Published On  Dec 11,  2011






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Editor's Note Share

Suspension of Mining Licensing Creates Uncertainty, Risk for Much Needed Investors




Mainstreaming transparency has become a popular administrative element in most industries, except mining. An industry involving trillions of dollars of transactions across the world, mining remains resistant to collective accountability efforts. Creating a transparent industry is not even being realised by multinational financers, such as the World Bank Group (WBG), even with its enormous presence in the industry since 1950s.

It is only lately that voluntary efforts of transparency are taking root in the rather dappled industry with the Extractive Industries Transparency Initiative (EITI) assuming the defining role. Through its 34 member states, of which only 12 are compliant countries while the rest remain as candidates, the initiative desires to serve as a watchdog for the collective answerability of the global mining industry. To the surprise of industry observers, Ethiopia has come to forge a new alliance with transparency in the disclosing of its aspiration to join the club of countries, recently.

In complete contradiction with the aspiration, however, the government has pronounced that the window of exploration licensing is closed, indefinitely, until such a time that it cleans its regulatory house. As it appears, closure is corroborated with the need for organising information, building regulatory capacity, and ex-post evaluation. Up until now, little is being said about what impact the decision could have on aspiring investors.

As abrupt as the decision was, it troubled both major and junior investors. Its indefiniteness has left the sector open for speculation.

Many concessioners are worried that a rather strange regulatory surprise might appear, soon, that could jeopardise their investments, while some are watching the state meddle in their day-to-day operations. So shocked is the industry that many aspiring investors are pulling back their plans.

Unlike other sectors, the mining sector has received considerable attention from governments since the imperial regime. A series of studies was commissioned to assess the extent of resources and the value of prospective areas by subsequent governments.

Aimed at verifying the popular attitude that the nation is resource rich, the studies were predominantly undertaken by foreign companies. Changing hands with changing governmental ideologies, Canadian, British, Russian, Italian, and German companies have been involved in examining the surface and sub-surface mineral potentials of Ethiopia.

However, it was only after the liberalisation of the economy in 1991 that the industrial miners developed the confidence to invest in expansive exploration activities.

It is no wonder that the political stability of the nation has contributed a lot to this improvement. It is also obvious that the relatively clear investment regime created by the incumbent government has promoted the attraction of foreign investment.

Compounded with expanding infrastructure and aggressive economic diplomacy, the sector has started to grab the attention of renowned multinationals.

It is not all smooth sailing, however. A labour market restrained by a shortage of trained human resources and embryonic technology absorption holds the sector back from faster growth.

Poor planning capacity, high staff turnover, frequent restructuring and the related loss of institutional experience, and the absence of a centralised information database have gradually eroded the regulatory capacity of the Ministry of Mines (MoM), so much so that proper regulation of the rather sophisticated industry operators remains a pipedream, hence, the closure of the licensing window.

Certainly, investing in mining requires enormous financial, human, and technological capacity. It has never been easy to find foreign investors that command these essentials, and neither has it been effortless to buy enough of their confidence to get them to put their capital into Ethiopia’s mining basket. Indeed, the effort has started to bear fruit to the extent that big multinationals have arrived with their pocketfuls of cash, in recent years.

Growing national revenues and contributions to gross domestic product (GDP) rightly signify the budding importance of the sector. The share of mining in the GDP reached 1.7pc in 2010/11, growing by over fourfold since 2008/09. Analogously, national revenue from the sector has inched up to eight billion Br in 2010/11, a significant leap from a total revenue of 1.3 billion Br in 2008/09.

In closing shop, the government is squandering its own achievements. It is discouraging essential foreign direct investment (FDI)in the rather poorly financed sector.

Even if the intent is to manage the sector well, the cost is not justifiable compared to the benefits. Even worse, the loss in the government’s credibility among the highly concentrated group of mining concessioners in the world is invaluable.

It is just more evidence of the unpredictability of a developmental state, claim critics. Regulatory surprises are becoming the norm and are increasingly coupled with new breeds of industrial players in the form of enterprises or corporations. Too often, lag times, as such, are followed with crumbling directives and nonreciprocal obligations.

As long as the lag time is not properly defined, there is no way to disprove the interpretive projections of critics, not to mention the contemplations of industry operators. It is not yet clear what will come out of the closure of the licensing window. No official explanations are being provided for aspiring investors at the Ministry other than a short notice on the doors of the licensing department.

By and large, the decision is unwise. It does not take into account obvious industrial realities.

Mining is a capital-intensive investment. Industrial investors often assiduously look for risks related to state intervention. Abrupt interventions can compound this risk factor, aside from sending negative signals to wannabes.

This is a scenario that prospecting countries want to avoid. Ethiopia is no different.

A growing role for mining in the economic development of the country can only be sustained if comparative stability prevails in the investment regime. Decisions that disrupt the regime play against the very objective of sector growth. It is even worse in an interconnected world, wherein word-of-mouth shapes perceptions amongst a concentrated group of investors.

As it appears, most of the mining companies are incorporated public entities with the major objective of increasing returns for shareholders. Concession plans are often decided upon after a series of evaluations of potential acquisitions.

With a wider shareholder base comes the challenge of settling conflicts of interest. Shareholder perception about investment locality has, therefore, a lot to do with defining perceptive risk.

By closing the licensing window, the Ethiopian government has increased the perceptive risk of investing in mining. It has reduced the confidence of investors so significantly that some are reconsidering their plans. It has sent a negative signal to green project investors that could have produced a new source of growth for the economy and created employment opportunities.

It might not be too late for the government to see the impact of its decisions in the reduction of foreign investment. Certainly, this would affect the sector’s vision for the five-year economic Growth & Transformation Plan (GTP).

Indeed, the capacity of the MoM in both planning and evaluation is very low. It is degenerate with a high staff turnover.

Yet, closing up shop cannot be an option. Instead, the Ministry has to institute a thoughtful staff retention strategy. It needs to create a conducive working atmosphere for experts and provide them with meritocratic upward mobility.

With the country aspiring to join EITI, state interventions in the sector must be communicated effectively with stakeholders. It is only through effective communication that trust can be established between investors and the state. As long as the government is thinking big, it ought to start small.

Rectifying the institutional mishaps from short-sighted planning, as was evident from GTP targets met in one year for mining, to organising sector data, must not be achieved at the expense of discouraging viable investors. Sacrificing potential future investment with institutional restructuring is not worth the price that the nation would have to pay.

Changing this course is in high demand at this time of speculation. The government must open the window of licensing to investors, as it is only through transparent communication that industrial stability can be maintained. The government has to, at least, set a definite time for reopening it.

Inarguably, failing to do so could affect the aspirations of the nation on the home front as well as the global mining industry’s prerogative. Cool heads must prevail within the government sooner rather than later in order to see the bigger picture of this faulty decision.





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