Mining leaders focus on governance during the commodities downturn

At this year’s Investing in African Mining Indaba in Cape Town, South Africa, leaders are not hiding their concerns about the commodities downturn.

Government representatives express their frustration for not having benefited enough during the boom. Policymakers lament the lack of planning that has left their countries with no cushion in their budgets, and companies are looking to cut costs so they can weather the storm. And most importantly, communities are feeling the economic impact as mines purchase less local supplies, generate fewer jobs and halt some operations. 

Not only are things slowing down, but it seems a golden opportunity has passed us by. Fatima Denton, Director of the United Nations Economic Commission for Africa, highlighted that Africa is less industrialized today than it was in 1990. After the minerals super cycle of 2000-2013, the percentage of manufacturing of African economies actually declined from 12% to 11%. 

Unfortunately the end of the commodities down cycle is nowhere in sight. The World Bank’s most recent Commodities Markets Outlook predicts that metals will drop another 10% in 2016, after a 21% fall in 2015. This new normal of long-term low commodity prices is causing resource-rich developing countries to adjust their outlook for the foreseeable future.

This is why the World Bank is taking the opportunity during this down cycle to focus on lessons learned and identify where governance can be strengthened. Declining revenues and scarce investment flows make the market increasingly competitive. Governments need to proactively improve conditions to attract mining investment and facilitate its contribution to sustainable development.

I see this challenge as an opportunity to shift our focus to the governance structures that lay the foundation for growth. During boom times governments need institutions ready to effectively and efficiently tax, collect, administer and distribute revenues but they often do not have the time to plan in advance to ensure best practices are implemented. Now is the time to improve the efficiency of public institutions to better manage public resources, cut down on waste and corruption, and bring shared benefits to all stakeholders: governments, business, and civil society. 

Investing in good governance now will help attract investors to return when prices rebound.  Investors flock to countries where governance is strong because it provides security for their investment and a reliable government partner for project implementation. Good governance is also important for civil society because it enables more efficient sharing of benefits with the local population. 

The World Bank is working on measuring good governance in mining so governments know where to improve, companies know where to invest, and civil society knows where best to focus their efforts. We have developed the MInGov tool to measure governance in mining countries and provide an assessment of key factors that facilitate successful investments and sustainable development. More specifically, the tool assesses country-specific government policies and practices that affect the social, environmental and investment risk, and quality of decision-making in the sector. It also factors in different stakeholder perspectives and tracks country governance performance. 

For example, preliminary results from the MInGov study in Zambia point to several factors that attract investment and others that constrain investor confidence and returns. Factors that make Zambia an attractive investment destination include its geology and political stability, but others such as inadequate fiscal and tax stability, poor infrastructure access and ineffective practices regarding public financial management and accountability, revenue sharing, and public investment integrity might discourage investment.

Some governance measures can have unintended consequences. Faced with historic low commodity prices, several countries have used policies to add value to commodities such as increases in taxes and royalties, export restrictions and local content and local beneficiation requirements. Ghana, Zimbabwe and Indonesia recently attempted to introduce local beneficiation requirements through legislation, such as export bans, tax incentives or licensing controls. These export restrictions can contribute to episodes of global supply shortages and strong price swings that negatively impact economies and development.

On the other hand, productive policies that encourage the incorporation of competitive local content in the supply chain of global mining companies is an effective way to cuts costs for mining companies and contribute to economic diversification. In Nigeria industrial policy has helped the country become a cement exporter. In Morocco it has helped the country become an exporter of fertilizer.  Many similar success stories were discussed recently at a conference on local content policy in Mexico, hosted by the World Bank, the Mexican Ministry of Economy and the Inter-American Development Bank.

We are all feeling the pain of the down cycle, but we must work together to mitigate the impact on the poor in resource-rich African countries. As Sheila Khama said at the opening of Mining Indaba, “the actions of governments and the private sector will see us through this storm.”