The price of gold has surged by more than five times since 2000. Yet, according to the African Development Bank (AfDB), the continent’s gold producing countries are not cashing in sufficiently.
At more than US$1600 an ounce, the spot price of gold is close to an all time high.
Africa’s yearly average gold production is 480 tons – 20% of the world’s total output. Gold mining is an important activity in at least 34 of the continent’s 54 countries.
In a paper, entitled Gold Mining in Africa: Maximizing Economic Returns for Countries, the AfDB says that African governments and the peoples of Africa are not benefiting enough from the gold boom.
Limited linkages to broader economy
One of the reasons why ordinary Africans are not seeing the full benefits of gold production is because “most gold mines in Africa are economic enclaves having limited linkages with the rest of the economy. This problem is reinforced by the fact that modern mining is highly capital-intensive”.
Few goods and services required by the mining companies are sourced locally, with the exception of South Africa. “Adequate machinery and equipment are prerequisites in the capital-intensive gold mining industry and almost all of these are imported. Consumables such as fuel, explosives and chemicals are also usually imported … Employment generation is very limited due to the capital-intensive nature of the sector,” says the report.
In Mali, where mining accounts for 17% of GDP and 70% of exports, only about 13,000 people (or 1% of formal sector employees) are employed by the industry.
In a report released earlier this year, the World Bank says that mining companies can boost economic growth in west Africa by purchasing more equipment, supplies and services from local companies. “Buying local goods and services is a catalyst for private sector development and sustainable growth … Mining companies need to be transparent about informing local communities on procurement opportunities, so that these communities can benefit economically from mining operations. Mining companies should not only extract wealth, they must inject opportunity,” commented Obiageli K. Ezekwesili, the World Bank’s vice president for Africa.
Unfair mining deals
The AfDB further notes that mining operations on the continent are often characterised by concession agreements that are unfair to African governments.
The majority of gold mines in Africa are controlled by foreign mining companies. As a result, the main avenues through which African countries benefit from the mineral revenues is through government tax revenues.
According to the report, African governments often offer highly generous concessions with the belief that such incentives are necessary to attract investments into a continent with high perceived risks and challenges. Many government officials also don’t have the capacity to effectively negotiate with mining companies during concession discussions.
The average royalty rate for gold production in most African countries is fixed at 3%; a rate the AfDB suggests is too low. “Unfortunately, this fixed rate limits the ability of countries to take advantage of high rents produced by gold mines especially during periods of rising commodity prices. It is especially noteworthy that when the ubiquitous 3% royalty rate was set in most regional countries, gold prices at that time (from the late1980s and the early 1990s) were significantly lower than over the past decade. As a result, the benefits of higher gold prices are being forgone by revenue-constrained African countries.”
The AfDB says there is scope for higher royalties that will still allow mining companies to realise adequate returns on their investments. Will the mining companies agree? Not likely.