EDITORIAL & OPINION – COMMENTARY — Markets deter African investment

Investments in African mineral projects have fallen off, the chief reason being diminished confidence in emerging markets prompted by the collapse of the Asian market and current political and economic woes in Russia.

Finding financing for mining projects with 5- to 10-year development time spans is difficult at the best of times, but more so in a depressed commodities market.

The principle reason for the erosion of investor interest in Africa is the perception that political risk is unmanageable. Terrorism in the sub-Saharan region is, in fact, rare, notwithstanding the bombing of U.S. embassies in Nairobi and Dar es Salaam. Nevertheless, of the 14 countries that rank highest worldwide in terms of political risk, seven are in Africa, and four of these — the Democratic Republic of Congo (DRC), Sierra Leone, Ethiopia and Eritrea — are noted for their mineral resources.

Especially worrisome to mining executives is the DRC, even though the country features vast mineral wealth and an established (albeit poorly maintained) mines infrastructure. Three decades of corrupt and inept rule by notorious dictator Mobutu Sese Seko have brought the country to an advanced state of political, economic and administrative collapse, and this instability continues to pose a threat to bordering nations.

For a short time in 1997, the threat was deferred. The support of Uganda and, to a lesser extent, Rwanda, for the rebellion that brought Laurent Kabila to power in May of that year gave rise to hope that political and economic conditions in the former Zaire would improve.

It has since become apparent that Kabila is not equal to the task of managing political and economic transformation in sub-Sahara’s largest country, as evidenced by his regression to an extremist socialist policy. Mining companies, some of which had been negotiating contracts for as long as two years, complained of growing corruption, persistent delays and indecision in Kabila’s government.

The war in DRC recalls the negative forces that prevailed in the last years of Mobutu’s rule. With two fairly competent military powers, Angola and Rwanda, potentially pitted against each other, the outcome of the conflict is unlikely to be clean and decisive. It also raises the prospect of a prolonged conflict and opens a range of negative prospects, such as the secession of mineral-rich Katanga province, the annexation by ethnic Tutsis of the eastern Kivus and of the main gold mining areas, and disintegration into a Sierra Leone-like resource-based war in the Kasaii diamond areas.

Despite such examples of political instability, Africa and its mineral potential are vast. The sub-Saharan region comprises 40 countries in various stages of political and economic development.

With the end of the Cold War, Africa’s leaders found that they were increasingly free to pursue policies suited to Africa’s political, social and economic development. There has also been a tendency for governments to intervene in other jurisdictions to protect domestic interests, and this tendency lies behind the preparedness of Zimbabwe, Namibia and Angola to intervene in DRC.

Most countries on the continent are either in the second phase of democratization or moving toward more representative rule. Ironically, for foreign business investors, regular elections in most African countries bring the prospect of increased political risk and the prospect of regular bouts of politically motivated unrest.

Several countries have taken considerable strides to improve their economies in order, partly, to attract mining investors. Also, since 1990, most francophone West African countries also reformed mining investment laws.

Although several African countries are still plagued by war and political instability, there are others which represent safe investment prospects. Topping these is Mali’s Sadiola Hill project, Ghana’s Obouasi, Oboton and Tarkwa goldfields, and Tanzania’s Gold Pride deposit and Bulyanhulu project.

— The preceding originally appeared in Trendline, a publication of Control Risk Group, a consulting firm specializing in political, security and business risk assessments.