Sierra Leone at the crossroads: Seizing the chance to benefit from mining

New report, written for the National Advocacy Coalition on Extractives (NACE) in Sierra Leone.

To read the full report, click here

Executive summary

This report considers how the people of Sierra Leone could benefit more from the country’s mineral resources,
especially diamonds and rutile.  The task is urgent since the country is one of the poorest in the world, still emerging
from a brutal civil war. Although minerals account for around 90 per cent of exports, ordinary Sierra Leoneans are
failing to benefit significantly since government revenues are so low. Tax laws have given too much away to mining
companies while government policies to monitor and regulate the mining sector are poor or non-existent. Unless these
change, the current expansion in mining will not translate into benefits for people.

Sierra Leone now has an opportunity to turn this around. The government, supported by donors, is redrafting the
country’s mineral legislation and reviewing individual contracts signed with mining companies. This process is positive,
but NACE’s analysis is that it will fall short of what Sierra Leone needs to ensure that mining provides a route towards
prosperity. Officials from government and donors need to re-think their strategy.

Some individual mining and tax agreements signed by the government with companies have provided extraordinary
concessions. A 2003 agreement with Sierra Rutile, one of the country’s two largest foreign investors, reduced the company’s
royalty rate to a minuscule 0.5 per cent until 2014 and scrapped entirely the payment of corporate income tax on profits
until 2014. NACE’s calculation is that the country will lose $92m (£61m) from the royalty concession alone. Despite sales
of $28m in 2006, NACE’s understanding is that the company may be paying less than $1m in annual remittances to the
government.

Government revenues from mining are miniscule. Of mineral exports of $179m (£119m) in 2006 (of which diamonds
accounted for $125m), only around $9-10m (£6-7m) returned to the government – between 5 and 6 per cent. Studies
suggest that with significant institutional and capacity reform, Sierra Leone could export $1.2 billion a year in mineral
exports by 2020 – a sevenfold rise over current levels. With good government spending, nearly a million people could
be lifted out of poverty. The government appears to have adopted a target to receive 7 per cent of the value of minerals
exports as government revenue; NACE believes the government should be aiming to take a minimum of 10 per cent,
meaning its annual revenue by 2020 could be $120m – twelve times greater than currently.

No mining company in Sierra Leone is currently declaring a profit. But profit projections from the two major
companies – Sierra Rutile and Koidu Holdings, the country’s largest diamond miner – suggest that the government could
significantly benefit in the future. Sierra Rutile itself states that the government will receive $580m over 20 years; Koidu
Holdings that it will remit to the government $399m over the next 17 years.

However, if these benefits are to materialise, massive problems in Sierra Leone’s mining sector, all associated with
governance, need to be overcome.

•    There is an extreme lack of transparency, with a lack of information at all levels, creating mistrust and ignorance
about the financial position or intentions of government and companies. Some companies provide no public financial
information on their activities while the government does not publish a figure showing how much it earns from mining
overall.
•    There is a severe lack of capacity in all government departments associated with mining to, for example, assess and
collect revenues and taxes and acquire basic geological information.
•    The country lacks adequate monitoring mechanisms to ensure that mining companies are behaving in a lawful manner;
there are concerns that some companies claiming to be exploring are actually already exporting, for example. Diamond
exports are believed to be at least double the volume of what is officially declared.
•    There are extremely serious gaps in the mining regulations, creating uncertainty among companies and communities
as to who is responsible for what. For example, there are no laws dealing with underground mining, despite the fact that
there is one underground diamond mine in the country; there are no comprehensive laws on blasting, despite the fact that
this occurs; there is no functioning institution in the country with the legal authority to monitor Environmental Impact
Assessments; and there are no formal procedures laid down on relocating communities affected by mining, despite over a
dozen such relocations in the rutile mining area.
•    The prevalence of corruption is well-recognised. The Director General of the Ministry of Mineral Resources has stated
that ‘reducing corruption and rent seeking’ is one of the challenges facing the department which he recognizes ‘has had a
reputation for corruption’. Sierra Leone is ranked 142nd out of 163 countries in Transparency International’s Corruptions
Perceptions Index.

The government under President Ernest Bai Koroma, elected in September 2007, is committed to reviewing the country’s
mining laws and the individual agreements signed with companies, and has stated that the country is benefiting too little from
mining. A new Minerals Act has been drafted (under the previous government) and a Task Force has been put in place to
report to the President. However, it remains unclear whether the government really intends to implement the new Act and
how far the government will go in revising the country’s mining laws. The current draft of the new Minerals Act contains
some positive features but, very disappointingly, fails to propose any changes to the key tax aspects of the country’s mining
legislation.

The World Bank is also playing a key role. One of ten ‘triggers’ (ie, policies the government must implement) for the government
to receive a $10m World Bank loan is changes to the mining tax regime ‘in line with recommendations from the IMF’.  Some of
these recommendations, outlined in 2004, are reasonable, but they do not call for any increases in the royalty or other tax rates;
they call for the diamond royalty rate to be retained at 5 per cent and for the rate for precious metals (currently at 4 per cent)
to be reduced to 3 per cent. More worrying is the recommendation that the terms of the 2003 agreement with Sierra Rutile
‘should be implemented’.  It is quite unacceptable that the World Bank should be enforcing any recommendations at this level of
detail, when this is clearly the task of government – and still more when they are the wrong ones anyway. The triggers are
contained in a confidential 2007 document showed to NACE researchers by an official in the World Bank.

Furthermore, the impact of mining on desperately poor people in the mining areas is a mixed bag and sometimes harsh. On
the one hand, Sierra Rutile and Koidu Holdings (at least until its recent suspension of operations, which forced the company
to lay off over 500 workers) both employ hundreds of people offering relatively high salaries in rural areas where is there no
other economy than subsistence farming. These salaries benefit thousands of people in poor households and have stimulated
local economies, though the precise effects have never been quantified.

On the other hand, many hundreds of people have been made poorer, notably in the rutile area:

•    Dozens, and perhaps hundreds, of households are currently losing farmland as Sierra Rutile expands its mining operations
across hundreds of acres of new land. All villagers spoken to in this research have said their incomes, food production and consumption
have decreased since they lost their land; many say openly that they have been plunged further into poverty.
•    Mitigation programmes by the company are inadequate: rental payments for the use of land and compensation for the loss of crops
(both set by the government) are exceedingly low and insufficient to cover losses. Company commitments to rehabilitate land and
provide agricultural support programmes and alternative sources of income are either meagre or have failed to materialise at all,
as far as NACE has been able to establish.
•    Although Sierra Rutile has developed a voluntary community development programme, this has failed to spend any significant
amounts of money so far and, at around $150,000 a year, is a relatively small sum anyway. Furthermore, the company has bizarrely
chosen for its first major project a plan to convert 5,000 acres of palm oil to bio-diesel (the use of agricultural crops to produce
energy). Yet community needs in the area are overwhelmingly basics such as access to safe water, electricity and good schools.

The adverse impacts of mining on local communities are certainly not all the companies’ fault. Expectations in the communities
affected by mining are high. Yet the lack of adequate government regulations mean that it is unclear – to the companies, the
communities and the government itself – who is responsible for providing infrastructure and social services, what companies
precise obligations are (and how these differ from voluntary spending on local development), and what the right process is to
be followed in relocating or compensating communities.

To read the full report click here