By Franklin Sisabu Bendu
Last week, two key corporate institutions with significant foreign investment in Sierra Leone – Iluka Resources and Standard Chartered Bank Sierra Leone Limited (SCB-SL) were in the news. Both institutions have been an integral part of our economy – Iluka Resources in the mineral sector and SCB in the banking sector.
On the 14 April 2022, Iluka Resources announced a demerger with its Sierra Leone operations and said it would prioritise its Australian operations and development projects. Sierra Rutile Holdings, Iluka’s subsidiary, will now operate as an ASX-listed mineral sands company, which will continue to maximise value from the Sierra Rutile project and prioritise development of the Sembehun project, according to Iluka.
On the same day, Standard Chartered Bank announced changes to refocus and minimise its presence in Africa and the Middle East. According to the release, the aim of this policy is to “redirect resources within its Africa and Middle East (“AME”) region to those areas where it can have the greatest scale and growth potential, in order to better support its clients.” In essence, operating in Sierra Leone, three other African countries and two elsewhere is not considered profitable enough to continue operations. I spoke with a worker at the SCB-SL and I was reassured that the announcement does not mean the bank’s operations will stop immediately – they have at least one full year to go before that happens. The Bank of Sierra Leone has also issued a notice reassuring the public that the Bank’s operations will continue to function as normal until that time. That’s good news.
But for a country struggling with the economic consequences of the Ukraine-Russia crisis, and the lingering effects of COVID-19, this is not good news. There have already been opinions in various media outlets blaming the government for these two announcements. These two corporate entities must have been planning this for months and it just coincided with a time when the government is trying to address the spin-off from the Ukraine-Russia crisis. Government should critically analyse these two announcements with a view of making an informed judgement about next steps. Let’s take a few moments to examine the dynamics and implications of these operational closures.
First – the rutile operations.
After exploration activities were completed in the 1960s, Sherbro Mineral Limited (SML) commenced the extraction of rutile in 1967. The first post-independence major mining policy was made in 1969 when the government launched “A New Mining Policy for Sierra Leone - Partnership for the Future”. The intention was for government to purchase majority ownership in all the mining companies, Sierra Leone Selection Trust (diamonds), Sierra Leone Development Company (iron ore), Sierra Leone Ore and Metal Company (bauxite) and Sherbro Minerals Limited (rutile).
According to the policy, the aim was for the government to secure a larger share of profits from minerals and have more control over mining operations. However, only the Sierra Leone Selection Trust was completed in 1970, given the government 51 per cent control and the establishment of the National Diamond Mining Company (NDMC).
In 1971, Sherbro Minerals Limited went into liquidation due to high operational costs and its operations and assets were taken over by Sierra Rutile Limited (SRL), a subsidiary of Nord Resource Corporation. As a result of the high operational costs and the need to undertake further exploratory activities, SRL suspended operations until 1981. Extraction restarted in 1981 and the rutile mineral agreement of 1975 was renegotiated in 1989. The World Bank provided technical capacity to help the government renegotiate a new agreement. Consequently, the new agreement had better tax provisions and resulted in higher revenue to government. Rutile extraction was halted in 1995 when the Revolutionary United Front attacked the mine site.
It took another 11 years before rutile operations resumed in 2006. When the war ended in 2002, government was keen to resume mineral operations and went to significant lengths to support the resumption of rutile extraction. This included a € 25 million loan from the European Union to the government, which was subsequently lent to SRL. According to the loan agreement, the repayments from the loan were to be utilised for mineral sector development programmes and growth strategies. The fiscal provision in the Sierra Rutile Agreement 2002 and the Revised Agreement 2004 contained some of the worst fiscal provision that can be found in any mineral agreement, in my view. For example, for the period up to 2014, waiving corporate income taxes, reducing the royalty rate from 3.5 per cent to 0.5 per cent, reducing the turnover tax rate from 3.5 per cent to 0.5 per cent, and import duty from 12 per cent to 1 per cent. The government also gave up its rights to Pay-As-You-Earn (PAYE) taxes on employees, in exchange for a 30 per cent equity in the company. The excuse then was the country needed to attract foreign investors after the end of the civil conflict in 2002. The generous fiscal concessions meant that the country was unable to benefit from the commodity price boom between 2004 and 2010. As a result of the fiscal concessions given by government, between 2006 and 2018 the royalty payments to government from rutile extraction amounted to $19.4 million based on an export amount of $ 1 billion.
It is very important to note that mineral resources are exhaustible and rutile mined now will never be replaced. Very poor mineral agreement translates into very low revenue to government. The Iluka demerger offers an ideal opportunity for government to have a rethink about its involvement in the mineral sector. International institutions will tend to remind government about its role in regulating the sector. However, government needs to clearly understand what the demerger entails and how will the spin-out company continue operations. It is also an opportunity for government to consider having an equity in the company. This is the type of investment that makes taking a loan a rational economic decision. It is better to take a loan to finance government equity stake within the company than giving generous fiscal concessions to a private company.
Government’s intention to take a share in a mining operation is not new, although it’s not without its challenges. If this path is pursued, this government will do justice to the people of Sierra Leone by ensuring the company is operated devoid of political influence. Furthermore, the Public Financial Management Act, 2016, provides a clear framework for how revenue from the mineral sector should be utilised and invested.
History has taught us about the consequences of government treating a mining company as a cash cow. This was how the National Diamond Mining Company (NDMC) deteriorated and became a source of national embarrassment. We can take a leaf from how Botswana went about gaining equities in the various mining operations in the country. As was the case in Sierra Leone, in 1969, the government of Botswana and De Beers Group of Company established the Debswana Diamond Company (a 50-50 partnership). The main difference between the policies in Sierra Leone and Botswana was that the government of Botswana allowed De Beers to oversee the diamond operations. The evidence is there for all to see – NDMC is no longer in existence, while Debswana Diamond Company has continued to be a major part of Botswana’s economy making significant contributions to gross domestic product, foreign exchange earnings, employment and government revenue.
…Standard Chartered Bank
I cannot end this article without a word about Standard Chartered Bank Sierra Leone Limited. The Bank released a statement indicating its plans to cease operations in Sierra Leone and five other countries. SCB-SL is an economically viable entity in the financial sector and has numerous corporate clientele. Most of the International Non-Governmental Organisations (INGO) and large private companies, bank with them. In addition, most of the foreign transactions to the local commercial banks are routed through SCB-SL. The two state-owned commercial banks (Sierra Leone Commercial Bank and Rokel Commercial Bank) and the National Social Security and Insurance Trust (NASSIT), in consultation with the Bank of Sierra Leone, should carefully consider taking over the operations of the SCB. These institutions, either jointly or separately should be able to present a proposal to the Bank of Sierra Leone outlining their plan. This discussion can then be presented to Cabinet for consideration and necessary action.
Opportunities beckon and we will be imprudent not to look at these two opportunities that have been presented in the midst of global uncertainty.
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