African Markets Managing Natural Resources a Report from the Economist Intelligence Unit

African Markets Managing natural resources A report from The Economist Intelligence Unit

Sierra Leone

Commissioned by: March 2013 African Capacity Building Foundation

www.eiu.com African Markets Managing natural resources

Politics and institutions

Sierra Leone has a largely presidential system of government. The president and members of parliament are elected every five years by universal adult suffrage. A constituency system was adopted in 2007, replacing the national list proportional representation system, which had been in place since the end of the civil war in 2002. The country’s third democratic election, in 2007, was held in relative peace and led to the first peaceful handover of power from one party to another in post-independence history. The country has a legacy of civil war and military coups, although it has held three peaceful democratic elections since the end of the 1991-2002 civil war. This war was launched by the rebel Revolutionary United Front (RUF) and undermined the already weak institutions and fragile government. In 2002, after an estimated 50,000 deaths, the war was officially declared over, following the deployment of UN peacekeeping forces. However, the causes of political instability in Sierra Leone, such as corruption and socio-economic imbalances, have not been addressed. Creating networks of patronage in return for support at the polls is a long-established tradition in Sierra Leone, and one that continues today. Political parties The political scene is dominated by two parties; the ruling All People’s Congress (APC) and the Sierra Leone People’s Party (SLPP). The APC dominates the Temne communities in the north and west, while the SLPP draws most of its support from the Mende ethnic group in the south and east of Sierra Leone. The presidential election result in 2012 reflects this clear divide. Julius Maada Bio (SLPP) won the six southern districts, dominated by Mende communities, securing on average 74.8% of the vote. Meanwhile, Ernest Koroma (APC), won the other eight districts, with more than 80% of the vote on average and was consequently elected president. International observers praised the poll as free and fair, despite noting some irregularities, notably the APC’s access to state resources, which gave it significant advantage in the run-up to the polls. After a long civil war and many years as an opposition party, the APC regained power in 2007, and won re-election in 2012. The period of corrupt rule that the APC presided over from 1968-92 is now a distant memory for most people. The party was elected in 2007 on a mandate of wide-ranging reforms, including tackling corruption, creating jobs and raising the standard of living. Mr Koroma pledged to “run the country like a business”, and told parliamentarians that they were now working for Enterprise Sierra Leone Limited. Mr Koroma and his party have overseen a rise in economic growth—largely owing to foreign investment in the mining sector—as well as improvements in infrastructure, the power supply and the delivery of basic public services. Moreover, it has successfully made inroads into the eastern swing district of Kono through patronage networks and the strategic selection of Samuel Sam-Sumana, who hails from the district, as Mr Koroma’s running mate. Meanwhile, the SLPP has been weakened by internal divisions, and in 2012 the credentials of its presidential candidate, Mr Maada Bio, © The Economist Intelligence Unit Limited 2013 1 African Markets Managing natural resources

were tarnished by his involvement in two military coups in the 1990s. It will need to overhaul its party structures and widen its appeal beyond its strongholds in the southern and eastern provinces if it is to challenge the growing dominance of the APC. Institutions There are 124 seats in the unicameral parliament, while 12 paramount chiefs retain the right to sit as members. The quality of democracy is compromised by a number of factors, including weak institutions. The functioning of government is poor, reflecting weak administrative capacity, endemic corruption and widespread mismanagement. Poor levels of political participation reflect low representation of women, ethnic minorities, and indeed mainstream ethnic groups not associated with the ruling party. There are still concerns over civil liberties in Sierra Leone; freedom of speech, particularly the press, is not always respected, and the judicial system is very weak, suffering from limited capacity and political interference. The civil war and slow recovery weakened the state, and civil society organisations have played an important role in delivering public services, acting as intermediaries between government, donors and the wider population, and raising government accountability. The presidential, legislative and local elections in November 2012 were deemed free, fair and transparent by international and regional observers. Nevertheless, the SLPP’s criticism of what it saw as widespread and systematic fraud could tarnish the image of both the regime and the election process. Although the allegations of fraud levelled by the opposition could merely be an attempt to deflect attention from its poor showing in the election, political stability could be undermined should the National Electoral Commission or the judiciary be seen as biased against the opposition in their handling of any electoral disputes. Sierra Leone’s constitution came into force in October 1991, but it was suspended on a number of occasions during the civil war. Many judges, civil servants and other professionals left the country because of the war. Those remaining draw salaries, but often still lack the means to carry out their duties. The Anti-Corruption Act in February 2000 led to the formation of the Anti-Corruption Commission (ACC), but there has been concern over the failure to prosecute political offenders. During the APC’s first term in power (2007-12), it strengthened the powers of the ACC, giving it the power to prosecute. The ACC indicted 29 people on various corruption offences related to the misappropriation of donor and public funds in March 2013. Although 22 convictions on graft charges were secured in 2012, including that of the former mayor of the capital, Freetown, the anti-corruption fight has been undermined by lenient penalties. Most convicts are fined and avoid prison sentences as long as they pay. The country’s judiciary is weak and hampered by inadequate resources, corruption and political interference. Despite several allegations against senior public officials, there has been a lack of high- profile cases, leading to an impression that powerful politicians and civil servants are untouchable. Natural resources

The varying level of rainfall in different regions is important for agriculture. The growing season is longest in the south-west, which makes it ideal for cash crops. The climate of the north-west is more 2 © The Economist Intelligence Unit Limited 2013 African Markets Managing natural resources

suitable for growing staples, such as rice and cassava. Natural resources are also spread throughout the country. Kono, in the east of the country, is the most important centre of diamond production, while central and southern Sierra Leone contain large deposits of iron ore. Mining started in the 1930s and has been the country’s main source of foreign exchange and export revenue, as well as a significant driver of GDP growth. Sierra Leone is rich in mineral resources; diamonds, gold, bauxite, rutile (titanium ore) and iron ore are known to exist in large quantities, although geological studies have not yet mapped all the country’s terrain, and may reveal additional mineral deposits. The rise of commodity prices in recent years, particularly for minerals, has led to strong interest by international mining companies in Sierra Leone, resulting in a surge of new mining licences and exploration.

Main mineral production 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Diamonds ('000 carats) 351 506 691 668 582.3 604 371 400 437 350.3 Iron ore (tonnes) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 137,883 Rutile (m tonnes) n/a n/a n/a n/a 70,361 86,505 69,163 66,666 70,131 44,619 Bauxite (m tonnes) n/a n/a n/a n/a 970,654 1,154,223 815,371 680,219 1,254,742 1,421,765 Gold (ounces) n/a n/a n/a 751 2,642 5,623.4 5,361 9,362 5,287 Ilmenite (m tonnes) n/a n/a n/a n/a 8,561 12,006 22,597.0 10,230 21,193 19,089 Coffee (m tonnes) 947 113 118 1,532 1,475 2,483 1,958.2 8,144 2,704 3,787 Cocoa (m tonnes) 1,177 2,733 6,187 6,634 13,939 13,721 17,892.1 16,937 16,070 17,999 Source: Bank of Sierra Leone.

Agriculture Conditions for the cultivation of food and cash crops are favourable in most areas. Rainfall is abundant, although highly seasonal, posing problems of flooding and erosion. The soil, however, is relatively infertile, and cultivation of single crops is the norm. Agriculture, the mainstay of most of the population, was devastated by the civil war of 1991-2002. The war lasted longest in the eastern borderlands, where cash crops such as coffee, cocoa and palm products are grown, while the spread of conflict to the north also affected the production of rice, the country’s main staple. By the time the war ended, much of the rural population was left dependent on food aid. The post-conflict government has emphasised the need for self-sufficiency in food supplies, and some progress has been made towards this. Agriculture has rebounded strongly with the return of large numbers of refugees and internally displaced people to their former holdings. However, this is mainly subsistence farming. The weak state of commercial farming means that the country is still a net importer of staple foods, such as rice. Trends in fish production have largely mirrored those of crop production. The civil war had a large impact on fishing activities, but they recovered quickly following the end of the war in 2002. Diamonds Diamonds have been the largest source of export earnings in Sierra Leone for several decades and control over this resource was one of the main factors behind the civil war in 1991-2002. Sierra Leonean diamonds are considered to be of superior quality, with high average carat values.

Historically, small-scale artisanal mining with hand-held tools, shovels and sieves has accounted for 80-90% of diamond exports. Artisanal diamond mining is the main employer after subsistence farming. Kono is the most important centre of commercial diamond production. Koidu Holdings (South Africa) is the largest diamond producer, operating the Koidu mine in Kono, which has estimated reserves of 2.4m carats. The government has improved transparency in the diamond trade, but illegal mining and smuggling are still widespread. Actual diamond production is estimated to be over three times the official diamond export figures. Illegal diamond activity is difficult to control, given the ease of smuggling diamonds owing to their size, and the limited resources available to the government for monitoring the industry. Diamond exports from Sierra Leone were banned between 2000 and 2003 under UN sanctions, in an attempt to bring illegal trading under control. However, in light of the government’s increased efforts to control the diamond industry and its participation in the Kimberley Process certification scheme— an initiative aimed at preventing the sale of blood diamonds (diamonds sold to finance violent conflict) on the international market—the ban was lifted in June 2003, resulting in a sharp rise in the production of diamonds. Prices fell significantly during the global economic downturn, but have since increased, ensuring that export revenue has remained elevated. Despite a near-50% drop in diamond production between 2004 and 2011, exports actually rose by 2.7% in value terms. Iron ore Iron ore production was restarted in Sierra Leone in 2011, after the mines were shut down for over 30 years, owing to low global prices. It has transformed the economy and was the main factor driving estimated real GDP growth of almost 20% in 2012. It has also raised local expectations, and a strike at Tonkolili mine in April 2012 over workers’ salaries and conditions escalated into a violent protest, in which one person was killed and several were injured. There are two main iron ore sites: Tonkolili, with estimated reserves of 12.8bn tons, and Marampa, with estimated reserves of 1bn tons. African Minerals (UK) started exports from its Tonkolili mine in the final quarter of 2011, and it produced an estimated 5-6m tonnes in 2012, lower than the original projection of 15m tonnes because of a particularly severe wet season. It expects to reach its full production rate of 20m tonnes/year some time in 2013. According to the company, the constraints associated with the rainy season will be removed once current efforts to upgrade the processing equipment on the site are completed. Production was also restarted at Marampa by London Mining (UK) in December 2011. The company forecast production of around 1.5m tonnes in 2012, but had plans to invest more to increase annual production capacity to 9m tonnes. The company expects the annual output in 2012 to reach 1.5m tonnes, before rising to 4.2m tonnes in 2013. Other minerals Interest in Sierra Leone’s oil industry was sparked by US-based Anadarko Petroleum’s discovery of oil at its Venus well in September 2009. Since then, Anadarko has made two further discoveries at separate wells. However, these finds have not yet been fully assessed, and commercially viable quantities of oil have yet to be found in the country’s waters, despite speculation that it could be a bookend to an oilfield stretching along the West African coast to Ghana. As a result, any

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commencement of oil production is still several years away. Nonetheless, spurred by the onset of hydrocarbons production in nearby Ghana, Sierra Leone’s offshore blocks have attracted interest from several major oil companies. Companies that have acquired an interest in Sierra Leone’s oil industry include Lukoil (Russia), Chevron (US), Noble Energy (US), Repsol (Spain) and Tullow Oil (UK). Sierra Leone’s second-largest recorded export commodity, before the civil war, was bauxite. Operations ceased in 1995 as the war intensified, and only resumed in 2006 after extensive rehabilitation the year before. The two main bauxite mines are in Gondama, south-east of the capital, Freetown, and Port Loko, north-east of Freetown. The mines are estimated to have reserves of 31m tonnes, with an annual export capacity of around 1.4m tonnes. The rutile mining segment was also one of the most profitable and among the largest private sector employers in Sierra Leone before the war. The Sierra Rutile mine produced around 25% of the world’s rutile, making it the largest and highest- grade natural rutile deposit. Rutile mines also ceased operations in 1995 as the civil war intensified. Following rehabilitation of the Sierra Rutile mine in 2005, production for export resumed in 2006, and the sector currently employs around 1,000 workers. Policy, economy, and the business environment

Policy Corruption and economic mismanagement have consistently undermined economic development since independence. During the civil war, economic programmes were erratic and the government was forced to spend over three-quarters of its resources on the war effort. Since the initial peace process, progress has been made in stabilising the economy, achieving broad-based economic recovery and consolidating peace. Current government policy is broadly aligned with two important programmes— the government’s poverty reduction strategy and its US$45m extended credit facility (ECF) with the IMF. Objectives include improving domestic revenue collection, increasing the efficiency of public expenditure and investment execution, ensuring transparency in public procurement and the natural resources sector, strengthening the fight against corruption and ensuring the financial viability of public utilities. Progress in implementing both has been hampered by the weak administrative capacity of the government. Additional problems include poor fiscal management, lack of transparency, and corruption. Since the scaling down of the war in 2001, macroeconomic performance has improved and, as a result, fiscal deficits have narrowed. During this time, the government budget has depended heavily on foreign grants, which have composed around one-third of budget financing. Fiscal pressures are likely to continue in the medium term, as the government’s focus shifts away from post-conflict stabilisation and towards medium-term development and poverty alleviation. The Bank of Sierra Leone (the central bank) has only limited instruments for controlling the money supply and inflation. Monetary policy is controlled primarily through the issue of Treasury bills, although even this tends to reflect the government’s domestic borrowing, rather than the central bank’s liquidity and foreign-exchange management. Commercial lending rates are high in both nominal and real terms, as most banks continue to favour lending to the government, rather than the private sector, despite

rising competition in the sector. Inflation has been better controlled in recent years, after peaking at 67% during the civil war. This reflects the more stable exchange rate, which is a major influence on inflation, as most consumer goods are imported, and some progress in reining in government spending. Management of natural resources The desire to benefit from the management of natural resources is the main source of instability in Sierra Leone, and was a large factor in the five military coups since independence in 1961. The political system has cloaked the reality of unaccountable and highly localised deals between national political brokers, local landowners and various expatriate diamond merchants and mining supervisors. Indeed, Siaka Stevens, Sierra Leone’s most powerful leader (1968-85), built his power on the fact that most of the alluvial diamonds came from Kono, which he was able to control through alliances with powerful local chiefs. A lack of transparency in government operations has allowed this lack of accountability in the management of natural resources to flourish, and, although there has been some improvement in recent years, the roots of the problem are deep. There are irregularities across the public sector, including inadequate spending controls, ineffective audit practices and endemic disrespect for procurement regulations. The auditor-general’s 2011 report revealed serious gaps in accountability and transparency in ministries, public enterprises, schools and state institutions. In ministries alone, it is estimated that over US$25m was lost in 2011 owing to poor public finance management practices. The government has recently received a significant boost in revenue, on the back of rising mining royalties and signing fees for oil blocks, causing concerns about the authorities’ ability to manage the large financial influx from the natural resources sector. Criticism of procurement and contracting processes raises doubts that the government will be able to implement efficiently its ambitious public investment programme. Most worryingly, weak public finance management practices are not only owing to a lack of capacity and training, but also wilful non-compliance with laws and regulations. The expected boost in diamond production in the coming years will only have a limited impact on the public finances; only around 5.5% of the total value of the diamond exports goes to the government. In addition, several of the mining companies operating in Sierra Leone have negotiated substantial tax reductions and pay considerably less than the 30% tax rate set out in the country’s mining legislation. This has led the opposition to call for revisions of the agreements with mining companies. The government’s opponents are seeking to capitalise on popular sentiments that, with rising mining output, particularly of iron ore and diamonds, should come increased government spending, improved delivery of basic services and more employment opportunities. Although Mr Koroma has vowed to increase the mining sector’s contribution to the public finances, any changes to the mining code are unlikely to significantly affect business-operating conditions.

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The Extractive Industries Transparency Initiative (EITI) has temporarily suspended Sierra Leone The decision in February 2013 by EITI, an and negotiated and their content. Although this international body set up to increase accountability is beginning to change, exchanges between the in the oil industry and mining sector, to suspend government and many mining companies have been Sierra Leone comes as a blow to the government, dominated by informal communication channels, which has made considerable progress in boosting with little or no accountability. Moreover, the transparency in the country’s natural resources government’s monitoring, data management and sector. Most significantly, it has, with backing auditing capacities are weak, which has further from donors, set up an online repository, where hindered greater transparency. Being deemed all licences and non-tax payments by mining compliant has several benefits. It facilitates the companies are published. It has also established a monitoring of governments’ natural resources more professional regulator, the National Minerals management, by donors as well as civil society Agency, which aims to depoliticise the licensing groups and the opposition, and can thereby help regime and ensure compliance with the country’s to prevent political and economic disputes around laws and regulations. In announcing Sierra Leone’s the oil industry and mining sector. It also helps suspension, the EITI acknowledged the country’s investors to mitigate reputational risks by allowing “significant progress” towards meeting the them to show how their investments contribute to necessary requirements to be admitted as an EITI- the development of the recipient country. Despite compliant country. However, several weaknesses Sierra Leone’s suspension, the government appears remain, and the authorities’ natural resources intent on boosting transparency in these areas of management will remain a cause for concern among the economy, and, if ongoing reforms and capacity- donors, creditors and civil society groups. Notably, building efforts continue, the country is likely to be there is a lack of transparency with regard to mining considered EITI-compliant in the short to medium agreements, both in terms of how they are awarded term.

Economic growth Sierra Leone has large potential wealth in the form of mineral resources, yet it is one of the poorest countries in the world, reflecting decades of corruption and mismanagement. The economy has seen a marked deceleration in growth since the 1960s, and suffered severe stagnation and recession from the early 1980s to the end of the 1990s. Economic growth picked up as the civil war came to an end, peaking at 27.4% in 2002. The economy has continued to grow quickly in the years since, largely as a result of strong growth in agriculture and mining. The global financial crisis led to a large fall in commodity prices, including of the important export commodities of diamonds, rutile and bauxite, which was a constraint on growth. Following the onset of iron ore production, real GDP grew by an estimated 19.7% in 2012, and mining sector activities, particularly iron ore production, will continue to be the main driver of economic growth in the next couple of years. However, power shortages, inadequate infrastructure and volatile weather conditions will continue to limit the pace of this expansion.

Main destinations of exports (% of total) 2004 2005 2006 2007 2008 2009 2010 2011 Belgium 82.1 81.2 47.1 53.7 43.2 25.3 25.7 25.9 Romania 0.0 0.0 0.0 0.1 0.0 1.6 13.4 11.3 Netherlands 1.3 1.5 6.1 4.9 4.5 7.5 6.4 8.3 China 1.1 0.9 0.4 2.1 2.2 4.2 2.7 6.6 Note. Based on partners’ trade returns; subject to a wide margin of error. Source: The Economist Intelligence Unit.

Main origins of imports (% of total) 2004 2005 2006 2007 2008 2009 2010 2011 China 10.9 9.8 11.0 14.5 16.2 11.6 14.0 15.1 South Africa 7.6 6.9 6.5 5.2 2.6 22.5 19.3 10.1 US 15.6 12.1 11.1 13.7 12.2 9.0 8.7 6.9 UK 17.0 14.9 9.6 8.9 10.3 6.9 8.4 6.7 Note. Based on partners’ trade returns; subject to a wide margin of error. Source: The Economist Intelligence Unit.

The business environment

Although the country’s business environment has improved in recent years, poor infrastructure, inadequate land laws and an inefficient bureaucracy remain deterrents to companies wishing to invest in the country. Sierra Leone’s infrastructure has been severely neglected for decades. Post-war reconstruction efforts have done little to improve this. Almost all the infrastructure in the country requires significant investment and this is a government priority, with a high proportion going towards capital expenditure each year. However, the ability to speed the pace of post-war reconstruction and development has been constrained by a lack of capacity at both the administrative level and within the local construction industry. The railways are largely defunct: a network connecting Freetown and a number of towns in the interior was closed in the 1970. The road network has benefited from donor funds aimed at supporting post-civil war reconstruction, provided largely by the World Bank and the EU. The country’s power-generation capacity falls short of demand and this, together with weak distribution networks, means persistent power shortages. The government is eager to advance the planned second development phase of the Bumbuna hydroelectric project, which is expected to boost its capacity from 50 mw to 300 mw by 2016. Mr Koroma’s overwhelming re-election cements the presence of a relatively pro-business administration in Sierra Leone. He endorses foreign investment-led growth and oversaw large

investments in the mining and agriculture sectors during his first five years in office. Indeed, Sierra Leone was named by the World Bank as one of the top reformers in its annual Doing Business index in 2012. The biggest improvements in its business environment were in paying taxes, trading across borders and enforcing contracts. On average, it takes six procedures and 12 days to open a new business in Sierra Leone, compared with an average of eight procedures and 34 days elsewhere on the continent. The country fares badly across a number of areas, including dealing with construction permits, registering property and getting electricity. If it is to become more competitive, it will need to improve land title and registration. Only the western area has freehold property rights and this accounts for only a tiny proportion of the country’s land mass—the rest of the country has leasehold rights. Over half of court cases are related to land disputes and it is the biggest source of backlogs, with cases taking several years to be resolved. The recent launch of a commercial court should speed up the process, over time. Foreign land investments are on the rise in Sierra Leone and the government has encouraged them, saying that they will help to boost economic growth, promote agricultural development through the transfer of new technologies and provide employment opportunities. The Sierra Leone investment and export promotion agency (SLIEPA) markets the country as having 4.3m ha of arable land available, and several foreign investments into biofuels production for the global market have been concluded in recent years. A US-based think tank, the Oakland Institute, said that 500,000 ha of land had been leased by early 2011. Hainan Rubber Industry Group, a Chinese-based company, in January 2012 signed a US$1.2bn agreement with the government to lease 135,000 ha of land for rubber and rice production in the country. Bengal Agro Sierra Leone, a subsidiary of Bangladesh-based Lalmai Group, announced plans in mid-2012 for US$59m of investment in the agricultural sector.

Sierra Leone Economic data Demographic and social data 2011a 2004-11 (av) latest available Real GDP (PPP US$ bn at 2005 prices) 5.6b 4.7 Population (m) 6.0 Nominal GDP (US$ bn at PPP) 6.3b 5.0 Area (sq km) 71,740 GDP (% real change pa) 6.0 6.0 Under 5 mortality rate (per 1,000 live births) 185.3 GDP per head (US$ at PPP) 1,050.0b 898.3 HIV/AIDS (% of people aged 15-49) 1.6 Budget balance (% of GDP) -6.1 -3.5 Human Development Index ranking (out of 186) 177 Public debt (% of GDP) 41.0b 85.5 Money market interest rate (%) 24.1 19.1 Consumer prices (% change pa; av) 16.2 13.0 Current-account balance (% of GDP) -55.9 -20.2 Foreign-exchange reserves (US$ bn) 0.3 0.2 Exchange rate LCU:US$ (av) 4,349.2 3,279.0 a Actual. b Economist Intelligence Unit estimates. Sources: The Economist Intelligence Unit; UN Statistics Division; UNDP; World Bank.

© The Economist Intelligence Unit Limited 2013 9 While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.

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