Our conclusion is unambiguous: the overwhelming benefit is government revenues. Here’s a roundup of why…

1. Economic Growth: While extractive resources have boosted Mozambique’s GDP, it is now commonly accepted that there has been little spillover to the rest of the economy. The real question is; how can these massive investments better promote economic and social development.

2. Employment: The extractive sector generates fewer jobs than any other form of foreign direct investment. Sasol’s $1.2 billion investment and Vale’s $1.7 billion investment resulted in fewer than 700 and 900 long-term jobs respectively. These gains will have a limited effect on national employment, especially with a labor market growing by an estimated 300,000 annually.

3. Infrastructure: Much is made of infrastructural development through so-called “resource corridors.” However, in most cases, investments are site-specific with

little broader benefit. Nevertheless, in the case of Mozambique, investments in transport for coal exports will strengthen much-needed transportation corridors and shipping ports. Furthermore, several companies in Tete may sell power from their own operations to the power grid.

4. Community Investment: An extremely modest proportion of the considerable profits accrued by extractive companies is re-invested into affected communities. Mozal, for example, invests just 1% of its pre-tax profits. What’s more, these investments are directed to those in close proximity to major operations, with little impact at a national level. It is also important to differentiate infrastructural investments driven by core business needs. When Vale reports that 2011 social and environmental spending was $1.5 billion globally, they are conflating huge operating expenses with modest investment in communities

5. Government Revenues: Although these revenues do not come on stream quickly, they hold the greatest promise and potential to add billions of dollars each year to government income. For natural resources to serve the interests of development in Mozambique, it is essential to negotiate a “fair” deal for the sale of these non-renewable assets and to build the capacity to assess and collect the appropriate taxes owing.

Firstly, natural resource dependence has been linked to increased incidence of civil war in places like Angola, Sierra Leone and the Democratic Republic of Congo.

In the case of Mozambique, natural resources were not a factor in the civil war. A distinction can be drawn between resources that are “lootable” – those that can be exploited with out sophisticated technology – and those that require industrialized production. While there is artisanal production in Mozambique, the majority of the mineral wealth can only be exploited with industrial technology.

Secondly, abundant natural resources revenues are said to corrode public institutions as opportunities for corrupt behavior skyrocket as demonstrated in countries such as Nigeria and Equatorial Guinea. With no need for taxation from the non-extractive sectors, public institutions become unresponsive to citizens demands.

The close links between natural resource extraction and corruption cannot be denied. There are, however, reasons to believe that the association between the two may be less direct in the future than it has been in the past. This is due to greater transparency, and the creation of monitoring bodies such as the Extractive Industries Transparency Initiative (EITI).

Furthermore, in comparison to other resource-rich countries, Mozambique already has comparatively high levels of revenue transparency and relatively effective tax authorities.

Thirdly, there is a range of economic ills, often subsumed under the heading of “Dutch disease,” which are said to explain long-term economic underperformance among resource-rich developing countries. Indeed, it cannot be denied that resource-dependent countries are more vulnerable to a boom and bust cycle.

Analysis of the specific causal mechanisms is, of course, much more complicated than is implied here. However, the broad policy proscriptions are relatively simple: manage revenues efficiently and transparently, and reinvest them in physical and human capital.

From this perspective, the resource curse is best understood not as a curse at all, but as a preventable disease. The risks factors are well understood and so too are the appropriate policy responses. There are of course no guarantees that the appropriate policies will be implemented. But there is certainly nothing inevitable about the path from resource dependence to declining economic and social development.

These projections, if proven, would place Mozambique among the top fifteen countries in total gas reserves.

Unlike coal where massive investments have already been made, the future of the gas sector is far less clear. Although exploration has led to ever-expanding reserves, it is important to note that no company has yet made the formal decision to develop a liquid natural gas (LNG) project in Mozambique.

Both Anadarko and ENI are reported to be planning to make final investment decisions in 2013, with production beginning as soon as 2018. Many hurdles remain however, with oversupply, limited infrastructure and slow-moving legislation at the forefront.

While the industry can feel relatively reassured on the demand side, there are serious concerns of oversupply in the medium term. Global production has expanded by more than 50% from 2009 to 2013, and further expansion is expected in the coming years as Australia, Indonesia, Nigeria and Papua New Guinea expand their operations.

Developments in hydraulic fracking have also led to a massive expansion in non-conventional gas, previously thought to be locked in shale. The United States is projected to become a net exporter by 2016.

Even in the face of potential oversupply, Mozambique appears to be well positioned in comparison to others. While production costs may be higher in Mozambique, the region has better access to Asian markets than other rivals.

To capitalise on this advantage, Mozambique must overcome a second key hurdle: limited existing infrastructure. As with coal, infrastructure rather than reserves will determine the volume of exports.

A third hurdle relates to legislation; the legislative framework for the gas sector is not yet finalized and negotiations between companies on co-developing a gas-field have yet to be completed. This will further delay investment decisions.

Assuming the decisions are positive, timelines may slip again as the rapid development of LNG plants elsewhere is pushing the limits of construction capacity.

As a result, industry assessments suggest that LNG exports are unlikely to begin before 2020.

It has long been known that there are vast coal deposits in Tete and Niassa provinces. According to industry analysis, Mozambique has the potential to provide 20% of the world’s sea-borne coking coal by 2025.

In 2004, Vale – a leading Brazilian mining company – won the rights to begin coal exploration in Tete.  Since then, a whole host of mining companies, including Rio Tinto, Jindal and Beacon Hill, have begun operations in the area. 112 licenses have been granted to 45 national and foreign companies during the last two years alone.

While there is clearly no shortage of coal or export markets, rail and port capacity is the single largest barrier to expansion. After all, limited infrastructure was a key factor in Rio Tinto’s decision to revise the value of their coal assets in Mozambique from the $4.2 billion purchase price to less than $1 billion early this year.

The revision led to the removal of the CEO of the company, and also raised questions about the realistic expectations of coal exports. In 2012, total exports were less than 3 million tons. Given transportation limitations, it is difficult to see how exports could exceed 50 to 60 million tons per year, as currently predicted by the end of the decade.

Upgrades and investments are underway to the rail line running through Malawi to Nacala. However, exports of significantly more than 50 million tons per year will require an alternative export route.

Proposals to barge coal down the Zambezi have been rejected by the government on environmental grounds. The alternative, a green-field rail line and port running to the coast just north of the Zambezi river, would provide the capacity to exploit coal reserves in Tete, but would take years to complete and cost billions.

As the Marikana commission of inquiry hearings have tellingly reminded us, the deaths were not a proud moment in South Africa’s embryonic democracy. It was, in some respects, not an unsurprising moment either for South Africa’s troubled mining industry. It could, however, prove to be the catalyst in crafting a new deal for the industry.

Mining was at the veritable crossroads well before 46 people tragically lost their lives during an illegal and unprotected six-week strike at Lonmin’s Marikana platinum mine from early August.

When a settlement was finally reached between mineworkers and Lonmin, it led to wage increases of between 11% and 22%. It later became apparent that most mineworkers would be less than 3% better off than they were before the strike, with the wage increases having included, among other things, a 10% increase that was negotiated before the strike and which would, in any event, have taken effect.

What makes the settlement negotiations extraordinary was the fact that they were mediated by the South African Council of Churches — bypassing the National Union of Mineworkers and thus the normal union-led wage negotiation process. Arguably, more perturbing than the cost to Lonmin is the serious loss of confidence this represents in the collective bargaining process itself.

Although events at Marikana were ostensibly driven by trade-union rivalry, wage dissatisfaction and a deficit in management as much as crowd-control techniques on the part of the South African Police Service, the root causes of the tragedy run much deeper. Plagued by an unhappy combination of regulatory ailments, infrastructure constraints and ever-escalating labour and energy costs, the South African mining industry shrank by 1% a year between 2001 and 2008. In the same period, the world’s other major mining jurisdictions expanded by 5% every year — a commodities boom on which South Africa clearly missed out. 

With the recent downgrade by Moody’s of South Africa’s government bond rating owing to, among other things, “a decline in the government’s institutional strength amidst increased socioeconomic stresses”, it is important to understand why things are so difficult for the mining industry and also to examine some solutions to the crisis the industry faces in Marikana’s wake. 

The mining sector’s historical association with colonialism and apartheid has created a legacy as much as a legitimacy issue for it politically, while, paradoxically, black economic empowerment (BEE) in the industry has failed to broaden its ownership base. According to BEE ratings and research agency Empowerdex, only 7% of BEE transactions between 2004 and 2008 involved employee share-ownership schemes, while a further 10% involved communities. Although more progressive mining companies have embraced both, a number simply have not. 

While the revised Mining Charter, released in September 2010, provides for employee share schemes and community trusts, it does not make broad-based black economic empowerment compulsory. Unlike the original Mining Charter 10 years ago, it imposes obligations only on the industry — not on the government or labour. 

In this respect, the revised Mining Charter is unbalanced and inequitable. 

Marikana itself has highlighted the dreadful living and working conditions of workers in and around some of the country’s mines and serves as a clear reminder of why a development partnership is urgently needed between the government, labour and business. In this regard, it is striking that the Rustenburg municipality has received five qualified audits from the auditor-general, while the settlements surrounding Marikana, where many of Lonmin’s mineworkers live in the most squalid conditions, show evidence of evanescent local or, for that matter, provincial government. 

Marikana also illustrates the underlying weaknesses of social and labour plans required for mining rights under the Mineral and Petroleum Resources Development Act. Under the act, a mining right may be issued only if the applicant submits a compliant social and labour plan. 

Social and labour plans are aimed at promoting employment and advancing the social and economic welfare of South Africans, while ensuring that the holders of mining rights contribute towards socioeconomic development. 

The required content and form of social and labour plans have, however, been unworkably vague. 

By presupposing a template model for communities — despite diverse needs and circumstances — these plans are simply not delivering the necessary benefits to mine communities. A study in 2009 by Stellenbosch University’s Unit for Corporate Governance in Africa has described the social and labour plan process as being “treated as a paper exercise to get approval for the mining licence”. 

South Africa could do well to learn from other resource jurisdictions. 

In Nigeria, for instance, the Minerals and Mining Act requires applicants for mining rights to conclude a community development agreement that should “ensure the transfer of social and economic benefits to the community”. Reviewed every five years, community development agreements have the ability to address emerging challenges while still providing reasonable stability. Similar approaches are now followed in Sierra Leone, Papua New Guinea and Mongolia. 

Community development agreements, as opposed to social and labour plans, provide more effective mechanisms for community participation in the planning, implementation, management and monitoring of development plans. 

Community development agreements also enable communities to become better acquainted with the financial and other constraints on mining companies, thus fostering a better understanding of expectations. 

Marikana has reinforced the urgent need for a new social compact for the industry that offers mineworkers and mine communities a real stake in mining operations. 

It must create a shared sense of responsibility between the government, the mining company concerned and the communities involved. And it must foster a mutual understanding of the expectations of all the parties concerned. 

Without strengthening mines’ social licence to operate, South Africa will simply not develop a proper foundation for a sustainable and growing mining sector. If a new deal is not struck, the fires of resource nationalism and its close relative, nationalisation, are likely to be stoked further. 

As Moody’s warns, increasingly interventionist economic strategies by the government will simply imperil South Africa’s growth potential further. 

With a record 6.4% current account deficit already attributable to lost mine production in the first quarter of this year, any further loss in investor confidence in the mining sector is something South Africa simply cannot afford. As the trade balance is principally financed by short-term investment flows, any rapid reversal of these would have a devastating effect on the current account, the currency and the overall economy. With endemic levels of unemployment, high levels of inequality and weak economic growth, the last thing SA needs is a domestic version of Argentina’s 2001 economic crisis. 

• Leon is partner and head of Africa mining and energy at Webber Wentzel.

With Africa holding 15% of the world’s oil reserves, 40% of its gold, and about 80% of the platinum group of metals, natural resources represent important development opportunities for the continent. For example, oil production has been growing steadily in Africa, and is expected to continue to rise at an average rate of six percent per year for the foreseeable future.

At the 40^th Anniversary Meeting of the Zone Franc Monetary Union in Paris today, attended by over 20 African Finance Ministers, the French government strongly supported the new fund, and encouraged other governments and donors to back the Bank initiative.

“We stand fully behind the World Bank in its efforts to help African countries secure the best-possible mineral contracts with international companies in order to promote the long-term development of their countries and the wider continent. We urge other governments and donors to also support this new World Bank initiative,” said French Finance Minister, Pierre Moscovici.

Welcoming the French government’s strong support, the World Bank’s Vice President for Africa, Makhtar Diop, said the new fund would work closely with the African Development Bank and other partners for maximum impact, and would welcome donor support to expand its reach.

“It is clear that Africa sits on top of extraordinary wealth and that these natural resources could be transformational for the continent,” said Diop. “Being able to negotiate the best-possible deals is essential for African countries to convert more of their natural resources wealth into inclusive and sustainable growth.”

According to a concept note on the new World Bank fund, translating natural resources wealth into broad-based development can be difficult in Africa. Contracts to develop natural resources are often highly complex, and African governments may be less well-informed about technical details and geological endowments than the oil, gas, or mining companies who come to negotiations with highly-paid lawyers and technical staff.  The Bank notes that the potential benefits of new extractives contracts in African countries are likely to be missed in such negotiations when governments have insufficient capacity to manage the negotiations process.

On top of this unbalance between governments and private companies, is the complexity and long life of these contracts, and a further challenge is that opportunities to create local jobs are often frustrated by poor infrastructure and limited country capacity.

The Bank notes that managing the environmental and social footprint of the extractive industries sector is also essential to avoid damage to land and waterways.

“Too often local populations suffer all the environmental damage and development neglect of extraction, while the benefits and the profits end up far away,” said Diop.

The proposed new fund would cover several key priorities

1.      Legal advice to negotiate better deals from private investors—This could include direct legal advice during negotiations, advice on the methods of negotiation (competitive bidding, bilateral negotiations, and so on), advice on different transactions fees.   Advice would be available from reputable legal firms.

2.      Help to reduce environmental risks—Environmental risks occur at two stages: during extraction and when operations close. Technical assistance is typically needed to assess environmental impacts, as well as to develop workable solutions and remedies that are effective.

3.      Technical assistance to address social risks—This could include advice on new benefit sharing arrangements drawing on other Bank and global experience , as well as technical assistance to assess social impacts, health, and livelihood effects, as well as local service delivery.

Students display their work at the Anganwadi centre in Jamsaut village in Bihar. (Gates Foundation/flickr)

The world of international development has long been divided between idealists and pragmatists. The idealists give more weight to addressing the needs of the world’s most destitute. The pragmatists are driven more by impact at the aggregate level, such as increasing GDP per capita. A growing body of evidence, however, suggests that the interests of these groups coincide. In many cases, it is most cost-effective to focus on the poorest groups.

In part, the convergence is due to the fact that, although many development indicators have improved at the national level — including an overall reduction in poverty and child mortality and increasing school enrollment — there are growing disparities within many countries. That is, as broad indicators improve, the gulf between the best and worst off is widening. A recent UNICEF study found that, in 26 countries, the mortality rate for children under five has declined by ten percent or more since 1990. But in 18 of those countries, the gap between the child mortality rates for the richest and the poorest quintiles of the population remained unchanged or grew. A specific example: between 1990 and 2008, measles immunization rates increased by ten percent among the wealthiest quintile of the population in West and Central Africa. They only increased by around three percent among the poorest quintile.

Across the developing world, children in the poorest income quintile are still less than half as likely as those in the wealthiest quintile to have benefited from prenatal care; nearly three times as likely to be underweight; twice as likely to die before their fifth birthday; and, among girls, are three times as likely to get married before the age of 18. In addition, the disadvantaged have suffered the most from rising food and fuel prices, too often leading the poorest families to sell off vital economic assets and withdraw their children from school.

These and other disparities are an injustice. Beyond the moral imperative to correct them, there is also a practical, economic case for investing in equity.
For decades, development experts have maintained that a public policy focused on helping the most disadvantaged is desirable in principle, but not cost-effective. Further, many believed, a rising economic tide would float all ships. But the past 15 years have shown that economic growth alone does not necessarily help the poorest of the poor.

The development community increasingly recognizes that approaches that emphasize greater equity are, in fact, cost-effective. Picking the low-hanging fruit does not necessarily produce the greatest results per dollar expended. We know intrinsically that the greatest results can be achieved where the needs are greatest. The same vaccination program in an area of widespread disease saves more lives than one in a less afflicted area. Opening a new school in an area that has none will boost education more than opening one in an area with several. The question is whether the greater impact outweighs the additional cost of working in the hardest-to-reach areas.

The answer is yes, it does. According to “Narrowing the Gaps to Meet the Goals,” a recent UNICEF report, an equity-focused approach is actually more cost-effective than one that simply focuses on improving national averages. In countries with the highest under-five mortality rates and the worst poverty, a $1 million pro-equity investment will save up to 60 percent more children than a traditional $1 million investment. Even in middle-income countries, such approaches generally save as many children per dollar as traditional ones.
Investing in services for the poorest groups not only saves more lives but also promotes economic growth. This is true in developing and middle-income countries and in richer ones, too. Evidence shows that developed and developing countries with deep inequality tend to grow more slowly. A recent IMF staff study found that a ten-percentile decrease in inequality increases the expected length of an economic growth period by 50 percent. To see how investing in the social sector can promote and sustain growth, consider efforts to improve education and address malnutrition.

In both rich and poor countries, an increase in learning achievement (as measured by test scores) of one standard deviation is associated with an increase in a country’s long-term growth rate of around two percent annually. Countries in which large sections of the population are denied quality schooling are thus wasting a hugely important and productive resource.

And that is especially true of those countries that deny girls an education. One extra year of primary school can boost their future wages by between 10 and 20 percent — an increase that also benefits their families. A 2003 study found that women and girls worldwide reinvest 90 percent of their income into their families (men reinvest only 30 to 40 percent). South Asia and sub-Saharan Africa, in particular, are held back by gender inequality in education. Estimates suggest that between 0.4 and 0.9 percent of the differences in the growth rates of those two regions and that of East Asia is attributed to their large gender gaps in education. In other words, educating the poorest — especially the poorest girls — is not only the right thing to do. It is the economically smart thing to do.

Addressing malnutrition reaps similar gains. A hundred and eighty million children around the world are stunted, a permanent condition from chronic early malnutrition that prevents children from ever growing as tall or as cognitively developed as they should have been. The price of malnutrition is thus paid later in reduced earning capacity — some estimates show by as much as 22 percent. And that, in turn, can have a devastating impact on a nation’s economy.

Stunting can be relatively easy and inexpensive to prevent. Promoting improved feeding practices and providing micronutrients, such as Vitamin A, zinc, iron, and iodized salt, are examples of proven interventions that have had significant positive results in reducing malnutrition. The impact on economic development of such interventions can be tremendous. The World Bank estimates that improving early-childhood nutrition can add two to three percent to the GDP of a poor country. More concretely, the Copenhagen Consensus, a group of leading development experts, calculated that every dollar of Vitamin A supplements can eventually yield a return as high as $100.

In addition to contributing to growth, an equity approach helps promote stability. Inequality, if unchecked, contributes to weak social cohesion, poor institutions, and bad governance. All else being the same, the more unequal a society, the likelier it is to have higher infant mortality rates and lower life expectancy, poorer educational attainment, more teenage pregnancies, and a higher number of homicides and imprisonment rates.

Reducing disparities makes communities more resilient. For example, Brazil and Indonesia have been able to withstand the global recession better than other countries. A recent report by the International Labor Organization and the World Health Organization shows that earlier investments in the “social protection floor” helped maintain more demand for goods and services among the most disadvantaged. In addition, Bangladesh’s improved response to natural disasters in recent years has been attributed, in part, to its more diversified economy and its poverty reduction programs, along with its efforts to support remote, disadvantaged communities in disaster-prone areas.

A society in which children’s opportunities are limited by their gender or race, the income of their parents, or where they live is not only unjust. A country that fails to tackle these issues is also one that is limiting its potential for long-term growth, stability, and resilience. It is thus time for idealists and pragmatists to work together toward greater equity not just because it is the right thing to do but also because it is deeply practical.

Copyright © 2002-2012 by the Council on Foreign Relations, Inc.

President Guebuza

(2012-05-10) Mozambican President Armando Guebuza warned on Monday that the social and economic problems faced by Mozambicans will not be solved simply through the exploitation of mineral resources, but through integrating the mining sector with other areas of the economy.

Guebuza was speaking in London at a meeting with the Mozambican community resident in Britain.

He recognised that Mozambique could have a brilliant future thanks to the mineral resources it possesses, and others that may be discovered in the future. However, this will only come about gradually.

“The minerals we have discovered will not give their best results immediately”, he said. “It will take time for us to recover the investments made, It will take time but that doesn’t mean that we won’t have gains. We shall gain from the jobs created and the taxes paid. Gradually there will be benefits, although not at the level that would be desirable”.

“This situation is creating impatience”, Guebuza admitted. “But we must keep a cool and clear head, because the benefits will come”.

Over the last decade, the President added, Mozambique had maintained an average annual growth rate of between seven and 7.5 per cent.

“We used to have a per capita income of 80 US dollars and today it’s more than 400 dollars”, he said. “It has been rapid and sustainable growth, which has kept on throughout recent years, and even with the global financial crisis growth has not faltered”.

Guebuza explained that this growth was not due simply to coal and natural gas. “We are growing sustainably without gas, and even without coal”, he said. “I would like to remind Mozambicans that we should not think that the use of these resources will solve all our problems”.

“What must happen is that the resources are used to speed up development, and thus bring us to accelerate the fight against poverty”, he added.

Guebuza recognised that recent economic growth is not yet reflected in an improved quality of life for Mozambicans. “Often the question is asked – if there is growth, why is it not reflected in people’s pockets?”, he said. “This is a problem of distribution. The government is distributing wealth through the provision of good quality services, by increasing access to clean water, building schools and improving their quality, and bringing electricity and telephone services to the population”.

He pointed out that, over the last ten years, these services have become more accessible to citizens. In the recent past, there were parts of the country where people had to walk for 200 kilometres to reach the nearest health post. That maximum distance has now been cut to 40 kilometres.

“This is important and has a great impact on people’s lives”, said Guebuza. “These results are most visible for people who live in the countryside”.

Guebuza also noted that access to higher education used to be limited because there were only two universities in the country, both in Maputo. But now it is possible to attend university courses in all 11 provinces.

About 250 of the 600 Mozambicans living in Britain attended the meeting.

One of Mozambique’s top economists, Firmino Mucavele, has warned that, despite the rapid development of the mining industry, Mozambique will go nowhere if it does not build up its agriculture. Cited by Radio Mozambique, Mucavele, who was recently distinguished by NEPAD (New Partnership for Africa’s Development) for his work on agricultural development, warned that you can’t eat minerals – minerals run out, and the resources derived from mining do not guarantee food security.

According to Mucavele, “70 to 80 per cent of the investment in mineral resources is foreign and only 20 per cent of the returns stay in Mozambique”.

The minerals, he claimed, “will merely contribute to the image of the country. They are not a solution to food security or to our sustainable development”.

Mucavele called for far-reaching reforms in the agricultural sector, with the adoption of a pragmatic and realistic policy for transforming subsistence agriculture into commercial farming. He argued that Mozambique will only have an agriculture with high levels of production and productivity, which contributes to the development of other sectors, when it banks on commercial agricultural, with small and medium seized companies.

He warned that there is no coordination between different value chains, and there is no harmony and congruence between the policies and actions defined for the various sectors of development. “As a result, no action or policy is successful”, he said, “If there is financing for seeds, there is no financing for transport or storage. If there’s a railway line, there’s no agro-processing. There are no linkages between production, processing, storage and distribution”.

Mucavele also pointed to the low level of agricultural research, and the lack of connections between research, extension and innovation. There was a lack of investment in research, and a failure to use adequately the few staff trained in this area that the country possesses. Illustrating the shocking lack of agricultural staff, Mucavele said that Mozambique only has 800 rural extensionists –who have to deal with about 36 million hectares of arable land.

Smaller countries have much larger numbers of extensionists. Thus in Malawi, ten years ago, there were 3,150 extensionists, and in tiny Swaziland there were 2,300. Under the government’s current agricultural programme, Mozambique hopes to raise the number of extensionists to between 6,000 and 8,000. Even so, the number will remain well below the country’s needs. Mozambique was good at drawing up plans, Mucavele said – but they were never fully implemented. “We have an inexhaustible wealth of policies”, he said. “What we need to do is take some of them and implement them, linking theory with practice”.

Check out David’s article at :

http://www.guardian.co.uk/world/2012/mar/27/mozambique-africa-energy-resources-bonanza