guinea a holistic approach to extractive industries guinea a holistic approach to extractive...
TRANSCRIPT
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Guinea
A Holistic Approach to Extractive Industries
April 2010
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Contents
2.1 Significance of the Issue .....................................................................................7
2.2 Recent Progress ...................................................................................................7
2.3 Remaining Problems ...........................................................................................8
3.1 Extractive Industries in Guinea — Past, Present, and Future .............................8
3.1.1 Prospects 8
3.1.2 Economics of mining and past experience 11
3.2 Options for Dealing with the Issues ..................................................................13
3.2.1 Contracting with mining companies 13
TAX ISSUES ............................................................................................ 14
LICENSING RULES .................................................................................. 15
STATE SHARES ....................................................................................... 17
INSTITUTIONS, CAPACITY, AND ANTI-CORRUPTION ................................ 17
THE WAY FORWARD ............................................................................... 18
3.2.2 Mining and infrastructure 19
3.2.3 Governance, sustainability, and broad-based growth 21
LOCAL DEVELOPMENT ........................................................................... 21
MAXIMIZING BUSINESS LINKS ................................................................ 23
PROTECTING THE ENVIRONMENT, HEALTH, AND SAFETY ....................... 25
GROWTH POLES ..................................................................................... 26
MACRO-FISCAL FRAMEWORK ................................................................ 26
EXPENDITURE MANAGEMENT ................................................................ 27
DEALING WITH DUTCH DISEASE AND SUPPORTING AGRICULTURE .......... 28
4.1 Short-term priorities ..........................................................................................29
4.2 Medium-Term Priorities....................................................................................31
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Acronyms and Initialisms
ACG Alumina Company of Guinea
ACGF Africa Catalytic Growth Fund
ASM Artisanal and Small-Scale Mining
BHP BHP Billiton Ltd.
BOT Build Operate Transfer
CBG Compagnie des Bauxites de Guinée
CBK Compagnie des Bauxite de Kindia
CPIA Country Policy and Institutional Assessment
CVRD Companhia Vale do Rio Doce
DP Development partner
ECOWAS Economic Community Of West African States
EHS Environmental, health, and safety
EI Extractive industry
EITI Extractive Industries Transparency Initiative
FDI Foreign Direct Investment
FIAS Foreign Investment Advisory Service
GDP Gross Domestic Product
GoG Government of Guinea
HIPC Heavily Indebted Poor Countries
MC Mining company
MDRI Multilateral Debt Relief Initiative
MTEF Medium-Term Expenditure Framework
PACV Village Communities Support Program
PFM Public Financial Management
PPIAF Public-Private Infrastructure Advisory Facility
PPP Public-Private Partnership
PRGF Poverty Reduction and Growth Facility
PSD Private Sector Development
SME Small and Medium Enterprises
TA Technical assistance
WBG World Bank Group
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Acknowledgments This report was prepared by Boubacar Bocoum (COCPO) and Ishac Diwan (AFCW1)
following a 2008 mission that reviewed opportunities for applying a holistic approach to
the mineral sector in Guinea.
The report is prepared as part of a series of Policy Notes commissioned by the World
Bank Country Management Unit (AFCW1) managed by Peter Kristensen (Sector Leader,
AFTEN). Overall strategic guidance for these notes was provided by Ishac Diwan
(Country Director), and peer reviewers for the concept of the series of Policy Notes were
Habib M. Fetini (Country Director AFCF1), Vivien Foster (Lead Economist, AFTSN),
and Douglas Porter (Senior Public Sector Specialist, EASPR).
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1. Introduction
2.1 Significance of the Issue
1. The extractive industries have been a significant feature of the Guinean economy
since the 1950s. Even before independence, one of the first alumina plants in Africa was
developed in Fria in 1957. The subsequent development of bauxite operations by the
Compagnie des Bauxites de Guinée (CBG) in 1973 and the Compagnie des Bauxite de
Kindia (CBK) in 1974 established the mining sector as the predominant industry early in
the life of independent Guinea.
2. The country hosts some of the largest global resources of bauxite and iron ore,
sizable gold and diamond deposits, and a potential for development other metals,
oil, and gas. The combination of a conducive market for commodities, availability of
investment capital for both exploration and project development, and significant
geological resources have created momentum to expand mining ventures. In addition,
increasing transport costs are driving the development of alumina plants closer to bauxite
mines.
2.2 Recent Progress
3. Guinea is now the preferred destination for foreign direct investment (FDI) in
minerals in Africa, with a possible US$ 12 billion over the next three to four years and a
potential for an additional US$ 8 billion thereafter. These expected investments will
likely bring extractive industries (EIs) to more than 50 percent of GDP by 2015 from the
current estimate of about 20 percent. If Guinea’s potential for oil and gas is to be realized,
the EI share of the economy would grow further.
4. Mineral development has not grown to its full potential, which has severely
limited its impact on socioeconomic development and poverty reduction. Despite its
mineral riches, most of Guinea's 9 million people live in desperate poverty. Fewer than
one-third of adults are literate according to the U.N. Human Development Report, which
ranks Guinea 160 out of 177 countries. Unless appropriate policies and institutions are
developed, mineral development will not become a source of economic development,
instability will remain a dominant factor, and investments will taper off before the
country’s full potential is realized.
5. Guinea’s strengths, besides its large mineral resources and proximity to markets, is
the recent entry of some of the largest mining companies (MCs), many of which are
recognized as leaders in promoting sustainable mining practices. There is an increased
understanding among global MCs that unless mining benefits the host country, their
investments would not be assured for the long term, and operating costs would remain
higher than necessary. Other positive factors include civil society’s demonstrated
awareness and understanding of mineral development paradigms, several new
international initiatives to which Guinea subscribed (such as EITI and the Kimberley
process), and donor willingness to support country efforts for better governance and
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transparency. These factors can allow the EI to indeed become an engine for faster
growth and development in Guinea.
2.3 Remaining Problems
6. Guinea also shows vulnerabilities. It is ranked among the last countries in Africa by
Transparency International, and has a low CPIA and human development indicator.
Guinea’s weak governance, a slow political transition to democracy, and the lack of
capacity and institutions have not allowed it to have the strategic vision, policy controls,
and ability to implement the policies needed to take advantage of its mining wealth.
Moreover, the newness and overwhelming size of potential FDI compared to the size of
its economy (GDP of US$ 3.1 billion in 2006) and the difference in capacity between the
administration and sponsors of large mining projects make the challenge more
formidable.
7. To take advantage of its current mining investment opportunities and lift its
development prospects, Guinea will have to operate carefully within a coherent and
holistic multi-prong strategy. Such a strategy would need to include: (i) stable and
balanced legal and fiscal relations with MCs that protect the country’s interests in an
effective way and maximize state revenue; (ii) taking advantage of mining-related
investment and activities to develop its infrastructure, local services, and private sector
while preserving the environment; (iii) a unified community development framework,
including a pragmatic and fair revenue redistribution mechanism coupled with
transparent and participatory systems for use of redistributed revenue; and (iv)
maintaining macroeconomic stability and reducing the negative impact of the resulting
Dutch disease. At the heart of the challenges is development of local capacity in the EI
sector and finding ways to align the incentives of bureaucrats and institutions with those
of the state.
8. Given existing weaknesses, realistic plans need to include both some level of
gradualism and the type of early action that can establish Guinea’s credibility to sustain
large investments over time in ways that can benefit both its population and the MCs.
2. Analysis of the Issues
3.1 Extractive Industries in Guinea — Past, Present, and Future
9. Guinea has been labeled a “geological scandal” because of its rich mineral
resources. With the recent development of global markets for bauxite/alumina and iron
ore in particular, it is poised to become the preferred destination for new investments to
become the next very largest exporter of these products. Its current exports of about
US$1 billion could increase 10-fold within five years if investments that are currently
being considered by some of the world’s top players are realized. This huge potential can
be divided into several distinct ongoing “games” with different characteristics.
Figure 1. Mineral resources in Guinea
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10. The western bauxite corridor. From the West to the center of the country lie the
largest and highest grade bauxite deposits in the world. This area is attracting the largest
players in the sector as well as companies from China, Iran, and South Africa. These
firms have announced investment plans of about US$ 13 billion over the next three to
five years. This includes the development of two new alumina plants by Alcoa/Rio Tinto
(1.5 million tonnes) and Global Alumina/BHP-Billiton (5.4 million tonnes), and the
extension of the (only) existing alumina refinery in Kindia by ACG (700 kilotonnes).
Other bauxite/alumina projects in the pipeline include the Dian-Dian projects by Russki
(13.4 million tonnes of bauxite and 2.8 million tones of alumina in the short term, and
plans for an aluminum plant in the longer term); and the 1-million-tonne alumina SBDT
project sponsored by IMIDRO (Iran). Several companies, including BHP-Billiton and
CVRD, are also actively drilling in this region to confirm existing reserves with the
possibility of further developing bauxite/alumina projects.
11. If all these projects materialize, approximately 12 million tonnes of alumina would
be produced starting about 2012, 25 times the current output. This could help increase the
low rate of value-added — currently Guinea produces 12 percent of the world’s bauxite,
but only 1.4 percent of global alumina (and no aluminum). The value of alumina is two to
seven times higher than that of the bauxite it contains. At current prices, exports of
Carte d’Implantation desSociétés Minières
Carte d'implantation des sociétés minières
Gold
Diamant
BHP-BillitonAlcoa/Alcan
Nzerekore Pole
Boke PoleCarte d’Implantation des
Sociétés Minières
Carte d'implantation des sociétés minières
Gold
Diamant
BHP-BillitonAlcoa/Alcan
Nzerekore Pole
Boke Pole
10
bauxite and alumina would rise from the current level of about US$ 660 million to a US$
4 to 5 billion range.
12. The development of all these projects is not assured. While the western zone has
the potential to become a highly attractive area for alumina production, it would require
large new infrastructure investments — transport, a new port, energy, more effective
town planning, provision of services in newly created alumina towns, and a more
effective private sector to supply the new towns with goods and services at affordable
prices. The “game” in the West is a progressive one — the current state of infrastructure
and services will allow for some growth, but good policies could lead to much higher,
and more pro-poor, growth.
13. The iron ore eastern corridor. Southeast Guinea includes the world class iron ore
deposit of Mont Nimba, and the Simandou iron ore deposit estimated at several billion
tonnes (with a concentration of more than 60 percent). Simandou is currently the largest
non-developed iron ore deposit in the world. Feasibility studies are underway (Rio Tinto)
and the mine development and associated port and railway are estimated to cost close to
US$ 7 billion, producing up to 150 million tonnes a year. The Mont Nimba project is also
undergoing a feasibility study by Newmont and BHP-Billiton and is expected to require
investments of about US$ 1.3 billion, producing 20 million tonnes per year. The potential
value of iron ore exports from these two mines ranges between US$ 9 and 11 billion per
year over the coming several decades.
14. Investing in a railway backbone. Reaping the benefits from the potential of the
eastern corridor presents challenges that are different from those in the western corridor.
Playing “the game” constructively in a world of imperfect competition involves
convincing MCs to make huge and irreversible investments in building a national railway
backbone, and creating incentives for them to exploit these reserves rapidly, rather than
to sequester them and thus deny access to their competitors.
15. Other potential. Guinea also possesses other potential as well (Table 1):
Several hundred tonnes of gold reserves, but current production of 15 tonnes
mined by three companies, or about US$ 340 million in 2007, could easily double
within five years.
Several million carats of diamonds are available, but current production is l
million carats per year from artisanal miners and one industrial producer, or about
US$ 50 million of exports, which could double within five years.
Gold and diamonds are also mined by artisanal methods that employ several
thousand workers.
Guinea also has significant potential for uranium, nickel, calcium, and granite.
The Gulf of Guinea offers potential for oil and gas, where exploration is
underway.
16. The key will be to improve competitiveness in these sectors with new
infrastructure, a better investment climate, and support for the graduation of artisanal
mining into profitable SMEs.
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Table 1. Mineral potential in Guinea
Commodity
Base case scenario Average long-term unit price
(US$/metric tonne)
Export value
(million US$)
Current status of project
Production rate (million
tonnes)
Estimate of capital cost (billion US$)
Bauxite/alumina
BHP/GAC 3.5 4.5 223 781 Feasibility studies
Alcoa/RT 1.5 2.5 223 335 Pre-feasibility
ACG ext. 0.7 0.3 223 156 Feasibility done
Dian-Dian 223 Advanced project
SBDT Advanced Project
Iron ore
Simandou 150 7.0 55 8,300 On-going pre-feasibility
Mt Nimba 20 1.3 55 1,100 Feasibility studies to start this year
Uranium Exploration
Nickel
Oil Exploration
Gas Exploration
17. Mining has several characteristics that point to both the difficulties for a host
country to fully benefit, and the challenges it must confront to improve revenue.
18. Mining is an extremely capital-intensive industry. Capital is needed for (i)
machinery and infrastructure to dig, move, and transport bulky products to ports; and (ii)
to transform the product into higher-value products, thereby saving transport costs
(bauxite into alumina or aluminum, iron ore into pellets or iron). The difficulty in
attracting capital to long-term investments means that countries will typically operate
below their desired capacity. Two examples in Guinea give a sense of the magnitude. At
current production capacity (a level that has been relatively stable for the past three
decades), it would take 2,000 years to deplete bauxite reserves. Iron ore, which requires
huge investments for transport, presents an even more extreme case — while reserves
have been known for at least 50 years, there is no capacity at the moment. The key
implication is that the state must be able to guarantee long enough periods of safe return
to attract large up-front investments. So far, Guinea has only been able to attract two
sizable firms to mine bauxite/alumina, and more recently, two in the gold sector.
19. Industrial mining does not create lots of jobs. Currently, mining employs about
10,000 workers — a value-added of about US$ 100 million, or about 10 percent of
exports. Most of these jobs are in the alumina sector, with alumina plants operating like
small towns. More jobs can be created if SMEs can replace imports needed to operate the
mines — from international best practice, we know that value-added can rise to about 30
percent. Of course there are also multiplier effects. Value-added can be larger during the
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investment phase. for example, the construction of a 1,000 kilometers of railway to the
eastern corridor could create tens of thousands of good jobs for several few years,
especially if labor intensive methods were used. This would require that local SMEs
become more competitive, and that the investment climate and local services improve
markedly.
20. The main channel for country gains is taxation and pro-poor spending. This third
and important factor, an implication of the arguments above, is that the main channel for
country gains is through taxation and pro-poor spending. But so far, revenue from the
mining industry in Guinea is below internationally accepted norms. Government revenue
from mining exports stood at about 12 percent of export value in 2007 (or about US$ 130
million). The share of mining revenue in total revenue is only about 25 percent, slightly
more than the share of mining in GDP (which is 15 percent). Importantly, these averages
also hide a low and deteriorating tax performance. Out of the six MCs currently operating
in Guinea, one company (CBG), with 49 percent Government ownership, pays about 85
percent of total government revenue. The other firms yield tax rates between 3 and 5
percent of their gross sales. This is far below the international average of 15 percent. But
even if these tax rates were to rise, there is no guarantee that citizens would benefit — the
share of pro-poor spending by the Government is estimated to be lower than the African
average of 40 percent.
Figure 2. Mining exports and Government revenue, 1991 to 2009
Mining Export & Government Revenues (USD)
0.0
1000.0
2000.0
3000.0
4000.0
5000.0
6000.0
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
Ex
po
rt,
US
D -
Milli
on
s
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
160,000,000
180,000,000
200,000,000
Gv
nm
t R
eve
nu
e -
US
D
Mining export Revenue
Gvnmt Mining Revenues
Source: IMF staff
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21. Improving the future. In the remainder of this note, we will cover each of the
dimensions that needs to be improved for Guinea to benefit more from future mining —
contracting with mining companies, creating the investment infrastructure, improving
business links, and maximizing local benefits. In each case, we also describe current
efforts, support provided by various donors, and gaps that need to be filled.
3.2 Options for Dealing with the Issues
22. Guinea has been in the mining business for decades. A mining code is embedded
in its body of laws; it has signed exploitation conventions with about 10 large producers
(these are cleared by Parliament) and hundreds of prospecting conventions; it owns
shares in several MCs that operate locally; it has varying capacity and experience in the
Ministry of Mines and an energetic minister; and its main university produces skilled
geologists.
23. The Guinean Government has become a much more active player, pushed by
pressures from civil society, discontent about past performance, and the hope for a major
expansion of the sector in the future. It has focused its efforts on two fronts — to
renegotiate its existing conventions while at the same time trying to attract new investors
at better terms than in the past. This is certainly a challenging posture. Defaulting on old
contracts often reduces a country’s credibility, and thus its ability to attract new
investments. But reasonable renegotiations can also produce more sustainable and thus
more credible contracts. The difference is thin and probably resides in a country’s ability
to convince the market of its concern about the long term. This must necessarily involve a
degree of caring about the financial viability of its long-term partners.
24. What are the main sources of discontent with the “old way” of doing business in
Guinea? Three complaints are repeatedly voiced by policymakers: (i) the “freezing of
reserves”; (ii) low revenue; and (iii) a desire for a “big push” on infrastructure (transport
and hydropower) that would also serve the population. An underlying and recurrent
theme is the need to strengthen capacities and institutions to improve state performance.
25. “Frozen reserves” is the main driver of the will to renegotiate. For MCs to control
more reserves than they could ever mine may have made sense in the past when there was
little demand for investing in Guinea because the state had no other means to attract
them. But with the current boom in demand, moving to a system with many more players
and a closer connection between MC reserves and the speed at which they will extract
resources becomes an imperative.
26. Low revenue is perceived as both related to poor terms and poor implementation
of those terms. Existing conventions are criticized for their unduly long concession
periods and very long tax holidays.1 Some MCs are criticized for hiding their real profits
by using creative accounting. Solutions need to include reforming the mining code,
developing and implementing the regulations required to apply it, and building the
1. It is sometimes stated that the concessions were signed in non-transparent ways as a result of
uncoordinated interventions from institutions that command political power, but not directly mandated
to deal with licensing.
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capacities of the Finance and Mining ministries to play their contracting, monitoring, and
control roles effectively. Good governance and transparency are seen as central, but there
seems to have been less focus at this stage on developing precise plans to strengthen
these functions (besides signing on to the EITI).
27. Financing the future. In looking at the future, the state sees mining as the most
promising way to attract infrastructure financing. Currently, several large and highly
complex proposals are on the table at various stages of readiness. The topic is very
current and needs urgent attention. Infrastructure for licenses may make sense given the
limited access by the Government to international capital, but having to reach joint deals
on large mining concessions and infrastructure also complicates deal making enormously.
28. There are also other sub-themes in the public debate, related to a desire to move
up the value chain and add more domestic value; the need for the state to “own” a larger
share of new concerns in order to have more control over decisions; and also a need to
find ways to involve local entrepreneurs more centrally in the sector.
29. The limited fiscal revenues from MCs seems largely related to poor application of
existing rules, which has allowed MCs to systematically avoid paying their income and
profit taxes. This is often related to long tax holidays provided to companies during
project development (up to 15 years), which seem to be automatically extended when
MCs undertake extensions of operations. But it is also related to accounting practices
through the use of transfer pricing for outputs and sometimes inputs, and smart use of
depreciation methods.2
Unfair transfer pricing. This issue applies mainly to bauxite, which is part of the
very integrated bauxite-aluminum industry. The same companies mining bauxite
produce alumina and then aluminum, and can transfer costs between the elements
of the value chain and only show profitability where tax payments are minimized.
Guinea has thus far not been able to come up with an effective response to this
problem in its current legislation and practices. A related issue is the difficulty of
assessing the real costs that MCs incur in transferring their products from mine to
refinery.
Depreciation methods. Guinea uses negotiated ad hoc accounting principles in
each agreement.
Tax advances and payment requests from the Government to companies at
unknown interest rates and the lack of unified management of these requests have
also been problematic.
30. To date there have been no audits of the financial statements of the mining
companies. This is about to change. The Government is planning an audit of these
accounts for the period 2000 to 2006.
2. The extractive industries licensing requirements were not clarified in the 1995 legislation and the lack
of regulations in the legislation complicates management of licenses. It has left MCs with the latitude
to interpret this key document in a variety of ways. This has resulted in a lack of predictability in the
fiscal results of negotiated terms.
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31. While it is clear that the overall level of revenue in Guinea is low, and that at least
part of the problem relates to the application of current rules (and in particular, the very
low payment of income taxes), it is not clear if the tax rates found in existing contracts
are below the international norm. For larger contracts, part of the difficulty is that there is
not good information about the profitability of ongoing concerns (besides CBG). MCs are
subject to all sorts of other taxes, explicit and implicit. They contribute to local
development, rents on infrastructure owned by the state, and sometimes take charge of
certain community needs to “pacify” them and improve their security environment.3
32. Smuggling. It is probably true that the difference in fiscal framework for artisanal
mining between Sierra Leone, Liberia, Guinea (and beyond) is creating incentives for the
smuggling of diamonds and gold.
33. To maximize revenues and minimize corruption, the Government needs to:
Define and apply uniform accounting principles. These principles should detail
how to account for costs in income statement calculations, how to compute
depreciation allowances, clear use of interest rates on advances, etc.
Adopt legislation and procedures against unfair transfer pricing.
Eliminate regional incentives for smuggling and harmonize the fiscal and legal
framework as intended by the Mano River Union, West Africa Economic and
Monetary Union, and ECOWAS.
Collect income tax from MC employees.
34. Efforts have been initiated in all these areas. The Government of Guinea (GoG),
with World Bank support (an IDF grant), has completed an assessment of the fiscal
regime in its mining code compared to those found in other countries. This assessment
will be used in drafting the new model mining agreement in ways that avoid ad hoc
approaches in setting and enforcing tax rates and tax holidays. A study on transfer pricing
is being completed (also supported by the IDF grant), with a goal of introducing new
legislation and processes to curb this practice. The enactment of the new mining code
being sponsored through FIAS will address some of the accounting issues. To reduce
incentives for contraband, efforts at harmonizing these rules within the Mano River
countries have started, supported by the Bank and the African Development Bank.
35. From exploration to exploitation. While auctions seem at face value as the best
system countries can use to maximize their gains when dealing with MCs, such systems
do not work given the uncertain information and large size of potential deals, especially
in the bauxite and iron ore sectors. Instead the standard system is to award an exploration
contract over a given period of time (typically five years) during which an MC gets to
study its field and prepare a proposal. The state protects itself against the freezing of its
reserves by reducing the size of the bloc over time, until a convention is signed. In effect,
3. A quick look at existing contracts reveals some cause for concern. The three gold mines pay a 5
percent royalty, the diamond mine pays 10 percent, and artisanal miners pay 3 percent. Bauxite is more
tricky — while the CBG takes 65 percent of profits (all inclusive), ACG and CBK pay US$ 1 per ton
of bauxite exported, and US$ 0.5 per ton of bauxite used for local alumina.
16
exploration rights are an option to negotiate a concession agreement, and to test whether
a company has the means to secure its financing. This places all the burden at
negotiation, where the state tries to extract various commitments from the MC (tax rate,
servicing state infrastructure, building new infrastructure, contribution to local
development).
36. The size of concessions and the rules for unused reserves are being discussed. The current Government is trying to align reserves in each concession to the operational
capabilities of the MC, with an objective to reduce the potential “freezing” of mineral
resources. A conventional way of achieving this objective is in the updated legislation to
align future concession sizes with desired operational capacity of MCs.
37. It is also important to develop the capacity to closely monitor existing exploration
licenses, and to ensure that the application of statutory periodic relinquishment (every
three years one-half of the area licensed to a company must be relinquished unless
economic resources are identified). Important progress has been achieved in the recent
past. A review of all existing exploration licenses last year allowed the Government to
cancel the titles for permits for which holdings requirements were not fulfilled. This
allowed new companies to receive licenses for exploration.
38. But there are also considerations for “unfreezing” some of the reserves that were
already granted in the past, not only for bauxite (in the distant past), but also for offshore
oil exploration (these were more recent). But altering existing licenses is a departure from
accepted international practices and can significantly increase exploration and
development risks. Guinea had already gone that route once before in the recent past and
should be very careful with any such actions, especially if unilateral. Viable reserves can
be sold by MCs to other MCs, and the reserves are part of their valuation on stock
exchanges. To recoup reserves that were awarded in the past requires proper
compensation.
39. The current lack of a well functioning mineral cadastre office is a constraint that
has received less attention to date. The office is responsible for administering the mining
conventions and for verifying MC compliance with their agreed requirements. The
cadastre is also responsible for cartographic control of the geographic location and time
validity of mining rights. It normally publishes cadastral maps and/or lists of
current/pending mineral rights with coordinates and other non-confidential information,
thus ensuring transparency in the management of mining concessions.
40. What is being done and what needs support:
Update the mining and petroleum codes. Work is underway to prepare for the
update of the mining code through FIAS funding. An application has been made
to the Licus trust fund to update the petroleum.
Audit all MCs and renegotiate existing licenses. The Guinean Government has
benefited from IDF funding to train the members of the Inter-Ministerial Review
Committee and potential future mineral agreement negotiators. It nevertheless
requires resources for audits and support to the negotiation process through
additional professional backing by qualified and experienced transaction support
firms or individuals.
17
Development of a model concession agreement. This has been achieved for the
mining sector (through an IDF grant) and is pending cabinet approval.
Development of a model agreement has not yet been addressed for oil and gas.
Updating and equipment for the cadastre. This activity is not currently
supported by donors.
41. The current discussions consider state participation in extractive industries
equities, and setting up “strategic reserves” for future contracting.
42. A good investment? Guinea has traditionally been interested in state participation in
MCs. Based on current practices, a case can be made that there is some merit to this.
CBG, in which the state has 49 percent of equity, pays 85 percent of all the Government
revenue from the mining sector, and unlike all other companies, it pays both income tax
and dividends. A counterargument is that even while it is a large shareholder in CBG, the
state has not been able to push for more dynamic management. Indeed, this lack of
dynamism may have been due in part to the inability of the state to finance new
investments in relation to its shares. Participation is other existing MCs has been smaller,
but no dividends have been paid so far because these firms have not shown profits.4
43. The idea of strategic reserves is new. It emerged from the early success of the state
in recouping reserves from MCs that were in default on their exploration conventions.
More dynamic management of resources became possible by collecting and assessing
exploration data on resources identified by defaulting companies. When subsequent MCs
are interested in acquiring some of these resources/reserves, the state can more closely
mimic auction mechanisms because information on each potential lot can be made more
transparent at the outset of negotiations.5
44. In many ways, these are the central issues.
45. Institutions. Institutions involved in concession decisions and deal making are well
defined by the mining code. These include mainly the Cabinet through the Ministry of
Mines, which depending on the title could send conventions for ratification by the
Parliament before the Presidency signs the decree. In practice, there is little
accountability because these institutions do not have sufficient information to play their
roles effectively. At present, unlike many other mineral or oil producing countries, there
is no special mechanism that governs the mobilization, tracking, and allocation of mineral
revenues. These are handled like any other tax receipts. Moreover, there is limited
4. The state owns 8.5 and 15 percent of SMD and SAG, respectively.
5. A more financial interpretation of the concept of reserves arose after the phenomenal rise in the stock
price of Rio Tinto after it announced the signing of its exploration convention with Guinea. As
expressed by the PM, the vision would be to park un-concessioned reserves in a fund that would be
floated in major stock exchanges. This would allow the state to price the reserves, and initiate new
deals with MCs based on balance sheet considerations (rather than the current income statement).
Through such deals, the state would acquire shares in the local and the parent mining companies, and
would be able to derive income by managing this portfolio in more effective ways than through
bilateral negotiations with the MC..
18
information sharing and coordination among the several technical ministries involved in
management of the mining sector. Both factors have reduced the effectiveness of
Government institutions in their engagement with the MCs.
46. Capacity. Significant weaknesses exist in the capacity of the state to monitor the
payment of mineral revenues and assess the extent to which these payments are in line
with provisions in the mining conventions and internationally recognized norms. In
particular, Government institutions lack the capacity to assess the operating costs of
mining companies. The control and monitoring institutions in the Ministries of Mines and
Environment also have limited capacity and resources. Both ministries have lost many of
their most qualified and experienced staff in recent years because of inadequate pay and
incentives, several of whom are now holding senior managerial positions with mining
companies
47. Transparency. Guinea has made inroads in EITI implementation but progress has
stalled lately. The way forward for Guinea involves dealing with the inefficiencies of the
EITI Secretariat, which is not only preventing EITI from advancing, but is depriving
Guinea of a valuable instrument to improve benefits from and management of the mining
sector.
48. To improve capacities, the GoG needs to:
Strengthen the capacity of exiting institutions at the Ministry of Finance and
Ministry of Mines to assess the financial statements of the mining companies and
play a more effective role in monitoring financial flow.
Promote and strengthen cooperation and coordination among the technical
agencies involved in mining revenue collection and management.
Strengthen the control and monitoring capabilities of the Ministries of Mines and
Environment to ensure compliance with accepted technical, environmental,
health, and safety guidelines and standards.
Strengthen the cadastre to ensure compliance of title holders with requirements
and improve transparency and security of tenure.
Consider a revenue management law to frame the collection, utilization, and
allocation of mineral revenues.
Disclose the financial details of concession agreements in addition to prices and
tax revenues.
Strengthen the EITI Secretariat and the process in Guinea.
49. The IDF grant has proceeded with some capacity building and the Licus
application aims at building more, but much more needs to be done in all of ministries
involved in management of EIs in Guinea.
If the GoG decides to renegotiate existing mining conventions, it should do so
rapidly; uncertainty is slowing new investments.
19
Renegotiate first, or draw new code first? A new convention has been drafted and
provided to the Government so that it could enter into balanced agreements and
provide a reference document during the review process that is underway. In
parallel, a new mining code is being drafted.
Big push on capacity? It is becoming imperative to develop an elite corps in the
short term while working on institutional development in a more comprehensive
way for the medium and long terms.
50. The current state of national infrastructure is very poor. This not only taxes
general economic development (including agriculture), but also reduces the ability of the
country to take full advantage of its mining potential.
51. The transport infrastructure was neglected following independence, although
some improvements were achieved in the 1980s and 1990s. Significant improvements are
needed to ease year-round access to vast areas of the country such as the southeast, which
is currently cut off during the rainy season.
52. Electricity supply is limited. Only 18 percent of the population receives unreliable
electricity, of which a large share is produced by MCs. All electricity is thermal and high
cost. Paradoxically, Guinea has been described as the water tower of West Africa, where
some of the largest West African rivers originate, creating a hydropower potential of
several thousand megawatts. Some of the existing plans for hydropower include Souapeti
(515 megawatts for a capital cost US$ 700 million), Kaleta (209 megawatts for US$ 300
million), Amaria (360 megawatts for US$ 400 million), and Cogon (90 megawatts for
US$ 200 million).
53. The Government recognizes the need to develop infrastructure but has been
severely constrained by scarce financing. Guinea is an over-indebted country with no
access to the international financial markets. Its access to ODA is limited — about US$
224 million was disbursed by its development partners in 2007.6 But with the increase in
MC interest in Guinea, the situation is changing and financing should become more
available. The main challenge is not just how to attract infrastructure, but rather, how to
do so in ways that are as favorable as possible to the country. The typical enclave pattern
in the past has not benefited the population design, and other MCs are excluded for
competitive reasons.
54. Financing options are few for the moment. The most obvious is to ask MCs to take
care of their infrastructure needs, or more broadly, the concession for infrastructure
model. Examples include the eastern railways in the case of iron ore, and hydropower
against bauxite in the West and central parts of the country. The main risks with this
approach are to end up with an enclave infrastructure that only benefits the MCs, or to
unnecessarily increase the cost of doing business for the MCs by either pushing then
outside their areas of expertise, or by not being able to take advantage of possible
synergies among their needs. These problems can in principle be partly improved with
smart state planning to allow the assets to be used in non-exclusive ways by all the MCs,
6. http://www.africaneconomicoutlook.org
20
and to the extent feasible, by the population at large as well. But these are not easy
solutions to manage.
55. Changing the model. Negotiating with MCs to convince them to depart, to some
extent, from a pure enclave model can make sense. These departures will to some extent
increase costs because they would tend to reduce the share that the MC is willing to pay
to the state. The extra expense may or may not be worth it. A case in point concerns the
eastern railway. Unlike the bauxite corridor in the West, infrastructure and transport to
the East is completely lacking and needs to be built to extract the iron. The state has been
trying to push for the development of a railway that would run the length of the country
(about 700 kilometers, plus a new port) rather than to use the much closer route through
Liberia (200 kilometers and no port). (There are also national security arguments for an
all national solution.) The infrastructure cost for this corridor is estimated to be over US$
6 billion. So far, while the state seems to have convinced the MC to take a Guinean route,
it has only been able to secure a commitment for a southern route. It is still not obvious
that this is a mutually optimal option given that the Government is really looking for
ways to develop a northern route to open up the agricultural potential of the poor North.
A southern route is less valuable from an economic perspective.
56. The state can also push two MCs to work together — force coordination to lower
operational costs and thus its share of a larger pie. The western railway is again a case in
point. Ideally, it would also be used by other MCs operating in the West. Discussions are
ongoing with BHP in Mount Nimba to connect with the RT railway. Another case
concerns the port that Global is planning to build in the West. The guarantee provided by
the AfDB may have made all the difference in ensuring open access.
57. Where infrastructure has been developed by the MCs themselves, there are
incentives for the Government or the community to open its access beyond original plans.
A case in point involves water and energy. MCs currently have been pressured to
distribute some of the water and energy they generate for their own needs to the
population around their sites. But operating as independent producers is not their area of
specialization or comparative advantage. They are unable to collect revenue from the
population, and thus incur losses which reduce the ability of the state to tax them more
effectively. When they reduce services, they end up with riots (as in Kamsar and Fria in
2008).
58. There are other financing solutions that would not involve making deals with MCs
so they amend their infrastructure plans. At the other extreme, the state could develop a
national plan of infrastructure development meant to both serve its population and make
its mining sector competitive, and finance it by through international capital (sovereign
debt, or FDI). This is what an ideal high equilibrium (a Norwegian model) would look
like, with the state taking the lead in planning a national backbone in transport (roads and
railway), ports, energy (preferably cheap hydro solutions), and water (including urban)
within a tight timeframe (four to five years). The challenge would require optimizing the
approaches to railway (East) and hydropower (West) infrastructure to reduce duplication
and maximize synergies for the benefit of the whole economy. But Guinea is struggling
to benefit from the HIPC and MDRI initiatives at the moment, and it will have to exercise
caution in rebuilding its debts in unsustainable ways after it receives debt reduction. Also,
the required capacity to execute such an ambitious program are missing. For example, the
21
national water and energy utilities can barely maintain the existing minimal assets they
control.
59. There may be other financing options that need to be examined more closely. A
recent example concerns a recent offer by China to provide a loan to finance a dam in
exchange for a mining concession. Guinea has also been exploring the possibility of
various BOTs, with rental fees by MCs to ensure financial viability. These sorts of
solutions can be particularly fitting in the West where many separate MCs operate and
need to use the same roads and ports to remain competitive.
60. Development partners include the World Bank and could be critical in making
these solutions work better —supporting the development of the overall plans; structuring
the deals; providing capacity building for negotiations; and facilitation/possible partial
participation in the financing.
61. MCs activities affect communities in three major ways: (i) payment of local taxes;
(ii) social investments in basic infrastructure and services, including for environmental,
health and safety (EHS), and resettlement actions; and (iii) operational activities, which
include local procurement of goods and services and local employment. While the focus
is frequently on activities specifically funded by the company or the Government,
perhaps the largest potential for the MCs to affect local communities is through their
operations.
62. MCs need to live at peace with the communities in which they operate. Alumina
plants create small towns that need to deliver services to citizens. Environmental impacts
and congestion effects often need to be mitigated. Depending on the circumstances, this
creates various pressures on MCs to get involved more closely with the communities.
63. If the state functioned well, MCs would simply be taxed for their externalities, and
the state would also develop social and infrastructure services where needed. In the
absence of state capacity, however, MCs have incentives to become a substitute and
deliver all kind of services to the communities where they operate. This creates two
problems — MC operating costs rise, and incentives for state development become
weaker.
64. The current system is a mix of the two extremes discussed above. This results in
distribution of revenue (taxes and royalties) to the regional and local level that is complex
and opaque. Taxes specifically allocated for community development are negotiated
separately for each project. Community earmarked funds include 1 percent revenue for
diamonds in Kerouane to 0.4 percent for operating gold mines, US$ 450,000 for CBG,
etc. New projects tend to dedicate about US$ 500,000 to community development. For
GAC it goes up to US$ 1 million per year at year 15. Simfer Sa.’s convention assigns
0.75 percent of revenue to communities. Collectively the mining companies have paid
about US$ 1.7 million in 2007. But in addition, MCs are also drawn to provide direct
services to the population. For example, they are estimated to have contributed over US$
15 million to provide water and electricity.
22
65. Local revenues are expected to increase dramatically in some regions and
communities with the mega projects (GAC, Rio Tinto, and Alcan/Alcoa). Simfer Sa.
estimates its community development payments to reach US$ 10 million per year starting
in 2013. Community payments in Boke will also increase significantly with the new
projects planned to be completed by 2012.
66. The increased revenue can be a blessing for local development, but also raises
challenges for local government absorption capacity, transparency and governance, and
community representation and participation. The ability of the local administration to
identify community priorities, manage budgets, and develop and manage projects will be
critical and affect the extractive industries companies’ temptation to intervene directly to
preserve the “social license to operate.” This in turn might lead to ad hoc interventions
and unsustainable practices by companies trying to replace the state.
67. The lack of local government capacity to manage large revenue from extractive
industry projects is a common phenomenon around the world as revenue processes
continue to decentralize. In Guinea, two participatory community development models
have been piloted in recent years — the Village Communities Support Program (PACV),
a World Bank sponsored project with CBG, and the AngloGold Ashanti approach in
Siguiri. Both models involve capacity building and transparent approaches. The
PACV/CBG model is one year old and had to be stopped because all community
earmarked funds were allocated to power generation in Kamsar. The Siguiri model lasted
several years and has visible effects through paved roads, provision of electricity,
schooling, medical facilities, etc.
68. Other contributions to the local community are investments in basic services and
infrastructure. There are some good practice examples of companies addressing health
issues, often as an integrated part of business operations, including SAG, Guinea (health
monitoring for communities); HIV/AIDS initiatives, including Guinea Chamber of Mines
and international good practice (Anglo American and De Beers in South Africa, IFC
Against Aids initiative), Rio Tinto Palabora Foundation (South Africa).
69. In Guinea, the IFC CommDev has co-sponsored, with the Government, the World
Bank, and the Chamber of Mines, a study on community development experience and
created a set of guiding principles for a unified future approach. Follow-up work is
underway both from IFC and FIAS funding to complete the development of a unified
participatory and transparent mechanism for community benefit sharing and investments.
70. Priority actions for the future include:
Appropriate urban planning to accommodate increased in-migration fueled by
prospects of employment in the mines, and
Development of model agreements for community development.
71. To address community risks, the Government needs to draw lessons from existing
experience and provide and apply a consistent legal framework together with strong
dialogue with companies, civil society, and donor partners. Donor partners need to
facilitate public-private dialogue at local and regional levels, and help build capacity to
enable such dialogue for local governments and communities, companies, and civil
23
society. This process also has to be consistent with national poverty reduction strategies
and an on-going decentralization process.
72. The procurement of local goods and services is an essential channel through which
extractive industries can maximize their beneficial impact to the economy and generate
employment. Mining company procurement needs to peek sharply during construction
and gradually decline and stabilize during operations (Figure 3). During the initial
construction phase, the company typically uses a foreign company. At this time, despite
potential cost savings, companies often do not pay sufficient attention to opportunities to
develop procurement procedures and systems to facilitate local procurement.
Figure 3. Mining company procurement during the construction phase
Construction
Activity Level ($)
Duration
Local Content
Foreign Content
Production
Construction
73. Few local suppliers. Unfortunately, very few of the operating companies in Guinea
today have a local procurement policy and are actively working with local partners to
find local suppliers. A study conducted with a bauxite mine in 2005 found that about 10
percent of total goods and services are procured in Guinea, much lower than in a country
like Tanzania where it is 50 percent.
74. This is also a result of the unfavorable environment to enable businesses. Guinea
ranks 166 out of 178 economies on the 2008 Doing Business Index and scored
particularly poorly on starting a business, protecting investors, dealing with licenses, and
paying taxes. Guinea scores slightly better on the “getting credit” indicator (135),
however, accessing credit is still a problem for suppliers in Guinea. The current VAT
policies also currently favor foreign suppliers over domestic ones because foreign
suppliers are exempt. The situation is poised to improve with the significant effort that
sponsors of new projects in Guinea are making to increase local content in construction
and operations.
75. Employment. Mining company employment needs follow the same pattern as the
graph for procurement. It is estimated that the mega projects in Guinea (GAC, Rio Tinto,
24
and Alcan/Alcoa) will need up to an estimated 12,000 semi-skilled workers during
construction, a number that will decline to about 4,000 once operations start in 2012/13.
Associated infrastructure projects will need additional labor. Indirect job creation can
provide approximately one job for every US$ 1,000 spent on local procurement. Efforts
are currently underway by a number of development partners (AFD, IFC, others), the
Government, and companies to assess the current labor and skill needs and develop
vocational, technical, and business skill institutes to address these needs. Currently,
mining is the second employer after the Government, with about 10,000 permanent jobs
in the sector and a multiplier effect estimated at about three.
76. The VAT refund in Guinea has proved problematic because the state is incapable
of refunding the VAT that the companies pay on local contracts. The current system
favors foreign providers of goods and services compared to local companies. Customs
duties have the same issue.
77. To encourage domestic value-added:
Refineries, ports, railways should be taxed according to unified FDI rules, which
should be different from mining, and
Apply VAT rules in similar ways for both local and international firms
78. Local employment and value-added would rise with more local changes, but this
requires the availability of minimum services — energy and water, town planning, and
social services. Currently, Boke, the seat of the CBG mines, offers an example of state
limitations and the costly responsibilities imposed on the CBG with an estimated US$ 2
million spent annually to provide water and electricity to a small portion of the
community. Rusal (the only current producer of alumina) reportedly spent US$ 10
million in 2007 to provide water and power to the inhabitants of Fria. MCs do not have a
comparative advantage recovering costs. A good solution would be for independent
providers to buy energy and water from the MCs, and sell to the local population.
79. Providing power. A PPIAF-funded study on the options for power and water
infrastructure development in the Boke Region, was co-sponsored by CBG and carried
out with participation by national electricity and water companies, the governor of Boke,
the Ministries of Mines, Energy, and Interior, sponsors of existing and new mining
projects in the Boke region, and community representatives. The study identified a
strategy to provide utilities in the region by employing professional private utility
providers, but in the short term using generators to address urgent power needs. In the
medium term the mining companies will act as independent power producers and sell
their excess power to the community, and in the long run the cheaper option is to develop
hydropower. It is worth noting that CBG has done its part by buying US$ 2 million worth
of generators that are currently not being used because the Government has yet to
authorize intervention by a professional utilities provider.
80. Artisanal and small-scale mining is an expanding and disorganized sector. With
between 150,000 and 300,000 diggers of gold and diamonds, most are subsistence
artisanal miners living below the national poverty line, and include a significant number
of vulnerable groups, such as migrant workers and women (up to 70 to 80 percent). There
is a distinct lack of access to appropriate technology and access to credit, and poor
25
working conditions. The supply chain is also highly fragmented with many middlemen
concentrated in the down-stream export facilities in Conakry. In the gold areas, conflicts
between large-scale mining operations and small-scale miners are common because of
land issues. For many large-scale mining operations, this growing conflict has become
their greatest social challenge. Guinea is a member of the Kimberley Process and is
benefiting from support to artisanal mining from USAID.
81. Community expectations for local employment are often high and are a major
reason for discontent among the population. Programs aimed at improving skill levels of
the local community and increasing employability will be important. These elements
would help to increase the multiplier effect from the mining industry:
Doing Business Reform Program. Create an enabling environment for business
activities by reducing administrative barriers, including taxes, licenses, business
start-up procedures; reform social security and labor laws.
Develop enabling conditions for professional private provision and distribution
of utilities.
VAT reform. Develop policies equalizing import duties and VAT treatment
between foreign and local suppliers.
Facilitate access to financing. Develop matching grant mechanism (donor,
company).
Develop business skills training. Build on current joint donor and company
initiatives, and involve other education institutions, etc.
Support artisanal activities. Efforts should include establishing legal status of
ASM in mining code; supporting miners with tools, technical and valuation skills;
and strengthening internal control mechanisms of the Kimberly Process.
82. Concerns about the negative environmental impacts of mining include loss of
access to cultivable and productive land, loss of forest cover, water pollution, noise, and
dust. Reforestation and rehabilitation of open pit mines are most urgent in the gold and
diamond industry, including artisanal activities. Three operating companies have ISO
14001 environmental certification. Priority actions to improve environmental
performance and harmonize company practices include:
Closer analysis of the cumulative impact of mining and refineries on the
environment.
Harmonization between different laws related to the environment and mining
(mining, environmental, and water codes, and forestry).
Capacity building in the Ministry of Environment to monitor operations,
administer and follow up on EIAs of mining operations, refineries, and
infrastructure.
Participatory environmental monitoring by community and civil society.
Mine closure plans and funds set aside for rehabilitation.
26
83. Mining health and safety current practices and priority actions. Not much is
known about health and safety practices in the mines and refineries in Guinea. The
situation is likely to be most urgent in the artisanal mining sector. But practices in the
large-scale operations are very much dependent on companies’ internal systems.
Legislation about health and safety is lacking, manuals need to be developed and capacity
enlarged to harmonize company practices.
84. Resettlement current practices and priority actions. Resettlement is a significant
issue in a context that lacks adequate regulations. Ad hoc approaches and community
discontent are currently common. The Government needs to develop clear legislation and
guidance notes to companies, which should reflect international best practices, for
example, the IFC Performance Standards.
85. In addition to facilitating the procurement of local goods and services and hiring
local labor, the expanding mining and refinery industries in Guinea have the potential to
serve as a catalyst for broader growth, including other sectors of the economy. With the
strong concentration of mega projects in two main areas — Boke/Sangaredi in the
northwest and Nzerekore/Nimba in the southeast — “growth poles” have the potential to
develop if enabling measures are taken. Donor partners have an important role to play in
this process as facilitators.
86. The growth pole approach will help the Government and companies to maximize
spill-over effects from the mining industry to other industries by identifying and
stimulating sectors of the local economy with comparative advantages. It is a highly
participatory and dynamic approach involving central and local government, local
communities, companies, and civil society. It aims to (i) identify opportunities for the
growth of other sectors of the economy, including agriculture, fisheries, and tourism; (ii)
develop short-, medium-, and long-term growth scenarios and cost them; and (iii) develop
investment plans and mobilize public, private, and donor funding to implement projects.
87. Projects can include basic services to facilitate the growth of other sectors as well
as infrastructure. It is fortunate that the sponsor of mega projects (Rio Tinto) was
involved in the development of growth poles elsewhere in Africa (Madagascar) and is
willing to replicate the process in Guinea. DPs are also interested in supporting the
development of economic activities around Boke and Nzerekore. The Ministry of Mines
has already initiated a proposal to create a growth corridor in the northeast of the country,
and a workshop to consult on these plans will be organized in June.
88. The PRGF program (2008-2010), currently under implementation, sets out
Guinea’s medium-term macroeconomic fiscal framework. The program aims to
stabilize the economy and create conditions for long-term growth. Fiscal policy is
currently geared toward greater mobilization of revenue to bring the deficit to sustainable
levels. The Government recognizes that in the next years, the bulk of fiscal revenue will
continue to come from the non-mining sectors, with taxes on domestic production and
trade as the main sources. But over time, as mineral production expands in response to
new investments and ongoing legal reforms, the mining sector is expected to become a
27
major source of Government revenue and a significant share of GDP. Mining investments
are already affecting GDP growth — the IMF now predicts that large mining investments
will push economic growth to 4.5 percent in 2008 from a sluggish 1.8 percent the
previous year. The anticipated increase in mineral revenue will greatly increase the
challenges to manage these funds to finance public expenditures.
89. Guinea’s difficult political situation, coupled with important development needs
and expectations of significant benefits from mineral revenues, is likely to place
significant pressure on the Government to rapidly spend any revenue increases. The new
Government formed in March 2007 has taken a number measures aimed at restoring
fiscal discipline. It has cut expenditures, increased control, and strengthened cash
management. These efforts will need to be maintained.
90. Despite the implementation of several PFM reforms over the last decade, public
expenditure management has only started to improve. Critical weaknesses include:
Legal framework — inconsistent and outdated finance law and public
accounting regulations.
Budget preparation — (i) lack of a clear medium-term macroeconomic
framework establishing the costs of sector policies and alternative programs; (ii)
limited capacity for assessing sector needs, evaluating and planning projects; (iii)
lack of a link between the investment and operational components of the state
budget, considering recurrent costs generated by capital expenditures; (iv) weak
information system and poor budget negotiation processes, detrimental to the
reliability of budget estimates; and (v) failure to set ceilings for sector budgets in
the budget guidelines circular letter.
Budget presentation — existence of extra-budgetary operations, inadequate
budget documentation.
Budget execution and internal controls — ineffective a priori review of
expenditures by financial controllers, regular abuse of procurement regulations,
loose internal controls.
Accounting — outdated chart of accounts, lack of compliance with accrual
principles and standards, ad hoc and inconsistent accounting entries.
Cash management — excessive fragmentation of bank accounts, unsatisfactory
bank reconciliation processes.
Internal and external oversight — inefficient internal oversight due to limited
means and capacity; lack of activity of external oversight.
Local authorities PFM — out of date legal framework, weak and uneven
capacity.
91. The markets for primary products are known for their instability. In the case of
mineral commodities, this volatility arises because demand fluctuates greatly over the
business cycle. In recent years as the share of mineral revenue in total revenue has
stagnated, the volatility of revenue has been limited. However, the anticipated increase in
28
mineral revenue will induce greater volatility in Government revenue. Unpredictable
revenue profiles would make it very difficult for the Government to pursue a prudent
fiscal policy. This in turn will create problems in the economy ranging from aggravating
investor uncertainty to unstable spending policies. To deal with income volatility, efforts
would have to be made to stabilize spending.
92. Investing in the future. Similarly, a good case can also be made for annual savings
of some revenue from the extractive industries to preserve equity for future generations,
given that mineral resources are non-renewable. The amount that should be saved every
year, as opposed to financing the non-extractive fiscal deficit, depends on the level of that
deficit. This level can be approximated using the permanent income hypothesis, however,
due consideration should also be given to Guinea’s investment needs in human and
infrastructure capital, as well as to its absorptive capacity. Once the level of desirable
yearly savings from extractive resources has been determined, various technical solutions
are available to ensure that this level is met, including establishing an extractive resources
fund. Should such a fund be established, international experience strongly suggests that it
should be as fully integrated in the national PFM system in terms of budgeting, cash
management, expenditure management, accounting, reporting, and auditing.
93. Future reforms of the budget process and administration need to deepen the
reforms initiated in the 1990s. Over the short- to medium-term, it is recommended that
the authorities implement the PFM priority action plan that is being finalized with
assistance from the IMF and the Bank.
94. Agriculture has always been an important sector and major employer. Guinea’s
agricultural and ecological resources are very favorable. The country’s climate is ideal
for a range of agricultural products, livestock, fisheries, and forestry; and arable land is
available in large quantities Existing studies point to a variety of agricultural export
possibilities, but while agricultural potential is high, productivity remains low with
limited technology and capital to pursue intensive crop production.
95. A mineral boom may adversely affect the development of agricultural potential. A sudden influx of foreign exchange may affect exchanges rates and damage other
exports and hence slow economic growth (Dutch disease). Typically, domestic wages rise
as the booming mineral sector is forced to offer workers higher salaries to attract the
labor it needs and mineral exports cause a sharp appreciation of the real exchange rate.
Both of these developments will harm the agricultural sector, impede economic
diversification, and increase dependence on the mineral markets.
96. The main concern about Dutch disease is that non-mining exports (mainly
agriculture) will be squeezed, thereby affecting a major source of growth and poverty
reduction. The impact of Dutch disease may be attenuated, however, if mining proceeds
are properly invested as part of a national development strategy rather than used to
finance consumption. In particular, if mining earnings are invested in raising the
productivity of smallholder farmers, the overall effect may be a decline of the relative
price of non-tradable foodstuffs, which will benefit the economy.
29
97. Avoiding the resource curse will require the pursuit of a prudent fiscal policy to
prevent excess mineral revenue from immediately translating into greater aggregate
demand and inflation. This may entail the design and implementation of fiscal rules or
guidelines. Formulating and implementing long-run growth should focus on an
investment strategy that emphasizes infrastructure development which enhances
productivity in the private sector, especially in agriculture and export industries.
3. The Way Forward 98. Guinea is facing an historic opportunity to leverage large mining investments in
ways that create tangible and large benefits for its population. It should aim not only to
integrate this sector into the economy, but increase the benefits of EIs to the overall
economy. Important goals also include increased revenue for both the Government and
local communities, and the efficient use of these revenues to drive diversification. But the
country faces challenges in the management of natural resources within a context of
limited resources. It is therefore important to adopt a sequenced approach. Efforts are
needed to strengthen three sets of institutions — at the core, the Ministries of Mines and
of Finance, the supporting ministries in charge of infrastructure, PSD and local
development, and the institutions and processes needed to strengthen transparency and
accountability. Short- and medium-term priorities along with required resources are
outlined in the tables below.
4.1 Short-term priorities
Table 2. Build revenue collection capacity and improve coordination within and between the Ministries of Mines and Finance
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Enhance mineral revenue collection, recording, and analysis
Assess and improve skills in the relevant finance and mining departments
Build auditing skills
Enhance coordination between institutions managing mining and hydrocarbons
US$ 1 million for each year
Advisor in the Finance Ministry provided for in the LICUS application
Capacity building provided under the ACGF application for Guinea (US$ ~500,000)
US$ 400,000
Table 3. Finalize the review of conventions according to a pre-announced calendar, which should be preceded by a professional assessment of mining agreements
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Analytical assessment of each of the agreements under review for the identification of potential upside/downside.
Capacity building
US$ 2.75 million (US$ 250,000 per agreement)
Government’s own financing of US$ 250,000
LICUS application providing for Capacity building for another US$ 288,000
US$ 2.25 million
30
Table 4. Clarify the institutional framework, and reduce the role of institutions not mandated to directly manage EIs in Guinea
In this context it is especially important to address rumors of discussions about actions that will violate the sanctity of mining titles in the country by imposing unilateral expropriations
Table 5. Finalize the legal framework by updating the mining and petroleum codes and regulations and adjusting the model convention
Drafting the regulations and eliminating the latitude from all mineral stakeholders to interpret at will the provisions of the new law will be important. This process should also be coordinated with the ongoing regional Mano River harmonization initiative.
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Update the mining code, and draft its regulations
Update the standard mining convention
Draft a model community development convention
Draft the petroleum law and production sharing agreement
US$ 1.5 million FIAS funding of US$ 650,000 to update the mining code and a model community development convention
LICUS application to draft mining regulations and a petroleum law for US$ 305,000
US$ 600,000
Table 6. Conduct a quick study of the comparative advantages of the various options that can allow financing of infrastructure development
An immediate issue is whether building infrastructure in exchange for mineral assets can be a good option. How to improve on such options, and how to value the mineral assets being used as collateral, is essential and should be correctly assessed.
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Assessment of infrastructure needs
Draft/update an integrated infrastructure development plan with a definition of short-, medium-, and longer-term priorities
Define available alternative financing schemes with their strengths and weaknesses
Prepare transparent road map and processes for infrastructure financing/development.
Estimate: US$ 700,000
Discussions underway for PPIAF financing of infrastructure assessment. Potential funding about US$ 400,000
US$ 300,000
31
Table 7. Initiate public-private-civil society dialogue
Civil society should play its role to review and influence mining sector strategies, including issues of state accountability, community development, and the environment. Donor partners have an important role in facilitating this dialogue. The creation of a forum for discussions and coordination among the MCs and the private sector is also key.
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Strengthen demand for accountability on mining and hydrocarbon management
Facilitate public, private, and civil society dialogue on community impacts and benefits
Estimate: US$ 500,000
ACGF funding (US$ 250,000)
US$ 250,000
Table 8. Initiate detailed assessment of projects where current analytical information available is insufficient
Includes project feasibility for the main pieces of infrastructure being considered, and plans for the development of growth poles.
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Data compilation and broad (pre-feasibility) assessment of key current infrastructure constraints
Spatial and socioeconomic assessment of the most prospective economic activities and growth centres
Estimate: US$ 2 million
ACGF US$ 1.25 million
US$ 0.75 million
4.2 Medium-Term Priorities
99. The urgent actions described above will improve prospects for realization of
current potential investments. But a sustained effort is needed over time to address the
central vulnerabilities that relate to capacity, incentives, coordination, and cooperation
among stakeholders. Efforts can be divided into the components below.
100. Laws, regulations, and institutions. There will be a need to consolidate and
finalize implementation after enactment of updated mining legislation and regulations. It
will also be important to strengthen the alignment between the legislation applied to
extractive industries, including those related to environment, social health and safety, as
well as infrastructure and others (Table 9).
32
Table 9. Laws, regulations, and institutions
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Mining/hydrocarbon health, safety and security standards
Alignment between mining/ hydrocarbon laws and regulations with those of other sectors
Regional harmonization and definition of accounting standards
National and regional transparency legal frameworks
Drafting and harmonization of national/regional PPP/BOT laws
US$ 4 million IDA funding for FY09 along with the regional mining governance program (US$ 1 million)
US$ 3 million
101. Capacity building and governance. A sustained multi-year effort is needed to
train central government officials on how collect, administer, monitor, and audit mining
revenues, with the objective of ensuring that agreed-upon levels of royalties and taxes are
collected and transferred to regional and local entities. Some analytical work is also
needed to identify how to better assess the accrual of revenue from mining in the future,
and how in due time to apportion revenue between spending and savings to compensate
for depletion of non-renewable resources and stabilize revenue across price cycles.
Capacity is also needed in other public institutions, including the cadastre, the mining
inspectorate, and environmental protection (Table 10).
Table 10. Capacity building and governance
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Revenue collection
Analysis of expenditure management options
Mining cadastre
Mining Inspections, control, and monitoring
Artisanal mining
Creation and strengthening of National Petroleum Regulatory body
Sector promotion
Local and regional capacity building.
Integration of mining and other sectors
Capacity building of other institutions managing mining and hydrocarbons
US$ 20 million IDA funding for FY09 along with the regional mining governance program (US$ 3 million)
US$ 17 million
33
102. Institutions for accountability and transparency. Clarify the accountability
framework and strengthen agencies to ensure the conformity of EI management to
accepted financial, technical, environmental, and social guidelines and standards. Actions
must be undertaken to create awareness among private and non-governmental
stakeholders of the transfer mechanisms and strengthen civil society’s demands for
accountability (Table 11).
Table 11. Institutions for accountability and transparency
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
EITI
Setting regional extension services of main mining management institutions
Capacity building in public internal and external oversight institutions
Mining district information centers
Framework to enhance Government and private company dialogue
Enhancing demand for accountability
US$ 5 million IDA funding for FY09 along with the regional mining governance program (US$ 500,000)
EITI Trust Fund (~US$ 200,000 undisbursed)
US$ 4.1 million
103. Infrastructure financing. The state would get more involved in planning,
facilitating the financing, and ensuring proper execution for several large infrastructure
projects, including transport, energy, water, and urban development. Private solutions
will be sought whenever possible, including for small independent utilities, but within
coherent plans and with proper regulation and supervision (Table 12).
Table 12. Infrastructure financing
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Finalize an integrated infrastructure development framework
Create enabling conditions for infrastructure development
Identify sustainable financing options for infrastructuret
Promote and facilitate infrastructure development
US$10 million US$ 10 million
104. Economic impact of EI and growth poles. Several parallel efforts must be
undertaken to improve the development of business links. Using MC input, various
actions would seek to increase local procurement by improving the investment climate,
offering training opportunities, and facilitating access to financing. The infrastructure and
credible demands created by MCs will be used to enable development and/or expansion
of other sectors such as agriculture, fisheries, forestry, and tourism. Plans should include
34
needed investments in conservation, restoration, as well as physical and social
infrastructure. They should be sensitive to potential conflicts, compatibilities, and
constraints (Table 13).
Table 13. Economic impact of extractive industries and growth poles
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Create growth poles enabling environment
Thematic growth scenarios and staged regional growth strategies and investment plans
Facilitate access to financing
Capacity building, vocational training, and standards enhancement for SME and link development
US$ 50 million ACGF funding: US$ 15 million
US$ 35 million
105. Environmental and social management. Work is needed to address the lack of
specific environmental and social guidelines and standards in the extractive industries,
and to clarify requirements for SEAs and EIAs (Table 14).
Table 14. Environmental and social management
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Mining/hydrocarbon environmental and social guidelines and standards
Resettlement guides
Mine/hydrocarbon closure guidelines
Environmental laboratory and equipment
Environmental and social control and monitoring
US$ 5 million IDA funding for FY09 along with the regional mining governance program (US$ 1 million)
US$ 4 million
106. Regional harmonization. The optimization of EI benefits in Guinea cannot be
achieved in isolation from neighboring countries. The West Africa Mining Forum and the
Mano River countries meeting in February 2008 recognized the benefits of regional
approaches to EI development and intend to: (i) promote harmonized approaches to
mineral sector governance; (ii) reduce fiscal distortions between individual countries
leading to increased smuggling and the race to the bottom between countries to attract
FDI in EI; (iii) enable optimal development of infrastructure linked to benefits from
mineral investments; (iv) efficiently manage environmental and social impacts, especially
for the numerous projects located close to national borders; and (v) improve trade,
35
commerce, and collective growth potential based on EI and comparative advantages in
individual countries in the sub-region (Table 15).
Table 15. Regional harmonization
Activities to be undertaken Overall estimated resources
Currently available/application
Gaps in resources
Mano River Union regional harmonization
Capacity building and governance strengthening
Regional geological data collection
Development of growth poles
Regional mitigation of social and environmental impacts of mining
US$ 40 million IDA Country allocation (US$ 10 million including US$ 5 million for Guinea for FY09)
IDA Regional allocation (US$ 20 million)
Other donors (US$ 10 million)
IDA country allocation (US$ 5 million)
IDA regional allocation (US$ 10 million)
Other donors (US$ 10 million)
107. Role of development partners. Realizing the potential of Guinean extractive
industries will require support from donors. Current support for the reform agenda comes
from the World Bank, IFC, AFD, AfDB, USAID, and others (see Annex 2). More
support will be needed in the future to address the gaps identified in this report. Improved
coordination among DPs around a well-defined Government plan will be key. The
importance of the current EI prospects needs to be reflected in Guinea’s priorities and
programs. The World Bank Group (WBG) could play a significant role in enabling the
realization of current mineral development prospects by supporting capacity
development, improved donor coordination, and helping to improve the enabling
environment for coherent infrastructure finance.
37
Annex 1. Cost Estimate for Identified Priorities
Activities to be undertaken
Overall estimated resources
(million US$)
Currently available/
application (million
US$)
Currently available/pipeline
description
Gaps in resources,
(million US$)
Short-term priorities
1 Building revenue collection capacity
1 0.7 Licus US$ ~200,000, ACGF US$ 500,000
0.3
2 Finalizing the review of conventions
2.75 0.5 Gnmt~ US$ 250,000, Licus US$ 250,000
2.25
3 Updating the legal mining and hydrocarbon frameworks
1.5 0.9 FIAS US$ 650,000, Licus US$ 300,000
0.6
4 Comparative study on infrastructure development
0.7 0.4 Possible PPIAF funding US$ 400,000
0.3
5 Initiate public-private-civil society dialogue
0.5 0.25 ACGF: US$ 250,000 0.25
6 Detailed assessment of infrastructure projects and growth poles
2 1.25 ACGF: US$ 1.25M 0.75
Subtotal 8.45 4 4.45
Medium-term priorities
7 Laws, regulations and institutions
4 1 IDA FY09: US$ 1M 3
8 Capacity building and governance
20 3 IDA FY09: US$ 3M 17
9 Institutions for accountability and transparency
5 0.5 IDA FY09: US$ 0.5M 4.5
10 Infrastructure finance 10 0 10
11 Economic impact and growth poles
50 13 ACGF: US$ 14.25M 37
12 Environmental and social 5 1 IDA FY09: US$ 1M 4
13 Regional harmonization 10 5 IDA FY09: US$ 5M leveraging US$ 10M regional
5
Subtotal 100 22.5 77.5
Total 108.45 26.5 81.95
38
Annex 2. Current World Bank Support to the Mining Sector
Existing Grants
IDF grant (US$ 476,000). The leadership of Cabinet members has been strengthened for
managing the mining sector and negotiating mining contracts, and a standard mining
agreement for all mining contracts has been agreed. The first mining agreements signed
after capacity building on negotiating have an effective tax rate (ETR) of 30 percent,
which is certainly better than the 19 percent for the previous contract.7 In comparison,
however, the global average of ETR for mining (only) operations is about 40 percent, so
Guinea still needs to improve. This grant closed in June 2008.
EITI grant (US$ 576,000). The Bank has also been supporting Guinea in EITI
implementation. Guinea has made significant progress and now has a seat on the EITI
board. The grant will close in December 2009.
FIAS (US$ 650,000). The Bank Group (FIAS) has recently provided Guinea with a grant
to update its mining code, address constraints to the development of value-added
activities in the mining chain, and reinforce corporate social responsibility.
Grant Applications That Are Being Considered
ACGF Grant (US$ 15 million). This grant aims to stimulate economic growth through
the demands and opportunities created by expected large investments in the mining
sector. The grant is in the final stages of approval and aims to: (i) increase fiscal revenues
from the mining sector resulting from increased capacity of the Government to collect
and administer taxes and royalties, (ii) increase local procurement of goods and services
by international mining companies, and (iii) increase employment opportunities in key
mining regions as a result of employment multiplier effects.
LICUS Grant (US$ 723,000). This grant aims to bridge the gap between the closing
time of the IDF grant and the expected IDA mining technical assistance in FY09. It aims
to complete the mining legal framework, draft a petroleum law, and build the capacity of
the mining agreement review committee. It is expected to be presented anew to the
LICUS Committee in the coming fortnight.
7. The effective tax rate (ETR) is a measure, expressed as a percentage of the effective net cash flow, of
all amounts payable by a company to the Government (including dividends in the case of a free carried
Government equity share). ETR is calculated by summing the present value of all taxes and other
payments to the Government during each year then dividing that sum by the present value of the total
effective annual cash flow.
39
Annex 3. Some Government Priority Actions and Their Urgency
Issues Legal reform
Capacity
building (HR and equipment)
Coordination
(public-private and intra-government)
DP involved
Adequacy of funding
Access to natural resources
Mining code and regulations, including clear regulation regarding titling
High High High WBG Sufficient
Petroleum code and regulations, including clear regulations regarding titling
Medium Medium Medium Licus application
Insufficient
Fiscal regime
Provisions against transfer pricing
Tax holidays and other incentives
VAT
High NA NA WBG Sufficient
Contract negotiations High WBG Insufficient
Mining cadastre High High WBG Insufficient
State equity and share High High
Geological survey Medium Medium Medium
Kimberly Process Medium Medium Medium USAID Insufficient
Monitoring of operations/enforcement/ implementation of legislation and regulations
Environmental monitoring High Medium
Social monitoring High Medium
Economic auditing High High
Reconcile payments with contractual obligations
High High WBG Insufficient
VAT refund High High
Tax administration High High High Licus application/ ACGF
Barely sufficient
Assess operating cost of mining companies High High
40
Issues Legal reform
Capacity
building (HR and equipment)
Coordination
(public-private and intra-government)
DP involved
Adequacy of funding
Revenue management and redistribution of EI revenues
Expenditure management to ensure population benefits and avoid Dutch disease
Medium Medium
Investment budget High High
METF Process Consistency with the macro- and medium-term expenditure framework (MTEF)
Medium Medium
Decentralization Medium Medium WBG ???
Governance and accountability High High WBG Insufficient
Savings decisions Medium High
Oversight – EITI High High WBG Sufficient until Dec 09
Sustainable development
Decentralization/revenue distribution High High WBG Insufficient
Business enabling environment Medium Medium
Local procurement High Medium
Local employment
Labor rigidity
Social security
High Medium
Environment High High High
Mine health and safety Medium Medium Medium
Resettlement High High High
Mine closure Medium Medium Medium
Basic services (education, community health)
High High High WBG/AFD/ UNDP, etc
Insufficient
Basic infrastructure (roads, water, electricity)
High High High WBG Insufficient
Growth poles High High High WBG Insufficient
Artisanal and small-scale mining High High Medium USAID Insufficient
Large-scale infrastructure High High High AFDB Insufficient
41
Annex 4. Guinea Mineral Sector Historical Development
Bauxite & Alumina Production
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,0001990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2,0
05
2006
2007
Years
To
ns o
f B
au
xit
e e
xp
ort
ed
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
To
ns o
f A
lum
ina p
rod
ucti
on
Alumina Production (t)
Total Bauxite Production
Gold Production in Kg
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2,0
05
2006
2007
Years
Ind
ustr
ial
Go
ld i
n k
g
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
350,000,000
US
D
Industrial Gold Production
Industrial Gold Revenue - USD
42
Diamond Export & Revenue
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
2,0
05
20
06
20
07
Years
US
D
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Cara
ts
Valeur des ventes de diamant ($)
Total diamond export - Carats
Artisanal Gold Mining and Revenue
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2,0
05
2006
2007
Years
Kg
of
Go
ld
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
US
D
Artisanal Gold Production
Artisanal Gold Revenue - USD