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IN THE wake of my recent article The mining super ethic, I was confounded by the absence of naysayers to my admittedly naïve approach to social development.
So I have decided to push that envelope a little further to the avant-garde of naïveté, with an Africa-wide application for this strategy.
Without repeating the thesis - the gist of it being advocacy for mining companies to go way beyond the letter of the law and to coordinate regional development for the communities in which they operate - this is not the revolutionary component; unfortunately, this is almost expected in many places.
The revolutionary component is that this development should be paid for by ringfencing taxes from mines rather than from mining profits - or in other words, not letting government get their grubby paws on it.
Government - designed to fail
There is value in understanding why government is unsuited to doing its job; this understanding can inform the structural changes which need to be made.
The World Bank Group delved into this topic in a recent report, where it listed the three main factors that constrain the efficiency of infrastructure planning and implementation. These are:
1. Lack of policy planning and coordination at the national level;
2. Weak central oversight by the national economic and development authority and the department of budget and management; and
3. Intensive political intrusion and subsequent constant shifting of priorities.
Treating the above maladies is obviously necessary – but your impetuous correspondent seeks a solution more in tune with the frenzied pace of revolutionary change manifest in the current epoch.
Private nation builders wanted
I believe that the solution is to privatise nation building, not as a first prize but as a means to getting the job done.
This is not based on a belief that companies operate on a higher ethical sphere than elected officials, but on anecdotal evidence that the top ten companies in any given region are governed far better than the top ten municipalities in the same region.
This performance mismatch is well understood and supported by common sense; short-termism in the local political economy is incentivised through short-term election cycles.
Long-term infrastructure projects are no match for prevailing sentiments of “that’s my replacement's problem”.
Companies however are entrusted to make profits no matter who is running the country, and as such have a longer investment horizon. This may sound counter-intuitive to developed world readers, since public companies are constantly criticised for chasing quarterly targets instead of long term-value.
Let’s just say that this is indeed the case, but it’s a rich world problem, kind of like obesity.
Circling back to the question at hand, we understand that companies could do a better job than government if given the funds and mandate to do so. However, we are still faced with a series of hurdles.
Let us explore the solution with an example of a challenge relevant to every African country, albeit with varying degrees of severity: lack of infrastructure.
Why is there a lack of infrastructure?
In the generic vanilla African state this would be a cocktail of pre-colonialism, colonialism and post-colonialism, all contributing unique ingredients such as underinvestment, wars, famines, juntas, coups and despots.
What can we do about it?
In an effort to ringfence the solution, let us follow the obstacle course of economic development, starting with geopolitical stability.
Geopolitical risk is a perennial favourite hurdle to investing in long-term infrastructure, whose projects require decades of cash flow assumptions which are rendered meaningless in the face of regime swapping.
The next hurdle is access to capital.
International aid and development agencies are willing to support game changing infrastructure projects in theory and often in practice too - but dissonance all too often arises when these organisations make their funding conditional on tiny changes like transparent elections, fiscal discipline and regime change.
Assuming Africa Inc can overcome bureaucratic hurdles and convince potential investors that the regime is stable, property rights are robust and corruption can be kept to tolerable levels, the problem of deploying capital comes to the fore.
Developing neophyte sub-Saharan capital markets is no small hurdle in itself, requiring a sophisticated legal, accounting and advisory infrastructure.
This chicken and egg problem to African development solutions is well trodden, so much so that it has opened the door wide to China’s version of infrastructure development – which despite its many pitfalls does get the job done, while sparing the moralising.
In earnest, there is no utopian solution to infrastructure challenges and the western and eastern solutions are sub-optimal to their core, so we need to ask the not-so-obvious question.
Is there a better alternative?
Indeed, there are many alternatives.
These include the usual suspects of foreign aid, non-profits and social investors who are among the well-meaning paternalistic problem solvers.
Unfortunately, for a myriad of reasons building an ecosystem for sustainable development is enduringly beyond their reach.
Which is why I forward a solution of terraced development.
Terraced development
Leveraging off the assumptions of the mining super ethic - where governments agree to ringfence tax funds to be deployed by the private sector on mutually agreed upon, high-level deliverables - we can offer a solution which is but one of the many available structures on the menu of models for infrastructure delivery (as depicted below).
Exactly which model is selected is case dependent, each with pros and cons.
The model which I propose fits well into the generic, resource rich, infrastructure poor African country which we will give the fictitious name of Zongo.
Zongo has rich deposits of copper, iron ore and thermal coal, all of which require energy, mines, rail and ports to reach market.
Using the building blocks of good governance supplied to the Zongolese leadership by the World Bank, the government secures international loans to build a port and power plant near its mineable resources, which happen to be a few hundred kilometres from the coast.
Mine #1 invests in its own infrastructure and constructs the rail link to the port. Using the ringfenced strategy, taxes from Mine #1 are used to build the next rail link into the hinterland where Mine #2 will set up shop.
Mine #2 piggybacks off the infrastructure laid by Mine #1, but it too generates taxable profits which are deployed in the same manner, creating additional rail infrastructure further inland for Mine #3 to commence production.
This virtuous cycle repeats for mines #4 and #5 until the mining infrastructure is adequate, and then moves onto funding regional infrastructure such as schools and hospitals.
As depicted below, we observe the production profile of mining outputs displayed in terms of revenues. The mines follow the typical life of mine trajectory, ramping up production, maturing and eventually exhausting their resources.
The next stage of the strategy is to move beyond mining and begin planning for value-added manufacturing, known in the industry as beneficiation.
Due to the essentially free capital costs of setting up this beneficiation infrastructure, combined with long-term subsidies to attain competitiveness, the mining region of Zongo becomes an industrial centre for the region.
It constantly diversifies up the value chain, acquiring more and more value from its commodities and eventually moving into the service economy.
Since we are exploring a utopian solution, we also observe below how profits from these mines are deployed to nurturing beneficiation projects while mining productivity is at its zenith.
This perfectly choreographed economic renaissance allows Zongo to convert its limited natural resources into a sustainable economic engine.
Call to action
This solution of terraced development following a virtuous cycle is unapologetically optimistic - but it is not entirely fanciful.
Economic development is constantly stuck in the mud across the continent. Having been stuck in the mud in the desert before, the solution which worked for me was deflating the tyres and letting the engine do its thing.
In the sub-Saharan African context, there is no shortage of egos who could use deflation; isn’t it time we approach the challenge from a new angle and let the engine do its thing?
- Fin24
*Jarred Myers is a resources strategist and can be followed on Twitter on @JarredMyers. Opinions expressed are his own.
So I have decided to push that envelope a little further to the avant-garde of naïveté, with an Africa-wide application for this strategy.
Without repeating the thesis - the gist of it being advocacy for mining companies to go way beyond the letter of the law and to coordinate regional development for the communities in which they operate - this is not the revolutionary component; unfortunately, this is almost expected in many places.
The revolutionary component is that this development should be paid for by ringfencing taxes from mines rather than from mining profits - or in other words, not letting government get their grubby paws on it.
Government - designed to fail
There is value in understanding why government is unsuited to doing its job; this understanding can inform the structural changes which need to be made.
The World Bank Group delved into this topic in a recent report, where it listed the three main factors that constrain the efficiency of infrastructure planning and implementation. These are:
1. Lack of policy planning and coordination at the national level;
2. Weak central oversight by the national economic and development authority and the department of budget and management; and
3. Intensive political intrusion and subsequent constant shifting of priorities.
Treating the above maladies is obviously necessary – but your impetuous correspondent seeks a solution more in tune with the frenzied pace of revolutionary change manifest in the current epoch.
Private nation builders wanted
I believe that the solution is to privatise nation building, not as a first prize but as a means to getting the job done.
This is not based on a belief that companies operate on a higher ethical sphere than elected officials, but on anecdotal evidence that the top ten companies in any given region are governed far better than the top ten municipalities in the same region.
This performance mismatch is well understood and supported by common sense; short-termism in the local political economy is incentivised through short-term election cycles.
Long-term infrastructure projects are no match for prevailing sentiments of “that’s my replacement's problem”.
Companies however are entrusted to make profits no matter who is running the country, and as such have a longer investment horizon. This may sound counter-intuitive to developed world readers, since public companies are constantly criticised for chasing quarterly targets instead of long term-value.
Let’s just say that this is indeed the case, but it’s a rich world problem, kind of like obesity.
Circling back to the question at hand, we understand that companies could do a better job than government if given the funds and mandate to do so. However, we are still faced with a series of hurdles.
Let us explore the solution with an example of a challenge relevant to every African country, albeit with varying degrees of severity: lack of infrastructure.
Why is there a lack of infrastructure?
In the generic vanilla African state this would be a cocktail of pre-colonialism, colonialism and post-colonialism, all contributing unique ingredients such as underinvestment, wars, famines, juntas, coups and despots.
What can we do about it?
In an effort to ringfence the solution, let us follow the obstacle course of economic development, starting with geopolitical stability.
Geopolitical risk is a perennial favourite hurdle to investing in long-term infrastructure, whose projects require decades of cash flow assumptions which are rendered meaningless in the face of regime swapping.
The next hurdle is access to capital.
International aid and development agencies are willing to support game changing infrastructure projects in theory and often in practice too - but dissonance all too often arises when these organisations make their funding conditional on tiny changes like transparent elections, fiscal discipline and regime change.
Assuming Africa Inc can overcome bureaucratic hurdles and convince potential investors that the regime is stable, property rights are robust and corruption can be kept to tolerable levels, the problem of deploying capital comes to the fore.
Developing neophyte sub-Saharan capital markets is no small hurdle in itself, requiring a sophisticated legal, accounting and advisory infrastructure.
This chicken and egg problem to African development solutions is well trodden, so much so that it has opened the door wide to China’s version of infrastructure development – which despite its many pitfalls does get the job done, while sparing the moralising.
In earnest, there is no utopian solution to infrastructure challenges and the western and eastern solutions are sub-optimal to their core, so we need to ask the not-so-obvious question.
Is there a better alternative?
Indeed, there are many alternatives.
These include the usual suspects of foreign aid, non-profits and social investors who are among the well-meaning paternalistic problem solvers.
Unfortunately, for a myriad of reasons building an ecosystem for sustainable development is enduringly beyond their reach.
Which is why I forward a solution of terraced development.
Terraced development
Leveraging off the assumptions of the mining super ethic - where governments agree to ringfence tax funds to be deployed by the private sector on mutually agreed upon, high-level deliverables - we can offer a solution which is but one of the many available structures on the menu of models for infrastructure delivery (as depicted below).
Exactly which model is selected is case dependent, each with pros and cons.
The model which I propose fits well into the generic, resource rich, infrastructure poor African country which we will give the fictitious name of Zongo.
Zongo has rich deposits of copper, iron ore and thermal coal, all of which require energy, mines, rail and ports to reach market.
Using the building blocks of good governance supplied to the Zongolese leadership by the World Bank, the government secures international loans to build a port and power plant near its mineable resources, which happen to be a few hundred kilometres from the coast.
Mine #1 invests in its own infrastructure and constructs the rail link to the port. Using the ringfenced strategy, taxes from Mine #1 are used to build the next rail link into the hinterland where Mine #2 will set up shop.
Mine #2 piggybacks off the infrastructure laid by Mine #1, but it too generates taxable profits which are deployed in the same manner, creating additional rail infrastructure further inland for Mine #3 to commence production.
This virtuous cycle repeats for mines #4 and #5 until the mining infrastructure is adequate, and then moves onto funding regional infrastructure such as schools and hospitals.
As depicted below, we observe the production profile of mining outputs displayed in terms of revenues. The mines follow the typical life of mine trajectory, ramping up production, maturing and eventually exhausting their resources.
The next stage of the strategy is to move beyond mining and begin planning for value-added manufacturing, known in the industry as beneficiation.
Due to the essentially free capital costs of setting up this beneficiation infrastructure, combined with long-term subsidies to attain competitiveness, the mining region of Zongo becomes an industrial centre for the region.
It constantly diversifies up the value chain, acquiring more and more value from its commodities and eventually moving into the service economy.
Since we are exploring a utopian solution, we also observe below how profits from these mines are deployed to nurturing beneficiation projects while mining productivity is at its zenith.
This perfectly choreographed economic renaissance allows Zongo to convert its limited natural resources into a sustainable economic engine.
Call to action
This solution of terraced development following a virtuous cycle is unapologetically optimistic - but it is not entirely fanciful.
Economic development is constantly stuck in the mud across the continent. Having been stuck in the mud in the desert before, the solution which worked for me was deflating the tyres and letting the engine do its thing.
In the sub-Saharan African context, there is no shortage of egos who could use deflation; isn’t it time we approach the challenge from a new angle and let the engine do its thing?
- Fin24
*Jarred Myers is a resources strategist and can be followed on Twitter on @JarredMyers. Opinions expressed are his own.
