal for their resources will be enhanced to a more thorough understanding of the value of their country's mineral assets, while companies will risk less when identifying an area for investment. Improved information improves the quality of negotiations and operations for all parties. By reducing geological risk, all parties can focus on the above ground risk, which is complicated and warrants keen attention."

Best, 

Kelly Alderson, Communications Officer, World Bank,  Sustainable Energy, Gas. Oil, Mining (SEGOM)