Guinea
A Holistic Approach to Extractive Industries
April 2010
The World Bank
Contents
Acronyms and Initialisms iii
Acknowledgements iv
1. Executive Summary 1
2. Introduction 1
2.1 Significance of the Issue 1
2.2 Recent Progress 1
2.3 Remaining Problems 2
3. Analysis of the Issues 2
3.1 Extractive Industries in Guinea — Past, Present, and Future 2
3.1.1 Prospects 2
3.1.2 Economics of mining and past experience 5
3.2 Options for Dealing with the Issues 7
3.2.1 Contracting with mining companies 7
tax issues 8
licensing rules 9
state shares 11
institutions, capacity, and anti-corruption 11
the way forward 12
3.2.2 Mining and infrastructure 13
3.2.3 Governance, sustainability, and broad-based growth 15
local development 15
maximizing business links 17
protecting the environment, health, and safety 19
growth poles 20
macro-fiscal framework 20
expenditure management 21
dealing with dutch disease and supporting agriculture 22
4. The Way Forward 23
4.1 Short-term priorities 23
4.2 Medium-Term Priorities 25
Annex 1. Cost Estimate for Identified Priorities 31
Annex 2. Current World Bank Support to the Mining Sector 32
Annex 3. Some Government Priority Actions and Their Urgency 33
Annex 4. Guinea Mineral Sector Historical Development 35
Figures
Figure 1. Mineral resources in Guinea 3
Figure 2. Mining exports and Government revenue, 1991 to 2009 6
Figure 3. Mining company procurement during the construction phase 17
Tables
Table 1. Mineral potential in Guinea 5
Table 2. Build revenue collection capacity and improve coordination within and between the Ministries of Mines and Finance 23
Table 3. Finalize the review of conventions according to a pre-announced calendar, which should be preceded by a professional assessment of mining agreements 23
Table 4. Clarify the institutional framework, and reduce the role of institutions not mandated to directly manage EIs in Guinea 24
Table 5. Finalize the legal framework by updating the mining and petroleum codes and regulations and adjusting the model convention 24
Table 6. Conduct a quick study of the comparative advantages of the various options that can allow financing of infrastructure development 24
Table 7. Initiate public-private-civil society dialogue 25
Table 8. Initiate detailed assessment of projects where current analytical information available is insufficient 25
Table 9. Laws, regulations, and institutions 26
Table 10. Capacity building and governance 26
Table 11. Institutions for accountability and transparency 27
Table 12. Infrastructure financing 27
Table 14. Environmental and social management 28
Table 15. Regional harmonization 29
Acronyms and Initialisms
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
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).
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 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
3.1.1 Prospects
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$1 billion could increase 10-fold within five years if investments that are currently being considered by some of the world’s top players are realized. This huge potential can be divided into several distinct ongoing “games” with different characteristics.
Figure 1. Mineral resources in Guinea10. The western bauxite corridor. From the West to the center of the country lie the largest and highest grade bauxite deposits in the world. This area is attracting the largest players in the sector as well as companies from China, Iran, and South Africa. These firms have announced investment plans of about US$ 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 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.
Table 1. Mineral potential in GuineaCommodity / 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
3.1.2 Economics of mining and past experience