A Tale of Sierra Leone and Striving for Transparency

by Dulcie Leimbach, PassBlue
June 26, 2013

Britain, the world’s major center for investment in the extractive industries, is reviving the international debate on how open management of mining can prevent conflicts. The issue was raised in a Security Council meeting on June 19, after a seven-year hiatus on the subject in that setting. It was also discussed at the Group of 8 summit in June in Northern Ireland.

Sierra Leone, a former British colony in West Africa, possesses lush veins of iron ore that are being extracted with vigor by such companies as London Mining. The relationship between Sierra Leone and such investors provides a perfect example of how a country that tries to make its mining contracts more accessible to the public could potentially prevent a war from exploding over its precious resources. Indeed, as Sierra Leone recovers from an 11-year-long civil war that involved just that — the pilfering of diamonds — it is realizing that its natural resources should benefit its people more equitably.

So the country joined the Extractive Industries Transparency Initiative, a coalition of governments, companies and civil society parties striving for openness and deterring corruption in the industry. Supporting corporate members, numbering almost 80, include Hess Corporation and De Beers, totaling $19 trillion in global assets. Of the 39 member countries, 23 are “compliant” — met reporting rules and other requirements. Nongovernmental participants include the World Bank and Transparency International. All members have agreed to abide by certain standards of transparency and accountability, two often-cited words at the United Nations.

The Extractive Industries Transparency Initiative (EITI) is the leader in the field, a fact reinforced by its repeated mention during the Security Council debate in June.

The mining industry and preventing conflict is a particularly relevant topic for Britain, which is also home to an important lobbying group, the International Council on Mining and Metals, as well as the London Metal Exchange and London Bullion Market Association. Britain announced it would sign up to the extractive industries initiative, but that is as far as it has gone.

Up to 3.5 billion people live in the world’s 50 to 60 mineral-heavy countries, including Sierra Leone, but rarely does the wealth trickle down to everyday citizens, who in most of these nations live well below poverty lines under duplicitous governments. The paradox of Western countries sending millions of dollars in aid to resource-rich developing countries  is far too apparent, delegates at the UN debate reiterated.

To mitigate this global problem, the extractive industries initiative set criteria that enable investors and governments to open up their books for scrutiny. The initiative, which began in 2007 and operates from Oslo, gives countries a methodology to monitor tax and other payments from companies to governments and tracks governments’ revenue from the oil, gas and mining businesses. This way, countries can report what is paid into their coffers while companies reveal the costs of doing business and avoid reputation and political risks. The initiative verifies and reconciles the payments and publishes its findings in an annual report.

Clear-cut, yes; but any activity related to mining is never straightforward. Transparency is merely the first step. On another level, the initiative’s methodology offers some of the resource-rich countries the ability to create proper bureaucracies to process such information.

Six countries have tried but failed so far, having been suspended from the initiative — Central African Republic, the Democratic Republic of the Congo, Madagascar, Mauritania, Sierra Leone and Yemen — after revealing discrepancies in accounting methods and reporting.

The tale of Sierra Leone and London Mining shows how even best interests can falter.

Sierra Leone became a member of the initiative in 2008. Its last report was issued in 2010, covering the period of 2008-2010 on mining and petroleum industries. The report says that original discrepancies found by the Sierra Leone arm of the extractive industry initiative amounted to about $8.3 million; on further investigation, that gap was reduced to about $1.4 million. The “reconciliation” report, published in 2012, was performed by Boas and Associates, which is based in Accra, Ghana.

London Mining was among the 15 companies participating in the Sierra Leone reconciliation audit. (As a corporate member, London Mining voluntarily contributed $10,000 in 2012 to the extractive initiative; another payment of $2,600 to $4,000 was made to the local secretariat in Sierra Leone, said Claude Perras, head of sustainability for London Mining.)

The revenue streams from London Mining to various Sierra Leone official constituencies included licenses, rent and corporate taxes and royalties, some of the biggest chunks of the payment pie. The review process by Boas involved studying documents, data collection, analysis and aggregation and reconciliation.

Company payments were made to district councils and chiefdom administrations, among other high-level entities. Over all, from 2008 to 2010, the audit says that $20.5 million in payments were made by mining companies but only $12.2 million was received. The gaps were accredited to currency conversions (dollars to leones), resulting in potential duplication of payments, the report found. Some payments by companies were not supported by documents, receipts were missing or incomplete and timing of royalty payments was not standardized.

“They didn’t have a good list of all the mining companies that were operating, so it was difficult to know whether all mining companies and their payments were covered,” Eddie Rich, EITI’s deputy head and regional director for Southern and Eastern Africa and the Middle East, said in a phone interview about Sierra Leone. “It wasn’t possible to say they met the standards. We’ve gone back and said you need a full list, once you’ve got that then we can make assessment.”

As many West African nations enjoy the mining boom, Sierra Leone claims top producer: nearly 80 percent of its exports are mining based, with diamonds bringing in a hefty 60 percent of that portion. (Mining is second after agriculture in revenue.) Yet Sierra Leone, rising from its hellish civil war, in which people’s limbs were hacked off and rape and child soldier use were rampant, sits at the lowest rungs of human development: 177th out of 187 countries, below the average of the rest of sub-Saharan Africa.

Nevertheless, experts praise the country’s development progress, including its election of a new president, Ernest Bai Koroma, last November amid peaceful conditions.

That does not mean that the mining industry will necessarily avoid temptations to exploit Sierra Leone’s governance fault lines: the natural resource supply entails not only iron ore (which is used to produce steel) but also bauxite, gold, rutile and those precious diamonds. Oil and gas extraction also looks promising for Sierra Leone since the discovery of oil offshore in 2009.

London Mining began production in the Marampa region in 2011 and has been a member of the extractive industries since then. (It also has operations in Greenland and Saudi Arabia); the mine was formerly owned by the Sierra Leone Development Company, or Delco, from 1933 to 1975. It reached peak production in the 1960s before the market collapsed. The mine lay dormant for 30 years, throughout the civil war, until London Mining bought the license in 2006. The company is planning to dig more than 5 million tons in Sierra Leone this year, it says.

The government has been generous with London Mining, much to the consternation of such strong national civil society groups as the Network Movement for Justice and Development. The government first set an income tax rate of 6 percent for the company — well under the 37.5 percent level stipulated in the country’s mining laws. The contract has since been revised to an annual rate of 25 percent for the next six years; it changes to a rate of no more than 30 percent thereafter.

The company is also paying just 1 percent import dutyfor the first eight years, compared with legislation mandating 3 percent. It is paying a 3 percent royalty rate for the market value of the mineral, closer in line to the 3 to 5 percent range advocated by nongovernmental groups.

“Even though the agreement was reviewed and some improvement has been made, it still violates the national laws, i.e., the Mines and Minerals Act 2009 and the Income Tax Act of Sierra Leone 2004,” Abu Brima, the executive director of the Network Movement for Justice and Development, said in an e-mail. Other problems involve additional “concessions,” Brima said, such as when losses are recorded.

The Marampa mine was to be linked by an ancient 52-mile railway, whose ownership was under dispute, to a close-by port, but the concession was “snatched away” by London Mining’s rival, African Minerals, Perras of London Mining said. Instead, London Mining transports the iron ore first by road and then by river to Freetown, the capital, where it is all shipped by barge to China.

At 105 pence (about $1.61) a share price recently, London Mining’s stock is far from the buying power of most Sierra Leoneans, the majority of whom live on less than a dollar a day and whose life expectancy is 48 years old. Fewer than half the adult population can read.

London Mining says it is doing its share of civic mindedness. It employs about 1,500 Sierra Leoneans, or about 90 percent of its work force, in the country, Perras said. It has provided 750 scholarships to elementary and high schools in the area and is carrying out an internship program for 36 university graduates in partnership with the UN Development Program.

“Regarding the relationship with communities — yes, they are carrying out from all indication some amount of CSR [corporate social responsibility], which is purely discretionary,” Brima said in his e-mail. But he added that gaps resulted in a workers’ strike last year and flooding at a local village and other pointers to a “good/bad relationship that only the communities can express when given the opportunity.”

Since Sierra Leone’s suspension from the extractive industries initiative, the government said this month that it had put in place “checks and balances” to “prevent the reoccurrence of non-compliance approaches.”

For London Mining, this news is welcomed. “For us, we firmly believe in good governance and we support the government in becoming compliant as quickly as possible,” Perras said.

This article first appeared on PassBlue and is republished here under a Creative Commons license.