Africa’s resource curse is primarily the result of market-related factors, particularly commodity price fluctuations, which are, in turn, aggravated by political factors that relate to institutional quality and rent-seeking, law firm Herbert Smith Freehills partner Peter Leon told delegates at the recent East and Central Africa Mining Forum event, in Kigali, Rwanda.

“The African continent is endowed with abundant natural resources, including about 30% of the world’s mineral reserves. However, historically, most resource-rich countries have been categorised as low-income countries.

“Analysts have observed a negative impact of resource abundance on long-term economic growth.”

Leon explained that to establish the key drivers of the long-term negative impact, analysts have studied the growth in per capita income in 47 African countries from 1990 to 2014 and compared it with each country’s primary resource production during the same period – from agriculture, fisheries, forestry, hunting and oil and mineral resource production.

The results of the analysis indicated that the phenomenon known as the resource curse is primarily owing to market-related factors.

The most significant and insidious effect of resource abundance is often the destabilising effects suffered by other economic sectors when a country becomes overly dependent on exports of a single natural resource, Leon said.

He added that there tended to be a direct correlation between commodity prices and gross domestic product (GDP).

The fluctuations in commodity prices affect the GDP of the country if the country is largely dependent on the commodity in question.  African countries where this trend was recently observed include the Democratic Republic of Congo, Gabon, Sudan and Nigeria.

“The effect of fluctuating commodity prices is exacerbated in countries where little economic diversification has taken place, and the economy therefore remains overly dependent on the income derived from exports of specific raw commodities.

“A leading example is Zambia, where economic development has been hamstrung by over-reliance on copper exports, accounting for over 60% of export earnings in 2018, and insufficient reinvestments of the income from the depletion of its natural capital,” Leon noted.

Despite the economic causes underlying the paradox, the impression that African States are not reaping the benefits of their mineral wealth also gives rise to a growing discontentment with the disparity between the profits which foreign investors receive through the exploitation of the mineral resources and the poverty in which the citizens of a country live.

Leon said this has given rise to various disputes, including those between Acacia Mining and Tanzania, First Quantum Mining and Zambia, Vedanta Resources Holdings and Zambia, as well as the Gerald Group and Sierra Leone.

In an attempt to address this, a number of African governments have embarked on sweeping mineral law and fiscal reforms. 

As part of the process, the governments often introduce higher royalties and windfall profit taxes; issue significant new tax assessments; introduce or increase compulsory minimum quotas for shareholding and board representation by the host State or its citizens; local beneficiation, often through export restrictions; procurement of local goods and services (including financial services); recruitment and promotion of local personnel; and renegotiate investor–State contracts that stand in the way of these measures.

“These changes to a country's mineral law regime are often implemented without the support of the mining sector, which can lead to further animosity between the government and foreign investors.

“Such reforms can likewise constitute a breach of the protection afforded to mineral right holders under the mineral development agreements to which they and the host governments are party. To assert their rights, investors frequently invoke the stabilisation provisions provided for in such agreements and refer these disputes to international arbitration,” Leon explained.

Ironically, the disputes between foreign investors and host governments tend to be rooted in the historic imbalances which arise from the mineral development agreements themselves.

Leon pointed out that, while the ability to regulate the economic consequences occasioned by the resource curse lies squarely within the domain of the African governments, it should be possible to better regulate the long-term relationship between the host governments and foreign investors.  

In this regard, the Organisation for Economic Cooperation and Development’s recently approved ‘Guiding Principles for Durable Extractive Contracts’ set out eight principles that host governments and investors can use as a common reference for future negotiations of enduring, sustainable and mutually beneficial extractive contracts.

The purpose of the principles is to assist host governments and investors using them to structure their ongoing relationship in an integrated manner to promote long-term sustainable development, while attracting and sustaining investment.

Under the guiding principles, extractives contracts are likely to be durable if they are aligned with the long-term vision and strategy, defined by the host government on how the extractive sector can fit into and contribute to broader sustainable development objectives; and are anchored in a transparent, constructive long-term commercial relationship and operational partnership between host governments, investors and communities.

“While there is no one ideal fiscal regime, host governments ought to identify the optimal mix of fiscal instruments and terms to meet their objectives. 

“In my experience, a predictable fiscal regime that includes responsive terms defined in legislation and or contracts to adjust the allocation of overall financial benefits between host governments and investors contributes to the long-term sustainability of extractive contracts and reduces the incentives for either party to seek a renegotiation of terms,” Leon highlighted.

He further stated that the costs attributable to compliance with changes in law and regulations, and wholly, necessarily and exclusively related to project-specific operations, in turn, should be treated as any other project costs for the purposes of tax deductibility and cost recovery in production sharing contracts.

If such changes in law and or applicable regulations result in the investor’s inability to perform its material obligations under the contract or if they lead to a material adverse change that undermines the economic viability of the project, durable extractive contracts require the parties to engage in good faith discussions which might eventually lead the parties to agree to renegotiate the terms of the contract.

“Ultimately, transparency, predictability and a process of continued dialogue between the host governments and investors are key to the success of a project and an equitable sharing of benefits that result from the exploitation of the minerals,” Leon concluded.