Rethinking Africa’s resource curse: lessons from Guinea and Mozambique

curse-of-wealth_africa

The mining world was rocked earlier this month after swirling corruption allegations stemming from the Simandou iron ore mine in Guinea led to the dismissal of two top-level Rio Tinto executives and cast even more doubt over a project that has languished for two decades.

In a separate development, Mozambique’s government has been tussling with the IMF and its international creditors, after it used state-backed loans to buy several patrol boats to protect its huge offshore gas reserves and rich tuna grounds from illegal incursions.

The curse of wealth:

While seemingly unrelated, the two cases are a painful reminder of the many forms the resource curse can take in Africa and show just how hard it is for resource-rich countries to monetize their wealth. In their bid to improve living standards for their populations, the two countries have actually achieved the opposite effect – but for a host of different reasons.

Over two-billion tons of high-grade iron ore with an estimated value of US$80billion and the potential to add US$6billion to the country’s GDP sit idle in Guinea’s Simandou, waiting to be collected by Anglo-Australian mining giant Rio Tinto.

The project has been held under license by Rio Tinto since the early 1990s, but Guinea’s deep-rooted corruption prevented it from ever seeing the light of day. In 2008, Rio Tinto lost a portion of the northern tracts to the whims of former dictator Lansana Conté, who sold the remainder to BSG Resources (BSGR).

BSGR then sold half of what it had purchased to Brazil’s Vale. After a review of the leases by current President Alpha Condé in 2014, BSGR was stripped of its licenses by the government, alleging that BSGR obtained its rights by way of corruption.

Enter the lawsuits:

Still reeling from the loss of billions of dollars of easily-harvested iron ore, BSGR was served with a lawsuit by Vale seeking US$1.1-billion in damages due to losses the firm alleges it sustained from BSGR’s actions in Guinea.

Likely passing Vale’s process server in the hallway at BSGR’s headquarters was a server sent from Rio Tinto with papers notifying BSGR that it was suing both them and Vale for allegedly stealing its concessions in Guinea by using confidential and proprietary information to aid it in pulling off the alleged heist.

Though Rio’s lawsuit was ultimately dismissed for failing to file before the statute of limitations had run, the legal (and possibly illegal) wrangling over ownership rights has caused what has been called the El Dorado of iron ore to waste away. Experts believe it could be up to a decade before any of the high quality iron ore hits the market and the people of Guinea finally reap a fraction of the benefit of their iron ore resources.

This entire legal kerfuffle was made possible by Guinea’s pervasive climate of corruption. At the same time that Rio Tinto, Vale and BSGR were suing each other, China Hongqiao, the world’s top aluminum company, quietly bought the rights to a massive bauxite mine in Guinea – which is expected to become

one of the biggest in the world and create thousands of jobs in the process.

But even here, the resource curse rears its ugly head. Chinese bauxite mining tends to be highly destructive to the environment, leading to the contamination of water sources with radioactive materials and increasing the incidence of cancer cases among the native population. The Boké bauxite mine in Guinea might turn out to be a devil in disguise, harming the country’s population in ways unseen since the Probo Koala toxic waste dump in Cote d’Ivoire.

The inability to monetize:
Guinea is scarcely alone when it comes to a seemingly chronic inability to benefit from the wealth beneath its feet. However, much of the continent finds itself unable to make full (or any) use of its natural wealth due to environmental and political factors.

Nigeria, Angola, Papua New Guinea (Bougainville), Chad, and Sudan have all experienced internal conflicts in recent years fueled at least in part over control of petroleum resources. Economists have even found a strong correlation between a country’s dependence on the export of commodities (especially petroleum) and the likelihood of civil war.

Mozambique, the other country making headlines, found itself handcuffed by forces beyond its control when it attempted to market its 16 tcf of natural gas, discovered offshore in 2012. The effort at bringing it to market is known as the Coral South Project, an endeavor launched by Italian firm ENI.

The company has invested billions in the project, which was expected to begin production in the year 2018. However, the investment was thrown into doubt after the IMF raised questions over a series of loans taken out by Mozambique aimed at protecting its piracy-prone coastline.

fighting pirates:

Although not at the frenetic levels of 2010, piracy in the Mozambique Channel is still a very real problem, and it is a problem that the country’s government could not address. A few years ago, Mozambique had a total of one oceangoing vessel capable of occasionally patrolling the area. As a result of budget and equipment realities, the Mozambique navy (such as it was) generally stayed in port until needed, which means its arrival is usually far too late to do anything other than count bodies.

With billions of dollars hidden beneath the ocean floor, Mozambique decided to ramp up the protection of its waters through a series of loans taken out by government backed agencies, anticipating a spike in piracy once mining operations started.
However, this action was not without its own negative repercussions, as the IMF temporarily cut off funding to the country. Further criticism has also mounted over the use of the assets such as patrol vessels, which remain stationed at the port not being used.

Outside obstacles:

The paradox of the resource curse struck again, this time in a different form: in its bid to create the infrastructure that would improve the population’s living standards, Mozambique was blocked by international creditors. Unlike Guinea, there is a silver lining in Mozambique’s saga: on 21 November, ENI’s Board approved the

Coral project, which is expected to start shortly.

Africa is already the world’s fastest growing continent, with consumer spending set to double in the next 10 years. By 2050, its population will have doubled (to more than 2.2-billion people), and its GDP could grow from around US$2-trillion today to US$29-trillion, depending on economic trends. The path is, therefore, clear: Africa is set to prosper – the only question is just how zigzagged its road to success will be.

Source: The Market Mogul

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