V7ff 80
[EYYTW Bank                                                 June 1994
Strategies to attract new investment for
African mining
John Strongman
M        NM-      Industry and Energy Department
0  -hiD  Vice Presidency for Finance and Private Sector Development






Africa is well endowed with mineral         tures of US$400-500 million a year by the  RETROSPECTIVE
resources. The continent is a major producer   end of the 1990s are feasible if African
of bauxite, cobalt, copper, diamonds, man-  countries establish an attractive investment
ganese, rutile, and uranium. The region's   environment. This expenditure level would
mining potential is much greater than real-  be close to current levels in Canada and
ized, and new exploration and mining devel-   Australia.
opment have lagged behind that in other
parts of the world. But Africa is now begin-  Attracting private capital
ning to mobilize the risk capital and invest-  African mineral growth has been achieved
ment funds needed for sound and orderly     mainly by the private sector. Future growth
mining development.                         will depend on attracting high-risk capital
Mining companies spend an average of     from foreign mining companies with the
US$2.5 billion a year on exploration and    technical and managerial capability to find
US$40 billion a year in capital investment.  new deposits and develop new operations.
But during the 1970s and 1980s Africa         Mining investments are capital-intensive,
attracted less than 5 percent of such funds.  usually involving time horizons of ten to
Consequently, Africa is relatively unex-    twenty years or more. Investors require
plored.                                     competitive terms and conditions, and solid
Large, well-established private mining   assurances that the investment environment
operations in such countries as Botswana,   will be stable and that the "rules of the
Gabon, Ghana, Guinea, Namibia, Sierra       game" will not change.
Leone, and Zimbabwe have contributed to       An exploration agenda requires a clear
the economies of those countries for        mining development policy, a reduced role
decades. And in the past five years new pri-    for state mining companies, and attractive
vate mining operations have started up in   conditions for private investors. As long as
Ghana, Mali, and Zimbabwe. International    state companies dominate the local mining
mining companies will invest in African     industry and control large tracts of prospec-
countries that have good mineral potential  tive land, new exploration investment will
and that match the investment conditions in    be severely limited.
the rest of the world.                        Investors consider country risk to be
African countries can attract a substan-  much lower where there is an explicit com-
tially increased share of world mining      mitment to and a demonstrated track record
investment. Greater investment is the neces-    of support for private investment. They
sary condition for revitalizing mining in   believe that countries with such characteris-
Africa and returning to strong sustained    tics better appreciate the concerns of
growth. But because of the long neglect of  investors and are more motivated to respond
exploration, the number of viable projects  to them. Investors perceive country risk to
ready for development is small. The few     be greatest where there is no commercial
advanced projects are in countries that per-  mining tradition.
formed well in the past.
Most African countrics with mining       Role of government
potential should substantially increase     Efficient and rapid mineral development
exploration expenditures to attract major   requires governments to allow private com-
new mining projects. Exploration expendi-   panies to take the lead in operating, manag-



ing, and owning mineral enterprises.         or output-related taxes).
Governments can encourage mineral devel-       Accounting rules along the lines of those
opment by restricting their role to regulator    used in industrial countries must be adopted.
and promoter, leaving operations and man-    Investors should act responsibly, ensuring
agement to private enterprise.               arm's-length transactions consistent with
Countries wishing to attract high-risk    accepted international practice.
private exploration and mineral develop-       Country assessments prepared by World
ment funds should support or develop:        Bank staff indicate that at least twenty-five
* A legal framework that adequately          African countries have attractive mineral
defines the investor's rights and obliga-  potential warranting increased exploration
tions                                     expenditures by the private sector (see list
* Security of tenure to give the investor    below and map on page 3). In Category I
assurance of the fruits of success        countries, the geological potential extends
* A fiscal package that shares the rent of   across large areas. Each of these countries
profitable production equitably between   has sufficient geological potential to warrant
the government and the investor           expenditures of US$10-20 million a year by
* Guarantees of access to foreign exchange    private companies. Countries in Category 2
at market rates for repayment of debts,   warrant slightly lower expenditures-
repatriation of capital and profits, and  US$5-9 million a year each. In Category 3
purchase of essential inputs.             countries, good geological potential is limit-
Without these essential conditions, new      ed to one or two specific regions. Category
investment is unlikely.                      3 countries warrant private exploration
expenditures of US$2-4 million a year each.
Benefits to African countries                Even in these countries, world-class mineral
Mining generates more than 20 percent of     deposits can be found. More countries will
merchandise exports and more than a third    undoubtedly be added to the list in the next
of non-oil exports for Sub-Saharan Africa.   several years.
For nineteen countries, each with mineral
production exceeding US$25 million a year,    Countries warranting private sector
it accounts for about half of exports and a  exploration
third of taxes.
Governments can obtain a fair share of    Category i   Category 2    Category 3
economic rent from mining through stable     Angola      Botswana      Burundi
fiscal arrangements that are fair to both par-    Ethiopia    Burkina Faso   Central African
ties. They can increase their share by mak-  Ghana       Gabon           Republic
ing the investment environment safer and     Namibia    Guinea         C6te d'lvoire
thereby lowering the risk premium and        Tanzania    Madagascar   Kenya
returns required by investors and lenders.   Zaire       Mali          Liberia
This requires clear mining development       Zambia      Mozambique  Niger
strategies and sound institutional structures.    Zimbabwe  Sudan      Nigeria
Governments should emphasize earnings-                                 Rwanda
related taxes rather than royalties (or input-                         Sierra Leone
2



Priority zones for mineral development: precious metals, base metals and diamonds
;/Tnisic
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Former Sp(  nlhScc                   \
ur  noigr 
$   >\   <,                            g    Ghed    g              ~~~~~~~~~~~~~~~~~~~~Sudan   (-
The Gambica!9   S-i--Xn,   
Guinea-Biss         _ uitic                                            t,<f   ~
X    S   \  \AH           ,    Z           Ge~~~~~~~~~~~~n"]c African Repubi c           
Liberr\ aogo   ,                          aCmeroo \/
Equctoricl Guineca    g          /;.                       )   gnc   
Soo Tome cnd Pfrcinpe                                     k    cre Ruoi 
/t   -                    4       ~~~~~~~~~~~~~Tcnzci
Z   0  \   '--                        l,                     ~~~~~~~~~~~~~~~~~~~~~~~Seychelles
)   -0  +       t        1       -         ~~~~~~~~~~~Comoros
^     Angolca                       @cltt3
P             Cmbic    ,               X    <             /  g bia
\   E    T         <  ~~~~~Zimbbiwe     
- :Priority zones for mineral development                          otwn      Moc           ique/
t     <         Swc~~~~~~~~zi and W
V J        ~~~~~Lesotho 
South Afrirca/
3



LESSONS                  Chile                                      are levied only on the distribution of profits
FROM  COUNTRY            Chile has been highly successful in attract-  or dividends. This rewards reinvestment.
EXPERIENCE               ing foreign mining investment. There is no
discrimination between local and foreign   Ghana
private investment. One foreign investment    The Minerals and Mining Law of 1986
law covers all sectors, including mining, and    allows foreign companies and partnerships
provides for international arbitration in the  registered in Ghana exclusive rights to
event of dispute.                          prospect, explore for, and produce minerals
All mineral rights are reserved by the  other than construction materials and indus-
state. Mining rights have all the attributes of   trial minerals.
property rights, being freely mortgageable,   The Mining Law specifies that mineral
transferable, and constitutionally protected  deposits are owned by the state and grants
against confiscation.                      one agency the power to negotiate, grant,
The Chilean Mining Code recognizes      revoke, suspend, and renew licenses and
prospecting, exploration, and production.  mining leases.
Prospecting is open to all persons on any     Ghana's tax regime uses a combination of
land not covered by an exploration or pro-  income taxes and sliding-scale royalties
duction concession, subject to payment of  based on companies' operating performance.
compensation to the landowner. This pro-      The foreign exchange regime permits
motes prospecting and protects landowners.    companies to retain up to 80 percent of
Procedures for granting and transferring  their foreign exchange earnings in overseas
concessions are based on technical criteria  accounts.
and are insulated from bureaucratic arbitrari-
ness. Applications are reviewed by the     Indonesia
Mining Technical Service, which makes rec-   In Indonesia, mining companies sign con-
ommendations, and approved by judges. All   tracts of work with the state and act as "con-
disputes are settled in the courts.        tractors" mining on its behalf. The govern-
Effective income tax rates are low. Taxes  ment has established a strong track record of
4



contractual stability. Ownership of minerals   obligations of the investor and the govern-
is vested in the state, which regulates all  ment, including financial obligations. Access
aspects of mining. The Foreign Investment    to foreign exchange, land, and markets and
Law guarantees protection of private proper-   protection against adverse changes in the
ty and access to foreign exchange.     laws are guaranteed.
Contracts of work define the rights and
Ghana-Attracting foreign investment for gold mining
Ghana's gold mining industry has experienced a dramatic turn-around in perfor-
mance since the introduction in 1986 of new mining laws that opened the indus-
try to foreign capital and expertise. Australian mining companies have taken the
lead in bringing in new capital and management and in introducing low-cost
technology to Ghana, including heap-leaching surface mines. The first wave of
investments is taking place in known mines and deposits. Golden Shamrock has a
controlling interest in Ghanaian Australian Goldfields, producing 123,000 oz a
year. Pioneer has taken over the Teberebi mine and increased production to more
than 164,000 oz a year. Ranger Minerals and Kiwi Goldfields are also financing
small developments. Other foreign companies investing include Billiton
(Netherlands), the majority owner of the Bogusu mine (94,000 oz a year), and
Cluff Resources (UK), which is developing a gold mine at Ayanfuri (30,000 oz a
year). The government is developing plans for further surveys to encourage pri-
vate exploration and a second wave of investment in greenfield projects in new
areas.
The government is also divesting its interest in the State Gold Mining
Company. Goldfields of South Africa is taking over the Tarkwa mine, and
Continental Mining and Construction is taking an interest in the Dunkwa mine.
The government is reducing its holding in Ashanti Gold Mines, which is operat-
ed by Lonhro (UK), from 55 percent to 31.3 percent by floating part of its share-
holding on the London stock market. The government is expected to obtain
more than US$300 million from the share float. Ashanti, one of the world's
lowest-cost gold mines, has cut costs and increased production from 242,000 oz a
year in 1986 to 766,000 oz a year in 1993. It is also implementing an investment
program that should raise production to more than I million oz a year by 1995.
5



ATTRACTING               Actions needed                             * Information
NEW  INVESTORS    Many foreign companies are willing to             Most mining companies hesitate to do grass-
explore or develop projects in Africa. They  roots exploration. They prefer specific tar-
operate global exploration strategies and  gets or highly prospective regions. They are
will consider working in any country that  more likely to be attracted to countries
has mineral development potential. But they    whose governments provide:
are more likely to invest in countries that  -  basic geological data
meet certain needs.                          -  legislative, economic, and fiscal data.
* Infrastructure-with the exception of
precious metals and gemstones, mineral  Actions to be avoided
exploration and development is more     Similarly, foreign companies are more likely
likely in areas that are accessible.    to invest in countries where certain risks and
* Mining rights and fiscal terms-Africa    requirements can be avoided.
must compete with other regions to      * State ownership and control
attract private investment in mining.      -  mandatory local majority participa-
Only the African governments can create       tion, either government or private
a policy environment that will attract pri-  -  mandatory provision of social ser-
vate investors. Governments must also         vices, restrictions on negotiating
obtain a fair share of the economic rent      wages, and limitations on expatriate
through fiscal arrangements that are sta-     personnel.
ble and fair. They need to provide:     (But minority local participation and manda-
-a guarantee of mining rights in        tory training of nationals can be positive.)
advance of exploration               * Political and economic risks, including
-  a well-established mining code          the risk that the government may:
-  contractual stability                   -  change the tax regime
-  a guaranteed fiscal regime              -  impose price controls on inputs, out-
-  the right to repatriate profits            puts, or both
-  access to foreign exchange              -  insist that the company undertake
-  the right to import necessary goods        marginal investments that are not
and services                               commercially viable
-  the right to export                     -  require excessive employment
-  protection against losing mining        -  require infrastructure or community
rights or legal title through undue        or social investments not originally
termination or expropriation.              agreed to.
6



Mining code                                  Twin principles of mining                    MINING CODE
A modern mining code or a satisfactory pro-    codes
ject agreement is a prerequisite for explo-  * The investor should have the right to
ration and investment by major companies.      explore for and mine minerals in return
The power to grant mineral rights should     for making specific commitments that
reside with one authority. Close coordina-      can be assessed and monitored.
tion w:[th the economic and administrative   * The investor should have secure and
reforms affecting the nonmining sector will     long-term title to mining rights.
be needed.
Most countries assume public ownership    What are the choices for
of minerals. Virtually all African states exer-    mining codes?
cise permanent sovereignty over their min-   * Detailed legislation with a minimum of
eral resources. This does not prevent the       ministerial discretion, or
allocation of secure title to mining rights to  * Specific project agreements backed by
private parties, nor does it imply that rights  general legislation
cannot be traded. But it establishes that the  And as a consequence
state can charge for access to resources and  * Gradual adjustment, or
has a legitimate interest in the manner of   * An immediate shift to another fully elab-
exploitation. A mining code outlines the        orated framework.
interaction between the state and the min-   For countries with a large, established min-
ing company.                                 ing industry or with considerable develop-
ment potential, the recommended approach
An effective mining code                     is a comprehensive mining law with rights
* Applies equally to all investors           granted according to explicit criteria rather
* Clearly specifies the ownership of miner-   than ministerial discretion, and obligations
al resources                              fully specified in the law. For smaller coun-
* Contains explicit criteria for the alloca-  tries where there may be only one or two
tion of rights and allows them to be      large mining investments, an alternative is
transferable and saleable                 specific project agreements backed by gen-
* Ensures that land is either actively       eral legislation. Project agreements may also
explored and worked or relinquished       be useful as an interim measure while mod-
* Prescribes procedures for settling dis-    ern mining legislation is being prepared and
putes in the courts or by arbitration.    enacted.
7



LICENSES                  Few investors incur exploration expenditures    minerals.
without assurance that they can proceed to      An exploration license-issued typically
mine if they find an attractive deposit. The  for three years with one or two possible
joint interests of companies and             renewals for the same period-grants an
governments in the award of mining licenses    exclusive right to explore for and prove up
can be advanced by:                          mineral deposits. Such licenses:
* Providing that only the exploration        * State minimum work commitments or
license holder may be granted a mining       surface rental or both
license                                   * Establish minimum expenditure commit-
* Specifying the criteria under which an       ments in place of a government-designed
investor is entitled to a mining license.    work program
* Permit the declaration of a "discovery
General principles of licenses                 area" at any time
Licenses should:                             * Establish the conditions under which a
* Allocate to private parties secure title to  mining license will be granted.
mining rights                             A single-license system such as Chile's
a State terms for retention of mining leases    under which the license grants the conces-
and the suspension or termination of      sion holder the right both to explore and to
operations                                develop and operate a mine, is also possible.
- State that the mineral rights holder must    The Botswana Mines and Minerals Act of
explore or develop land or release it for  1976 provides that the holder of an explo-
others                                    ration license who has established the exis-
* Allow rights to be traded                  tence of a commercial deposit has a statuto-
* Allow companies the right to market        ry right to a mining license. The investor
their product freely                      must submit "a proposed program of mining
* Clearly specify reporting obligations.     operations," and the Minister of Mineral
Resources and Water Affairs is entitled to
Types of licenses                            impose certain conditions. But if the
A mining license-issued typically for        program meets the criteria set out in the
twenty to thirty years with a similar renewal    mining code, the license must be granted.
period-grants an exclusive right to extract
8



General principles of                         Content of investment                        INVESTMENT
investment agreements                        agreements                                     AGREEMENTS
Investment agreements can reduce country-     * Clarification of mineral rights: invest-
related risk for the investor while protecting  ment agreements may provide assurances
the interests of the host government.           regarding such issues as size of explor-
Investment agreements formalize the          ation and production licenses, duration of
details of:                                     rights over successive periods, exten-
* Arm's-length pricing                          sions, and required area relinquishments.
* Satisfactory debt structure for the project    * Obligations of the titleholder: agree-
* Reasonable limits for tax-deductible pay-     ments may specify work or expenditure
ments to associated companies                obligations, infrastructure provision,
* Retention, suspension, and termination        employment, training, health, safety,
issues                                       reporting and accounting requirements,
* Taxation arrangements                         and environmental obligations.
* Omissions or ambiguities in the applica-    * State participation: agreements may spec-
ble general legislation                       ify whether state participation is optional
i Safeguards for the investor and the gov-      or mandatory, the timing, structure, level,
ernment that may not be adequately set        and financing terms of participation, and
forth in the law.                            the allocation of managerial responsibili-
Investment agreements can also ensure fair      ty and operational control.
and appropriate conduct by investors by       * Fiscal provisions: fiscal provisions are
securing protection against attempts to         best included in a country's fiscal law.
reduce tax obligations by:                      Agreements may, however, provide assur-
• Underpricing mineral products sold to         ances that taxation provisions will remain
affiliate companies                          stable over the life of a mine.
* Overleveraging the project's financial     * Financial considerations: agreements may
structure                                     detail foreign exchange arrangements,
- Making excessive payments to parent or        provisions for debt repayment and divi-
affiliated companies                         dend and capital repatriation, escrow
* Making shareholder loans with above-          accounts, minimum debt-equity ratios,
market interest rates.                       and criteria to regulate intercompany
Many countries use model agreements as a        transfers, such as charges for manage-
basis for negotiations. These models help       ment services.
investors familiarize themselves with a coun-    * Legal safeguards: agreements may include
try's legal, regulatory, and fiscal environ-    arrangements for settlement of disputes,
ment, form a clear picture of the structure of  including the use of arbitration, force ma-
a deal, and review the guarantees and safe-     jeure provisions, and guarantees against
guards Lhat will underpin it.                   improper termination or confiscation.
9



TAXATION                 Tax policy                                  Tax packages
Tax policy not only determines how rent is  The structure of the tax system, as well as
to be divided between governments and      the size of the tax burden, will have a strong
investors, but also establishes conditions for    influence on investor decisions. Profit, divi-
investment and rent creation. Mining com-  dend, and cashflow taxes are more attractive
panies strongly prefer earnings-based taxes  to investors and will cause less distortion to
to royalties because of large fluctuations in  investment and operating decisions than
profitability.                             input- or output-related taxes.
A sound tax regime will provide incen-   * Mineral taxes should be consistent with
tives for investment while ensuring adequate  domestic tax arrangements. If Africa is to
compensation to the country for the           attract investments from international
resources extracted. At the sectoral level, tax  mining companies, its tax regimes must
policy should maximize tax revenues over      be comparable with those of other coun-
the long term (ten to twenty years).          tries.
Fluctuations in mineral revenues should  * Mineral taxes should be fixed and stable
be dealt with by appropriate macroeconom-     over the long term.
ic policy measures, not by special taxes.  * The tax regime should apply equally to
Suitable macroeconomic policies normally      foreign and local investors, and to private
would be superior to a tax system that gen-   and state-owned enterprises.
erates lower but more stable revenues.      * Double taxation and the sacrifice of tax
revenue to foreign tax authorities should
Governments should:                           be minimized.
* Use mineral revenues to achieve econom-    * Accelerated depreciation should be con-
ic and social aims rather than forcing the  sidered as a way to promote the rapid
mining industry to pursue these            recovery of exploration and development
secondary objectives                        expenditures.
* Establish earnings-based taxes since such  * If state participation is sought, this
taxes do not distort investment and pro-   should be taken into account in design-
duction decisions                          ing a tax package.
* Not require local purchasing of supplies
* Not oblige, or offer incentives for, min-
ing companies to use employment-
increasing techniques.
10



In countries where mining is an important  * Mineral reconnaissance                  THE FIVE CORE
economic sector, an effective institutional  * Geological mapping and publication and    SUPPORTING
framework comprises five main building       dissemination of maps                   INSTITUTIONS
blocks. The principal building blocks are the    * Compilation of a modern and accessible
Ministry of Mines and the Geological         geological and exploration data base.
Survey, which need reconstruction to carry
out the core regulatory and promotional    Mineral Promotion Agency
tasks. In countries with little mining tradi-  Some countries may set up a small indepen-
tion, temporary administrative devices will  dent government agency, with no decision-
be Important until permanent institutional  making authority, to act as:
arrangements are established.              o An introductory and facilitating agency
providing a key point of contact for
The Ministry of Mines                        prospective investors, especially those
This channel through which investors deal    with little knowledge of the country.
with the government when preparing pro-
jects and. negotiating agreements is responsi-   Environmental Office
ble for:                                  This agency, which oversees the environ-
* Broad policy direction                  mental performance of the mining sector:
* Coordination with other ministries      * Sets environmental standards
Organization and negotiation of mining  * Monitors exploration and mining opera-
agreements                                tions
* Supervision of mining sector agencies.  * Enforces compliance with established
standards
The Department of Mines                    . Reviews environmental assessments for
This subunit within the Ministry of Mines:   new projects.
* Licenses and administers exploration and
mining rights                           Institutional capabilities and
* Monitors compliance with work or        skill development
expenditure requirements and health and    Skill development in Africa's mining sectors
safety standards                        has tended to concentrate on technical edu-
* Assists companies with project coordina-    cation in geology, mining engineering, and
tion                                    related disciplines. But skill formation for
* Compiles production statistics and gener-   regulatory functions has been much less
al industry information.                effective. Most African countries have diffi-
culty fielding mining lawyers, contract
The Geological Survey                      negotiators, financial analysts, mineral tax
This independent government agency under   specialists, and public administrators experi-
the general supervision of the Ministry of  enced in mining law.
Mines carries out:
'I1



ENVIRONMENT             In comparison with such global and national   greatly increased risk to the investor. Both
environmental issues as deforestation, deser-   governments and companies have an inter-
tification, and climate change, the effects of    est in ensuring that such power need not be
mining are generally localized, identifiable,    used.
and specific, and adequate technology is
available to deal with them. But mineral  Existing mines
beneficiation and processing can involve the   International companies are improving their
use of toxic materials, and it is essential that    environmental standards, but many state
satisfactory operating practices are enforced.   companies are lagging behind. A suitable
The necessary measures to safeguard the   approach could be to:
environment and the health and safety of  * Identify problems at existing mines and
the population and the workforce can be     take initiatives to address them
incorporated in legislation and regulations.  * Agree with the company on a realistic
New plant and equipment usually pro-     timetable for priority actions
vide both improved efficiency and superior  * Establish specific sanctions to be applied
environmental performance. Improved         if the timetable is not met
physical environments are conducive to    * Require companies to take prompt mea-
improved productivity in the mines and      sures to deal with emergencies
plants and in the community at large.     * Consider expenditure on such emergen-
cies as ordinary operating costs.
Standards and policies
African governments need to:              Compensation and
* Set appropriate environmental, health,  reclamation
and safety standards                   A reclamation fund under independent or
• Establish procedures for reviewing per-  joint control could be built up through tax-
formance and monitoring compliance     deductible contributions by a company in
* Ensure that new projects are designed   proportion to the estimated depletion of the
and developed according to acceptable  ore reserve. The eventual target value of the
standards.                             fund would be regularly reappraised.
Many industrial countries have adopted      Alternatively, a government and a com-
standards set by neighbors with similar envi-   pany could fund agreed-on reclamation
ronments, or have adopted the U.S. Envir-  expenditures in proportion to the share of
onmental Protection Agency standards.    the cash flow each has derived from the
African countries may need to modify such  mine. As in the United States, a carryback
standards for local conditions. They can also   of tax losses could be introduced to allow
adapt health and safety standards from    companies to recover reclamation expendi-
industrial countries.                    tures against past tax payments.
Allowing companies to make tax-
Procedures and agreements                 deductible provisions is a problem for juris-
Some mining agreements and environmental   dictions observing English tax law since
codes give governments the power to sus-  deductions normally cannot be taken until
pend operations they consider environmen-    expenditures are made. The funds provided
tally damaging. The criteria for taking such  would remain under the exclusive control of
action must be clearly defined to prevent  the companies.
12



Background                                  State-controlled companies typically are   THE PRIVATIZATION
centralized, with limited authority and man-    OF STATE MINING
Performance of state mining enterprises     agerial autonomy. Private companies are    ENTERPRISES
During the 1960s and 1970s many countries    often decentralized, giving them flexibility,
nationalized previously private mining      authority, and managerial autonomy.
enterprises and focused on public sector
intervention. The objective was to maximize    Governance
returns to the state and the people. In most  There are also important differences with
cases the results have fallen far short of this    respect to corporate governance and cash
goal. State-owned enterprises have been    flow distribution. In a state-controlled com-
poorly managed, have become progressively    pany board members and senior managers
undercapitalized and technologically out-   are often appointed based on political rea-
dated, and have been outperformed by pri-    sons and are subject to political pressures.
vate mining companies in Africa in the past  Cash flow distribution is decided according
thirty years.                              to the needs of the economy, and companies
From 1960 to 1989 the value of mineral   may have insufficient funds for exploration
production by privately controlled mining   and investment. In private companies direc-
companies more than doubled, from US$3.9   tors and officers are selected for their busi-
milliorn to US$8.2 million. By comparison,  ness talents, and the commercial needs of
in the same period the value of production  the firm determine how much of the avail-
by state-controlled companies increased     able cash flow is distributed to shareholders
from lUS$2.5 million to US$3.4 million (all    and how much is retained for capital expen-
figures in 1989 terms). Production by state  ditures.
mining companies has been steadily declin-    Different organizational structures, man-
ing-and in some cases has ceased-in        agerial autonomy, and focus give private
Ghana, Madagascar, Sierra Leone, Tanzania,    companies an edge in responding to change.
Uganda, Zaire, and Zambia. Production by   Not surprising, they are more cost-efficient
most privately controlled mining companies    and productive than their state-controlled
has remained steady or increased.           counterparts.
Objectives                                  Reform  options
State-controlled companies are expected to
fulfill multiple objectives. Private mining  Overview
companies have one principal objective-to    If state mining companies are to operate
generate profits. Objectives such as promot-   efficiently, they must operate more like pri-
ing regionlal development, creating employ-    vate enterprises. There are two broad
ment, and generating foreign exchange       approaches to achieving a private sector
often conflict with profitability. Given these    management style. One is reform from the
competing objectives, state-controlled com-    inside-commercialization. This involves
panies must carry out a broad range of activ-    clear commercial goals, firm budget
ities-such as providing education and      constraints, and increased accountability
health care and managing townsites-in       and autonomy for managers, with clcar
addition to the core business. Private com-  rewards and sanctions linked to
paries focus on the core business of mining.    performance. It requires solid government
13



commitment and discipline.                   company may never be realized if the
The second approach is total or partial    process is placed in the hands of company
privatization, placing the strategic and oper-    officials. Instead, privatization requires the
ational control of the company in the hands    government, as owner of the company, to
of a technically and financially qualified pri-    make policy decisions within its normal
vate sector partner (or partners) with a     political realm.
major stake in the company's successful per-
formance. Privatization typically is a more  The privatization process
complex process than commercialization
and may require the involvement of outside   Preparation
specialists.                                 Although preparation of a detailed plan will
require the assistance of consultants with
The commercialization option                 experience in both mining and privatization,
Attempts to commercialize public entities in    establishing the necessary legal, financial,
Africa have been discouraging. Most African    and investment conditions remains the sole
countries are characterized by serious       prerogative of the government. Privatization
macroeconomic, financial, and social prob-   involves:
lems; limited, often ineffective, and corrupt  * Assessing the enterprise
administrations already struggling to imple-  * Preparing it for sale
ment reform programs; and a fragmented       * Carrying out the sale transaction.
society with a longstanding political focus  Several factors should be borne in mind dur-
on wealth distribution rather than wealth    ing this process:
generation. Too many conflicting interests   * Government policies on privatization
must be resolved for commercialization to    * The company's strengths and weaknesses
succeed, and no amount of financial engi-    * The company's position in the interna-
neering is likely to overcome these conflicts   tional marketplace.
overnight.                                   Prerequisites for successful privatization
Management contracts have had only        include clear agreements on:
limited success as an intermediate way to    * Overall regulatory and fiscal framework
push commercialization. The contractor has      for the mining sector
an insufficient stake to operate freely and  * Employment reductions
remains dependent on the owner.              * Financial liabilities
The treatment of existing environmental
The privatization option                        problems.
Given the political and social realities of
most African countries today, reform of state    Mining-specificfeatures
mining companies will require partial or     The mining industry has several unique fea-
complete privatization. Management and       tres that distinguish its privatization from
operational control of companies should be   that of other industries. In most countries
given over to private stockholders. Privat-  mineral deposits are owned by the state and
ization does not require management to pre-    "leased" to the enterprise; thus, issues of
pare and implement a plan, which would       national patrimony are often involved.
surely contain elements against its inter-   Mines are often located in remote areas and
ests. Indeed, privatization of a parastatal  incur heavy social responsibilities, for town-
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ships and other infrastructure. Mining oper-    Enhancing the value
ations are, by their nature, harmful to the  The value to the government of the sale of a
environment. For state-owned mines, this     state-owned mining enterprise can be
problem is complicated because they have     enhanced through the identification of "hid-
largely lacked the capital to invest in new   den" assets, such as undeveloped ore bodies
environmentally benign technologies.          or unexploited reserves. Sometimes selling
Finally, many state-owned enterprises are    the enterprise as a group of assets rather
integrally linked to local industries, in par-  than as a business or as a going concern will
ticular small mines that depend on state      enhance the value. In many cases it is neces-
enterprises for such services as smelting and  sary to remove certain liabilities from the
refining.                                    company's balance sheet-by reducing the
labor force, transferring social facilities to
Role of technical experts                     municipal authorities, and providing indem-
Maximizing the value of the sale of a state-  nification for environmental liabilities.
owned rnining enterprise is not simply a        Various commercial aspects of privatiza-
financial exercise. Mines have specific tech-    tion should also be recognized. Mineral
nical considerations that can make or break  prices are highly cyclical. More interest in
a deal. These can be brought to light only    the potential sale of an enterprise will be
through deliberate evaluation of the opera-   generated if the relevant markets are robust.
tions by technical experts. The value of the  The assessment of a company's competit-
mineral deposit is the defining variable in  ive position on international markets should
most privatizations of mining enterprises.   be strictly objective. Many state-owned
After the comprehensive technical review      entities have no competitive position and
has been completed, an investment bank can    will face great difficulty in attracting inves-
proceed with preparing prospectuses, sur-     tor interest.
veying potential buyers, and developing a
divesture strategy.
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ACTIONS BY THE            The World Bank Group consists of several        updated legislation and fair and competi-
WORLD BANK                related organizations. The International       tive fiscal terms
GROUP                     Bank for Reconstruction and Development      * Support development of strong institu-
(IBRD) makes loans to governments (a) to       tional capabilities to administer the min-
support economic stabilization and adjust-     ing code and negotiate agreements
ment ("policy" lending); (b) to help finance  * Design model investment agreements
specific projects ("investment" lending); and   and assist in negotiations with investors
(c) to strengthen government institutions    * Assist with analysis of environmental
and capabilities ("technical assistance" lend-  issues and design and implementation of
ing). The International Development            environmental standards and safeguards
Agency (IDA) provides soft "credits" for the  * Provide technical assistance for the priva-
same purposes to the poorest countries and      tization of state mining companies.
to noncreditworthy countries. The
International Finance Corporation (IFC)      Exploration and investment
makes loans to and provides equity invest-   promotion and financing
ments for private sector projects and also   * Help geological surveys to assemble and
provides investment advisory and privatiza-    reevaluate information using modern
tion services. The Multilateral Investment      techniques and to publish geological and
Guarantee Agency (MIGA) provides loan           other maps
guarantees against noncommercial risk        * Support training efforts and introduce
including currency transfer and convertibili-  computer technology for geological data
ty, war or civil disturbance, expropriation,    base preparation and information systems
and breach of contract.                      * Design and support promotional activi-
The World Bank Group is working to          ties, including brochures and promotion-
assist various African countries to encourage  al events
new private sector exploration and mining    * Participate in mobilizing the necessary
investment. Activities include measures to     financing for selected mine and
improve the policy and regulatory environ-     infrastructure investments
ment and to mobilize financing for explo-    * Provide guarantees for loans for new
ration and mining projects.                     mine and infrastructure projects.
Policy and regulatory reform
John Strongman is Principal Minerals Economist,
• Support sound macroeconomic policies      Industry and Mining Division, Industry and Energy
* Help establish clear mining policies with  Department, Finance and Private Sector Development
16



The views expressed are those of the author and are nct intended to represent
an official statement of Bank policy or strategy.
Comments are welcome. Please send them to John Strongman, Room G2027,
The World Bank, 1818 H Street, NW, Washington, DC 20433, USA.
®   printed on recycled paper