Key messages

• Africa’s metals are essential to the rapid transition of energy systems away from fossil fuels. Africa holds 19 percent of the global reserves of metals required to make a standard battery-powered electric vehicle. The continent has at least a fifth of the world’s reserves in a dozen minerals that are critical for the energy transition.

• This time must be different. Africans have not benefited sufficiently from mining in the past, and mining has led to deforestation and pollution. The mining industry has contributed eight percent of total government revenues in the 15 most mining-dependent African economies but has generated few opportunities for African businesses in supplier segments and value chains using the minerals. Furthermore, globally, the metal mining industry contributes 10 percent of emissions on average and indirectly causes seven percent of deforestation.

• A triple-win is possible and necessary. A better deal for Africans will help reduce risks for investors, and support global industry efforts to secure more metals. While protecting the environment from mining will ensure efforts to move to a more sustainable way of life are not in vain. Mining governance must work for each of African citizens, the environment and the energy transition if it is to work for any of them.

• Time is of the essence. There are only 28 years remaining until countries representing two-thirds of the global economy aim to have “net zero” emissions, yet it takes on average 17 years for the mining industry to develop a mineral discovery and start production.

• Success doesn’t require “reinventing the wheel.” Numerous existing policy approaches will help. Seven stand out that require the combined action of international and regional authorities, companies and governments:

  • Establish “no-go” environmental zones

  • Fund geological surveys

  • Develop value chains, including those that will benefit Africa’s own energy transition

  • Fund renewable energy for mining, processing and battery production

  • Support the development of African suppliers to mining companies

  • Transfer knowledge

  • Coordinate across the region

• These won’t work unless the foundations of governance are in place. This means improved governmental capacity to design and implement policies, and transparent, accountable, and corruption-free governments and companies. Seventy percent of African countries with transition mineral reserves rank in the bottom half of indices measuring corruption. While only 16 percent of current producers systematically disclose all or most mining contracts.

A triple win for Africans, their environment and the energy transition

The world faces three related challenges. First: To stop average global temperatures from rising by more than 1.5 degrees, or at least well below 2 degrees, humankind must accelerate the ongoing transition from fossil fuel energy to renewable energy. Second: Governments of countries constituting two-thirds of the world economy aim to reach net zero emissions by 2050, only 28 years from now. Last: The technologies needed for the transition are metal-intensive, and so transition requires a significant expansion in metal supply.1

However, mining and processing these metals creates two further challenges. These industries themselves emit large amounts of carbon dioxide, and cause deforestation and local pollution. It is in humanity’s interest to ensure that this destruction does not counteract the climate benefits of energy transition.

Also, many of the mineral reserves needed for the energy transition are in Africa.2  The history of mining in Africa is riddled with injustices, and few Africans can claim to have benefited from mineral extraction. Without further policy change, this will continue. Africans will see their minerals used to decarbonize the economies of wealthier countries and will not themselves benefit from the extraction—all while enduring some of the worst impacts of climate change. African officials and civil society actors have made clear that mining must change to benefit Africans in mineral-rich countries.

Meeting African demands is in the interest of energy transition industries and humanity more broadly. Mining companies must invest more in getting minerals out of the ground and processing them but have been reluctant so far.

This is because they have sought to avoid oversupplying markets and causing a slump, are uncertain of the pace of the energy transition, and wary of the risks of operating in parts of Africa.3  But mining companies can reduce these risks by forging better deals with mining countries to create more harmony between the governments, businesses and various parties involved in mining and the various industries producing technologies for the energy transition.

This is a “triple-win,” a set of policies to ensure that:

• people in African mining countries benefit from mining

• the global transition benefits from an increased supply of metals

• mining damage to the environment and communities is minimized and mitigated so that pursing the transition is worthwhile

Furthermore, any one party only benefits if everyone else wins too. Cooperation is key.

How to achieve a triple win

Fortunately, this does not require a complete revolution in how governments and companies govern and operate within the mining sector. Officials, executives, and civil society actors know well and agree upon the broad areas of required policy.4  However, some changes to these established governance programs are still needed. This is to address four emerging problems.

First, development partners should identify successful approaches and fund and scale these across the continent, rather than reducing funding for economic development programs to focus on more explicitly climate-related work.

Second, African governments, with the support of development partners, must close the gap between policies and their implementation; many countries have passed quality policies but failed to implement them.5

Third, global powers have heightened concerns around energy security and increased awareness of the economic clout that dominance of clean energy technologies will provide. Government leaders are scrambling to create national renewable energy and e-mobility industries in China, Europe and North America. This has changed the parameters that climate donors and development partners must work within.6

Fourth, there is a dilemma between increasing mineral supply to meet climate goals and improving governance, an often decades-long process. Companies have exacerbated this by wanting to profit from current high prices, whilst also calling for speed in the name of addressing the climate crisis.7  While governments in mining countries fear missing out on the current boom in demand for their metals.

The race between the industrialized countries to develop their own industries to produce energy transition technologies and the urgency in preventing further catastrophic climate change puts low-income mining countries in a strong position to demand more benefits.8  But it could also encourage people with the power to make these decisions to strike backroom deals and fast-track extraction. Such impatience has previously worsened governance in the long-run and resulted in fewer benefits for citizens and more risks for companies.

The world therefore needs a rapid improvement in mining governance. Yet, in the past, donor programs have sometimes failed to achieve governance goals by pushing them too rapidly.9

Despite these challenges, all parties share an interest and have the potential to implement a triple-win deal. Climate policy makers in governments meeting at COP27; donors and international finance institutions in both the climate and development space; international authorities and African regional authorities (such as the African Union and African Development Bank); mining companies, energy transition technology industries and their investors (who are particularly incentivised to think short-term); governments in mining countries in Africa who owe a better deal to their people:

Humanity cannot afford to repeat the mistakes that have beset Africa’s mining in the past. To achieve a triple win, this time must be different.

Policies for a mining triple win

A triple-win in mining is exemplified in the following seven policy recommendations, derived from the huge breadth of studies on these subjects. The remainder of the report gives details and additional recommendations. These ideas require further study but can form an agenda for discussion among various stakeholders and could inform the African Green Minerals Strategy and implementation of the Africa Mining Vision.

1. Establish mining no-go zones
   Once prospectors discover reserves, companies and governments are subject to strong incentives to develop them. Once a mine is developed, environmental protection is typically weak. To prevent environmental destruction, governments should establish areas in which exploration is unlawful. These areas should include not only UNESCO World Heritage Sites, but vast tracts of forest and areas of valuable biodiversity. To create the incentive to maintain these zones, donors should link them with global financing, such as the funding that a group of them have committed to protecting the Congolese forests. Donors should predicate other policies recommended here on the condition that mining, processing plants and other linked industries are never established in a no-go zone.
2. Fund geological surveys
   To expand Africa’s mineral reserves, donors should fund surveys to reduce geological risk. The World Bank and others already fund such surveys, but more funding is needed. These surveys should also be conducted far outside no-go zones. If surveys identify more reserves outside these zones, governments may find it easier to stop extraction inside the zones. Private sector companies should have access to the data for exploration, and governments should improve their geological data management.
3. Develop value chains, including those that benefit Africa’s own energy transition
   Southern Africa’s efforts to develop nickel, manganese and cobalt battery production might result in exporting Precursor material (see Figure 5). In addition, there is large potential demand in the region for electric two- and three-wheel vehicles, and stationary battery storage for use in household electrification and mini-grids. African industries based on lithium, iron and phosphate battery chemistry may also be viable. Africa doesn’t currently produce much lithium, but African companies could start first with battery assembly and eventually ascend the value chain to produce cells and cathodes, ultimately using Africa’s own minerals to feed these processes.
4. Fund renewable energy for mining, processing, and battery production
   Africa has greater potential than most other regions to produce metals and processed goods in a low-emission way, but investors’ risks are prohibitive. Climate donors and development partners could increase funds to governments and companies to de-risk renewable energy projects that power mining, processors, and the other energy-intensive activities along battery/ electric vehicle value chains.
5. Support African suppliers to the mining industry
   A competitive supply base for the mining sector would generate jobs for Africans and lower mining costs for the transition. But African businesses struggle to attract capital. African companies providing goods and services to the mining sector could benefit from funds jointly capitalized by governments, mining companies, and regional and international financial institutions, in addition to private capital.
6. Transfer knowledge
   Establishment of competitive supplier companies and industries along these value chains requires African managers and workers with more skills and knowledge. Foreign and local companies should partner more, and donors should fund universities and other researchers in the region.
7. Coordinate across the region
   Supplier companies and industries must operate at scale to be competitive, and multiple countries must cooperate to share minerals, workers and infrastructure to support robust value chains. Governments could coordinate to develop large-scale companies, and multinational mining companies could coordinate to set clear goods and services needs to inform supplier development plans. But regionalization will benefit some countries more than others. To encourage cooperation, the proposed the Southern African Development Community (SADC) Regional Mining Vision suggests mechanisms to coordinate and redistribute benefits across countries.

These policies must rest on firm foundations of governance, otherwise they will be poorly designed, unimplemented and unfollowed. In addition to pursuing these policy areas, donors and development partners, governments, and companies should continue to focus on improving government capacities and promote transparent and accountable public and corporate governance and anticorruption. Policy makers should heed the proliferating lessons from many years of governance programs. Including by partnering with African civil society to design and implement these policies to ensure that citizens’ views are considered, to tap the available expertise in these organizations, and as a check on governments and companies.

1. A win for the energy transition

Energy transition requires more investment in mining

Resource-intensive consumption by the wealthy is a major contributor to planetary warming. In 2019, the richest 10 percent of humanity (mostly in North America, Europe, but also the rich in East Asia and elsewhere) were responsible for 48 percent of global emissions. The bottom 50 percent were responsible for only 12 percent.10  In addition, climate change is impacting the poorest regions and the poorest people the most, because of both their geography and the sparse resources these societies must cope with change. Accelerating the energy transition should not further propagate such injustices. Resource-intensive consumption probably needs to fall.11

However, until that time, manufacturers of the technologies required to decarbonize consumption require metals. In this way the energy transition is driving a shift from fossil fuel dependence to metal dependence. For instance, battery electric vehicles (BEVs) require twice the metal of a standard internal combustion engine car. Solar and wind plants respectively require three and four times the metal needed for an energy-equivalent gas- fired power plant.12  This increases demand for both rarer “critical minerals” like cobalt as well as relatively abundant metals such as copper and aluminium. All these metals and minerals required in the “transition industries” that produce technology for the energy transition we call “transition metals and minerals.”

Manufacturers can obtain a portion of metal supply from recycling. But recycling is unlikely to replace the need to mine in the near future. Recycling of cobalt and lithium may only supply five and ten percent of the respective markets by 2030.13  As transition technologies such as BEVs, electric grid infrastructure and wind turbines proliferate, the amount of metal in circulation will fall short of expanding demand. In the future recycling might become a larger part of the solution as more metal comes into circulation, product design improves to aid the separation of metals during recycling, and recycling itself evolves to use less energy.

Furthermore, while technological innovation can translate into less reliance for some metals, it can also lead to increased demand for others. Engineers have already responded to metal scarcity; for example, the nickel, manganese and cobalt (NMC) 811 battery chemistry uses a quarter less cobalt than the original NMC 111 battery. Yet, the NMC 811 also uses 75 percent more nickel, a metal that the European Union and US Geological Survey recently added to their critical mineral lists.14

Therefore, until consumption is less resource- intensive and recycling is more viable, manufacturers will require miners to extract more metal from the ground—and quickly. Only 28 years remain until countries representing about two-thirds of the global economy aim to have “net zero” emissions.15  Reaching that goal requires producing millions of electric vehicles, wind turbines, and other transition technologies in the coming decades.

This in turn requires an even steeper surge in investment. Meeting climate goals may require a tripling of investment from 2021 to 2036, from about $0.5 trillion to $1.7 trillion.16  But so far companies have been unwilling to invest sufficiently in mines to accelerate the energy transition despite higher prices, which might slow the transition; the time it takes to develop mines is long and getting longer; and protests, disputes and other disruptions are all slowing supply. Africa, however, may hold the answer.

Africa is an essential source of transition minerals

The African continent already dominates global reserves of several transition minerals. (See Figure 1.)17  African countries hold 19 percent of the global reserves of metals required to make a standard battery electric vehicle.18  Most of Africa’s transition minerals discovered so far are in southern Africa.

Not only does mining in Africa already matter for the energy transition, but the continent is still relatively unexplored and has the lowest concentration of known mineral wealth in the world. (See Figure 2.) More exploration would likely reveal new deposits to accelerate the transition and unlock new subsoil wealth for Africans.

Attracting exploration investment partly requires reducing geological risk for companies. To do this, African governments can fund geological surveys to provide companies with an initial indication of where reserves might be located. Companies can then confirm this potential with more intensive exploration. But these surveys are expensive. The World Bank has therefore been providing support. Recent World Bank-funded surveys have indicated the potential for significant reserves in Malawi and Uganda, for example.19  More funding for surveys from donors would reveal more minerals that would both supply the energy transition and benefit African government treasuries and mining industries. New surveys are especially needed as many previous surveys were conducted before the recognition that certain minerals are critical to transition technology.20 As the African Development Bank’s African Mineral Development Centre theory of change advocates, governments should also cooperate on surveys with neighboring countries.21  Geology doesn’t respect national boundaries; knowledge about minerals on one side of a border can help exploration efforts on the other.

Discovery of new reserves in less environmentally sensitive areas could also reduce the push to explore in the most environmentally sensitive areas such as rainforests and sea beds. However, to truly be part of a triple win, governments, regional and international authorities should only commission surveys far away from these areas—establishing them as “no-go zones” where exploration and extraction are forbidden.

Figure 1. Africa’s shares of global reserves of transition minerals22

Figure 2. Comparison of exploration and mineral reserves per square kilometer across each region in the world23

Better mining governance can accelerate the transition

Better governance can accelerate investment and shorten mine development times

Figure 3. Comparison of countries’ mining governance quality and attractiveness to mining investors across the world24

Africa is underexplored in part because mining authorities have inadequately managed geological data, and mining companies have considered much of the continent commercially risky.25  For example, a South African strategy to boost exploration cites poor policy implementation, insufficient electricity, strikes and community unrest, and poor geological data.26  Better governance—by ensuring mining communities benefit and in turn providing a more secure environment for investors—is strongly associated with increased exploration activity.27  And quality of mining governance positively correlates with investors’ perception of country attractiveness. (See Figure 3.)

Increased exploration is only one part of the solution. Discovery does not automatically lead to development. By amount of metal reserves discovered since 1950, companies have developed just over half of projects across the world.28  Even mines that companies develop take an average of 17 years from discovery to the start of production.29  For copper mines, most of this time (12.5 years) was for discovery, exploration, studies and permitting. The rest was for construction planning (1.8 years) and for construction (2.6 years).30

Three factors shorten lead times.31  Higher market prices for minerals can hasten development, but at a delay. The price increases that began in 2004 only resulted in an acceleration in mine production in 2012. During that eight-year period the price of copper tripled.32  Nor is this a solution for the energy transition as it would increase costs for transition industries.

Two other factors are conducive to accelerating the energy transition. First physical qualities: large and high quality of deposit; mineral type (e.g., lithium and gold are faster than nickel and copper); shallower deposit depths; and further developing existing mines rather than starting from scratch with a greenfield development.

Two, higher-quality governance facilitates development. One study has indicated that if African countries improved their quality of governance to the level of Chile, they could shorten mine lead times by an average of two to three years.33  Policy makers cannot control most of the physical factors of mining and market price, but they can control governance. Specifically, they can focus on improving management of surveys and permitting phases to shorten lead times while still ensuring fair deals for their countries’ minerals.34

Better governance can reduce disruptions to the highly concentrated supply of minerals across Africa

Stable supply relies on stable relationships between mining companies, governments and communities. Discontent leads to disruption which is a risk particularly for industries that require transition minerals that are geographically concentrated.

Resources can be concentrated both at the national level, as seen in Figure 4, and at the mine level. For example, in 2020, four mines— Kamoto, Tenke Fungurume, Metalkol RTR and Etoile—all in the Democratic Republic of the Congo (DRC), produced 41 percent of global cobalt supply.35  In such cases a single company dispute with a government or local community risks cutting off large shares of global supply. These disruptions also increase risks to lenders who require higher interest rates from companies, thereby increasing costs and reducing returns.36

Figure 4. African countries with large shares of global transition mineral reserves37

2. A win for citizens in Africa’s mining countries

Listen to African governments and civil societies’ demands for better deals

The extent to which African countries have benefited from past mining booms is unclear. Some studies suggest that many countries did benefit from the last boom, but that these benefits were less than many citizens hoped for. For example, socioeconomic indicators such as those in the Human Development Index on average improved in African countries with large mining sectors.47

However, performance has varied. Analysis of the “adjusted net saving rate”, which measures the amount each country saves and invests in economic assets less the decline in subsoil and other natural assets, indicates that countries like Zimbabwe and DRC have through disastrous governance effectively sold the national wealth for less than nothing.48

Even countries that show higher adjusted net saving rates could possibly have benefited more with stronger governance.49  For example, while governments do generate significant revenue from mining, recent IMF research suggests companies’ avoidance of corporate income tax could be costing 15 African mining countries around $600 million annually.50  Governments have also struggled to develop local supplier bases (“backward linkages”) and to add value to their raw minerals through processing (“forward linkages”). In some cases, citizens living near mining sites have struggled to benefit at all.51

As African governments and civil society have made clear, things must change. African civil society organizations have consistently called for a “new deal” in which mining draws on more locally sourced inputs and supplies downstream industries on the continent rather than simply feeding exports.52  Government officials in mining countries as well as the African Union (AU) and other regional bodies have echoed these demands, which are also informing the African Green Minerals Strategy. 53  54

Following are key elements of a mining triple win. Some of the recommendations are not new, but African governments and their development partners have yet to systematically invest in them. Doing so now is crucial.

Develop E-mobility and battery storage value chains

Several African governments and regional bodies aim to establish industries within the battery value chain, for both e-mobility and electricity storage. The move to establish these and other value chains for energy transition technologies in Africa has climate benefits too; it could translate into cheaper and greener products for manufacturing elsewhere. Unlike most high-income countries, African states have significant spare renewable energy potential.55  Some high-emission industrial activity—such as metal smelting—could relocate to Africa.

Figure 5: An electric vehicle battery value chain

However, few African countries with mineral reserves have succeeded in efforts to establish industries downstream from mining. To change that, policymakers should:

Secure a supply of minerals and pool supply to achieve scale

Most processes along the battery chain benefit from scale economies, which require a large supply of inputs. This supply must be dependable to ensure plants are constantly running near capacity. No single African country has all the minerals required to produce batteries, particularly lithium. Countries will need to pool mineral supply to achieve the minimum scale and reliability in case supply from one mine stops. (See page 14 and 15) And with a significant amount of production already committed to overseas buyers through offtake agreements, governments will need options for securing supply for an African value chain. Increased exploration and discoveries will go some way to reducing this tension.

Provide cheap, reliable, and green energy

Metal processing requires substantial amounts of energy. Yet the DRC and much of southern Africa are short of industrial quantities of energy. The much-delayed Inga hydropower plants in the DRC will export their energy to South Africa. But if the Grand Inga dam is finally built, it could allow the DRC to process cobalt and copper with low carbon emissions.56  The international community should expand its support to increase the availability of cheap, reliable, and green energy in Africa for industry. Ensuring there is surplus energy for households could also induce local communities to accept the industries operating near where they live.57

Coordinate across the region

Governments in the region will have to closely collaborate and partner to create an African battery production industry. Recognizing this, the DRC and Zambia have established a “Joint Battery Council.”

Figure 6. Location of Africa’s battery mineral reserves and above ground assets needed for downstream industries 58

The African Continental Free Trade Agreement (AfCFTA) and other existing sub-regional free trade agreements will also facilitate coordination. But the location and benefits of activity will not be equal, particularly as some countries already have more capacity than others (as highlighted by their “above ground assets” in Figure 6). Those with the most minerals but the least potential to benefit could block efforts to coordinate. As a failed attempt at establishing a regional coltan refinery in South Africa showed, regional authorities must explore mechanisms for sharing not just the profits from an activity but also the wider economic benefits with producer countries.

The proposed SADC Regional Mining Vision proposes ways to ensure that disadvantaged countries can also supply other inputs, e.g., a common fund that pays the additional cost of transporting inputs from countries with weak transport infrastructure to where the activity is taking place.59

Develop large downstream markets for electric vehicles (particularly two- and three-wheelers)

Paradoxically, proximity to the mineral source is only a small factor in the location of downstream industries, since processed metals are relatively easy and inexpensive to transport. However, transport cost is still relevant for products closer to the raw extraction stage. Zambia has succeeded in developing copper smelting and refining to reduce the weight of exports, from concentrates to cathodes. Conversely, there is only a small manufacturing sector using this copper.

More important than proximity to the mineral source is the proximity to downstream markets, making some parts of the value chain more viable than others. This matters across the value chain. Cobalt from mines in DRC and Zambia, despite its high grade, usually contains many impurities. The next link in the battery value chain is producing ‘battery precursor material’, chemicals that are a precursor to making battery cathodes, themselves the ‘positive’ end of a battery. To produce precursors material, companies need to remove the impurities in mined cobalt. This process is more viable if companies locate the process plants near a cluster of other chemical plants.60

The next link involves creating battery cathodes. But these are difficult for companies to transport, so companies tend to locate cathode production close to battery cell manufacturing, the next link in the value chain.61  Lastly, cell manufacturing tends to be located close to EV manufacturers to benefit from quicker, more flexible delivery to customers.

Therefore, African industries along the battery value chain will be more viable if there is a market for battery-powered vehicles close by. It is even better if this market is large, since companies then benefit from scale economies.62  These factors matter in deciding which types of batteries to attempt to produce in Africa.

Given the DRC’s huge cobalt reserves, regional discussions have focused on developing industries in the nickel, manganese, and cobalt (NMC) battery value chain.63  NMC batteries are currently used in electric cars like the Nissan Leaf, Volkswagen e-Golf and Hyundai Kona. However, the African market for such cars is likely to remain small. Few people in Africa can afford them, and they require a reliable grid and charging infrastructure. Electric cars of any kind might only be a small part of the future African market: perhaps only 14 percent of EVs in Africa will be cars (of any type) by 2040.64

This makes it difficult for companies to be viable along the full value chain from mine to electric vehicle in southern Africa. One study suggests that producing battery precursor material could be viable if countries can coordinate to provide a reliable supply of minerals to a precursor chemical plant.65  But given the difficulties of transporting cathodes, processes further downstream from precursor production may be unviable until there is a large regional market for electric vehicles that use NMC batteries.

Conversely, Africa, following trends in India, is more likely to adopt electric two- and three- wheelers.66  Current two- and three-wheel electric vehicle models use an alternative battery chemistry: lithium, iron, and phosphate (LFP). LFP chemistries are also used in stationary power storage, useful for providing off-grid electricity for Africa’s dispersed population.

Therefore, in addition to developing part of the NMC battery value chain, African industries based on the LFP battery chemistry might also be viable.

Given Africa doesn’t currently produce much lithium, African industry might start at the other end of the value chain, with assembling battery packs from imported cells. South Africa already does this, assembling battery packs for mining equipment and refrigeration.

To go further up the chain, African industries need to invest in cell manufacturing plants. There is currently little incentive for investors, but three things could change this: a larger regional LFP market, more lithium discoveries and regional coordination on a lithium refinery.

Figure 7. Two options in locating parts of a battery value chain in Africa

Although the African market for electric two- and three-wheeled vehicles is growing rapidly, it needs to grow even faster to support a viable set of battery and EV production industries. There are different ways that governments could help a market to grow. Governments often protected infant markets from foreign competition. But protection on its own rarely worked. Governments have had more success by promoting local companies instead. Rwanda’s recent e-mobility strategy paper suggests a promising shift in this direction.67  Donors could support multinational companies to invest in the sector (including in joint ventures with local companies) and fund EV infrastructure (such as battery swap stations).

The AfCFTA can also help to develop this market for African producers by enabling African countries to focus on different links in the value chain. However, to realize this potential, governments must significantly reduce non-tariff barriers, such as procedural delays at borders. Governments within the trading region must also define and implement the AfCFTA Rules of Origin—the percentage of African materials used—to determine whether the AfCFTA applies. This will prevent foreign makers of semi- manufactured goods from avoiding tariffs and undercutting African producers.

Be ready for changes to battery technologies

The battery chemistries in demand today may not be the batteries of the future.68  Lithium-ion batteries—like NMC and LFP batteries—will likely dominate for at least the next decade.69  But the cobalt content in NMC chemistries has already fallen significantly, and there is growing interest from manufacturers in sodium-ion batteries. Some capabilities are transferable between some battery technologies—for example, between different lithium-ion batteries, and between lithium-ion and sodium-ion batteries—but not between others. Policy makers must consider that investments made for one battery chemistry may become “stranded.” African countries can insulate themselves from this risk in part by developing chemistries suited to the region’s needs and geological mineral profile. Local and foreign companies, researchers and international partners could collaborate to create appropriate technologies.

Nurture mining suppliers

Both the energy transition and African countries could benefit significantly if governments nurture competitive local companies

Developing African suppliers to the mining industry has perhaps the most potential among all the benefits countries can derive from mining. Suppliers provide products and services to mining companies. This can range from products such pick-up trucks, tyres, drills, conveyor belts, and specific replacement parts, and services such as catering, surveying, and human resource management. To name only few of a whole host of products and services that suppliers provide. There are also many other mining and processing tasks that a mining company that holds the mining license might also sub-contract to other companies. In total, the procurement of goods and services usually amounts to 50 to 70 percent of all money spent in host countries. Usually more than payments to governments, worker salaries and wages, and community investment combined (see Figure 8).70

Figure 8. Example of mining company spending in a producer country71

For the international community and companies, efficient local suppliers lead to lower costs for mining companies.72  Mining companies need to import fewer goods, and local expertise solves local problems. By procuring more
from the local market and establishing a wide network of local suppliers, the mining industry also has stronger ties to their host countries, reducing disputes and discontent.

The countries that have achieved the most development from mining - such as Canada, Australia, Chile, and South Africa - all have significant supplier industries. In both Australia and Canada there are more people employed at supplier firms than in mining itself.73

However, in African countries outside South Africa, much of procurement value is spent on imported goods resold by domestic suppliers, without creating many jobs, transferring business knowledge to other economic sectors, or substantially reduce mining costs. The challenge is to develop competitive African companies that can produce more of the supply chain themselves.

Policies to nurture competitive African suppliers

The Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), the International Finance Corporation (IFC) and Mining Shared Value have contributed to a growing understanding of what works best in developing supplier companies in Africa.74

African governments have often favored “local content” rules that stipulate how much mining companies should procure from local markets. But these have yielded mixed results. Governments usually do not monitor mining company procurement, and some mining companies have procured from suppliers with local political links rather than the most competitive. Most importantly, governments have often failed to pair local content rules with support to develop businesses that can meet mining companies’ demand. This is particularly important because cheap imports from China and other large developing economies means that African countries will struggle to create viable supply companies without government intervention.

But there are alternative approaches:

Create jobs within supplier companies

Share of direct mining employment is already high and further growth is limited, so creating jobs with suppliers has more potential

Even though the mining sector is capital- intensive, companies still employ significant numbers of people. Workers involved in core mining activities tend to make above-average salaries in most countries.

In contrast to the share of procurement between host and investor countries, the share of Africans that are direct employees is already much higher. While expatriates from outside the continent commonly hold the most senior management roles in African mining, most direct employees—both permanent and contract staff—are nationals.

There are several reasons. One is cost. Internationally competitive salaries for expatriates are much higher than the equivalent African salaries and transporting and housing expatriates is hugely costly. Host country citizens are likely to enhance their skills and capacities by working in mining operations, which often involve on-the-job training. Companies can also exert much more control and monitoring of activities “inside the fence” compared to the activities of suppliers of goods and services.

Governments do aim to increase the share of national citizens in the direct employment of mining companies. Governments use “demand-side policies” that impose quotas and percentage limits on expatriate employees. “Supply-side policies” conversely entail developing skills, including the prerequisite competencies that act as a foundation for core mining tasks (for example mathematics and vocational education). Companies and the international community can facilitate government efforts by supporting standardization and increasing certification for skills that workers have acquired.

However, employment policies are unlikely to yield many more jobs. Automation and other industry changes mean direct employment will likely decline.

Governments could focus instead on training, prioritizing technical education and highly skilled mid-to-upper management. However, programs should focus on employees within supplier firms, rather than those directly employed by mining companies. Employment policies might best focus on developing supplier companies and helping them employ more Africans.

Collect and manage tax revenues

African countries earn significant sums from mining, despite large-scale tax avoidance by companies. Effective revenue management remains a priority.

Many African government officials and civil society actors are concerned that corporate tax abusers have cheated their public accounts of billions of dollars of tax revenue. The International Monetary Fund (IMF) estimated that treasuries across the 15 most mineral-dependent countries in sub-Saharan Africa have potentially lost $600 million a year from companies avoiding mining corporate income tax.78

This estimated tax loss is equal to about 5 percent of the total revenues the governments of these 15 countries earned from mining.79  Addressing tax abuse80  might increase revenues by this amount, but governments must also look elsewhere for further revenue. First, given how little exploration has occurred in Africa, improving governance (rather than just reducing tax rates), could radically expand the tax base.

A second area of focus is tax rate adjustment. While legislated tax rates have recently increased across the region,81  rates negotiated in contracts for individual projects remain low in many countries. This is due in part to governments competing to attract investment by offering tax incentives that are often unnecessarily generous.82

Given the relationship shown in Figure 3, governments can make their countries more attractive to investors by improving other areas of governance, rather than lowering tax rates. Such missteps are particularly costly for governments that have legally agreed with companies that they will not change contract terms like taxes (known as stabilization clauses).83

Despite these issues, African governments still collect substantial amounts from mining companies. For the 15 most mineral-rich countries in sub-Saharan Africa, 8 percent of total government revenues. Across the continent more generally, Africa’s transition mineral reserves are currently worth about $2.97 trillion.84  Based on past collection rates including losses from tax abuse, and assuming no improvement in tax collection, Africa’s transition mineral reserves could generate $475 billion in taxes over the life of the reserves.85

Furthermore, despite the benefits of value chain development and supplier policies, collecting and investing taxes remains the best way for governments of mineral-dependent economies to fund programs to alleviate poverty and to diversify their economies. These economies have suffered from volatile metal prices and “Dutch disease,” which inhibits growth of other export sectors. Investing mining revenues in developing the rest of the economy ensures that these economies no longer depend on just one industry and helps lift citizens out of poverty.86

Therefore, how governments use the tax revenues they receive is still of paramount importance. A country’s “adjusted net saving rate” is one indicator of performance in revenue management. When compared to the potential revenues a government could collect (measured as resource rent), the adjusted net savings gives an approximate measure of how well countries actually collect and spend taxes from mining industries. By this measure, performance varies considerably. Since 2000, Zambia has received about the same rent per unit of GDP as Guinea, but Zambia’s adjusted savings rate has been 17 percent, while Guinea’s rate has been -11 percent. However, most African mining countries do not have fiscal rules for mining, and of those that do, few place controls on how governments spend the revenues.87  The potential boom in revenues from transition minerals serves as a reminder of the importance of a robust revenue management framework.

Some countries have successfully implemented policies to collect and transform mining revenues into sustainable development

Below are a few examples that governments and donors could further support, strengthen and adopt:

Stamp out corruption

Corruption tends to worsen during booms; everyone has a role in combating it now

Seventy percent of African countries with transition mineral reserves rank in the bottom half of Transparency International’s Corruption Perceptions Index.92

Corruption reduces the benefits from mining for most Africans, while increasing the risk of social and environmental harm.93  It also disrupts mineral supply by deterring investment, nurturing arbitrary and unpredictable regulatory environments, and potentially exposing companies to long-term liability and sanctions.94

Past commodity booms corresponded with an increase in corruption, and this could reoccur as the world scrambles to meet the demand of transition minerals.95  As profits soar, public and private sector actors are more likely to embrace risks, including engaging in or turning a blind eye to graft. During booms, government officials and company executives engage in frenzied, fast-paced dealmaking, which can facilitate corruption.

The integration of downstream companies (for example battery and EV players) in order to secure mineral supplies also means company executives are assuming new roles and negotiating unprecedented deals. They are managing unfamiliar risks, while regulators and oversight actors struggle to keep up, particularly as the dominance of powerful multinational companies across multiple stages of the supply chain can inhibit accountability.

How to fight corruption

Governments, the international community, and companies must all act to fight corruption. The following practices are derived from the Extractive Industries Transparency Initiative (EITI) Standard, the Organisation for Economic Co-operation and Development (OECD) Due Diligence Guidance for Responsible Chains of Minerals, and NRGI’s work on corruption in the extractive sector.96

3. A win for the environment and communities

Protect forests, water sources and biodiverse areas from the forthcoming surge in mining

Mining damage might increase as the energy transition progresses

Poorly practiced mining is environmentally destructive, threatens local communities and jeopardizes the planet-wide benefits of the energy transition. The collapse of a South African tailings dam in September 2022 swept away houses, polluted rivers and damaged thousands of hectares of farmland; this is just one recent example of the damage mining can cause.101  Mining indirectly causes seven percent of global deforestation,102  and contributes 10 percent of global emissions.103

Mining’s impact on the environment could worsen.104 The surge in demand for metals could encourage more activity in particularly environmentally sensitive areas. For example, the spike in coltan prices in 2002 led to a rush of mining in Kahuzi-Biega National Park in eastern DRC. IEA analysis suggests that the life-cycle emissions of clean energy are still significantly lower than for fossil fuel technologies, but future production will involve more energy- intensive processes.105  New discoveries are revealing deposits with lower ore grades, which require more extraction, and thus more emissions, to unearth the same quantity of minerals. The mining of many transition minerals requires particularly high water use, and some transition minerals, such as hard-rock lithium (Africa’s likely primary source of lithium), carry particularly high contamination risks.106  The start of lithium mining in countries such as Mali and Namibia could therefore exacerbate increasingly frequent droughts.107

Knowledge on how to protect the environment has improved, but practice is weak

Many governments now require mining companies to produce environmental and social impact assessments (ESIAs) and resulting environmental management plans (EMPs).108  These procedures have sometimes reduced the risk of environmental harm, however, their design and use are often problematic. Environmental risk from a mine can be so severe that even with a rigorous EMP, the expected damage outweighs any benefits that the project could generate for the country. But such mines often proceed nevertheless.

There are a range of solutions. One is setting no-go zones for exploration. (See also page 11.) Few governments exert control over company exploration, despite laws often providing them with the authority to do so.109  Several African governments have issued exploration licenses in environmental protection zones, some of which do not sufficiently cover areas of environmental importance, including large tracts of intact forest in the Congo Basin.110  Once a company discovers a deposit, authorities have difficulty stopping exploitation of the mineral because of powerful financial incentives and corruption. But in some cases, exploration licenses provide companies with the legal right to mine following discovery. In some cases, companies sue governments that withhold a mining license after discovery, even if this is due to environmental risk.111

Governments could improve their licensing decisions by incorporating environmental factors into their economic modeling, but this rarely happens.112

Generally, different governmental authorities are responsible for assessing environmental risks and the economic viability and benefits of a project, with little cooperation between them. Furthermore, authorities often allow mining companies to choose a method of measuring anticipated environmental damage, and sometimes waive the requirement for quantitative measures entirely, making assessments difficult to use in models. Authorities should in these cases consider existing guidance on good practice from the International Finance Corporation and IGF.113

Even with strong valuation tools, host governments often undervalue the environment. Officials often feel pressure to prioritize short- term revenues and jobs. Initiatives like the Central African Forestry Initiative to provide financing to Gabon to maintain its forests would change this calculus.114  Governments publishing clear criteria for investors on what constitutes unacceptable environmental risk would also help.

Having decided to extract, governments also often struggle to prevent risks from materializing. Hiring and equipping skilled staff is difficult.115  As companies use their own methods to measure damage, governments struggle to ensure that companies comply with regulatory benchmarks. Rapidly evolving mining technology and changing ecological understanding of environmental damage make it difficult for governments to protect the environment. Government efforts to increase environmental protection over time are often constrained by mining contracts, many of which still stabilize environmental provisions contrary to advice from the Organization for Economic Co-operation and Development and the United Nations.116

Regarding emissions from mining activities, governments may find carbon taxes a useful tool for incentivizing mining companies to reduce the greenhouse gases they produce. Many governments would need to strengthen their administrative capacities before carbon taxes are feasible, and stabilization clauses in mining contracts may also prevent their introduction. In the meantime, governments and the international community have some options for facilitating emissions reductions in the meantime. For example, while some companies are already turning to renewables to power their mines, they could increase support to expanding renewable energy systems in mining countries to further accelerate this shift.117

Local communities’ voices are currently constrained

Communities within forests and other vulnerable areas have a critical role in protecting the environment directly, as recognized at COP26.118  For example, various studies have shown that deforestation is lower in areas managed by Indigenous peoples given their experience of, and interest in, sustaining it for their livelihoods and future generations.119  Community management of land is also often more cost- effective than government and company schemes. Nevertheless, the international community provides little climate finance to support this practice.120

Given that environmental damage severely affects local communities, companies and governments must allow community members to participate in the decision to extract. In principle, governments and companies have increasingly recognized the need for “free prior and informed consent” from communities before allowing extraction.

However, this engagement is often meaningless. A recent survey of 26 African countries found that seven do not require public consultation until after companies have completed a draft ESIA, rather than during the drafting process.121  Even when companies do consult communities, they are rarely required to take local views into account.

Communities face similar challenges in monitoring the implementation of EMPs. While there are exceptions such as Ghana and Guinea, governments in many African countries do not systematically disclose these documents. African governments could learn from Latin America, where several countries have introduced participatory environmental monitoring committees—though such practices can only achieve so much without addressing the growing government hostility toward and violence against environmental defenders and community leaders.122 123

Figure 9. ESIA disclosures in law and in practice in African mining countries124

Conclusion

Africa’s mineral wealth is essential for the energy transition and for the hundreds of millions of people currently living in poverty in African mining countries. Whether and how governments and companies move to further extract this mineral wealth is not only economically and environmentally important for Africa, but also for the vital importance of protecting the world’s rapidly diminishing forests.

Everyone therefore has an interest in mining governance. We all need a triple- win in mining. But governments and companies have a generally poor track record in governance of the sector.

Few citizens in mining countries have benefited as much as they should have, corrupt actors have gotten away with ill-gotten riches, and investors remain reluctant to invest in some parts of Africa.

Some efforts by governments and development partners have helped to improve governance but given the possibility that African citizens could miss out on the next mining boom—and the need to supply an energy transition— these efforts must be both expanded and accelerated. With so much hanging in the balance, officials and executives cannot repeat past mistakes.

This report has highlighted some of the most promising approaches for obtaining a triple-win.

Developing downstream industries within e-mobility, battery storage value and indeed many other value chains; and developing a competitive supplier base within Africa would both benefit Africans and facilitate the energy transition. Improving how governments collect and manage tax payments from mining companies remains critical, both to fund programs to alleviate poverty and diversify economies dangerously dependent on the volatile mining sector.

Furthermore, authorities won’t achieve a triple win until they establish and maintain no-go zones for mining and better resource environmental protection agencies. Companies must do their part and uphold the highest standards of environmental protection. Finally, none of these policies will succeed unless governments and companies are more transparent, held to account and stop corruption among their ranks.

Governments of countries responsible for two-thirds of the world economy aim reach net-zero emissions by 2050—28 years from now. But climate donors, development partners, companies, and governments have much less time to improve mining governance. Proceeding from the recommendations here, all parties must immediately engage in this vital task.

Acknowledgments

Internal contributors and reviewers:

Lee Bailey, William Davies, Susannah Fitzgerald, Gabriela Flores, Andrea Furnaro, Patrick Heller, Phesheya Nxumalo, Matthieu Salomon, Amir Shafaie.

External contributors and reviewers:

Jerry Adhajie (ANRC), Kwasi Ampofo (BNEF), Jeff Geipel (Mining Shared Value), Richard Goode (independent), Paul Jourdan (independent), Amir Lebdioui (School of Oriental & Africa Studies, London School of Economics), Brendan Schwartz (IIED) and John Sloan (UNECA).

• Tanzania’s unique approach to mining taxation, described as an equitable sharing of economic benefits between government and mining company according to a negotiated split, could leave the country shortchanged.
• Tanzanian citizens have access to the terms of only one profit-sharing deal, a 50-50 framework agreement for Barrick’s gold mines. The rest remain unpublished, despite laws that require the government to disclose deal terms.
• The Barrick deal predicates government revenues more heavily on mine profitability than a more typical regime, making these revenues more uncertain. This structure also increases the risk that companies may seek to avoid tax payments.
• Negotiating the split on a project-by-project basis, without any legal guardrails on the approach, increases the risks of corruption and unfavorable deal terms.
• The Tanzanian government could eliminate these risks by borrowing provisions from other countries that also require a specific government share of mine profits but take a different approach.
• However, unless the government has identified benefits from its current sharing mechanism that a more typical regime does not offer, it should not pursue a sharing mechanism and instead focus on improving the underlying regime, such as increasing its flexibility with regards to profits and reducing tax avoidance risks.
• To gain more trust from citizens, Tanzania’s government should explain how the mechanism works in existing deals.

Summary

Tanzania has taken an innovative approach to mining taxation in recent years, based on an “equitable sharing principle.” It has negotiated deals by which the government and mining companies share “economic benefits” based on an agreed split. Public information about these deals is limited. My understanding of the sharing arrangement is based on: the framework agreement template in the Mining (State Participation) Regulations 2022, the framework agreement between the government and Barrick Gold that first detailed a sharing arrangement in 2019, and discussions with government and industry officials. The agreement with Barrick provides for a 50-50 split. I understand that the government has negotiated a larger share in at least some subsequent deals, but there is no public information about them.

“Economic benefits” are the sum of government revenues, return of shareholder capital, shareholder dividends and shareholder loan repayments. Therefore, by the end of a typical mine’s lifetime, its economic benefits should be broadly equivalent to its total pre-tax profit. Mining companies continue to pay the taxes set out in the legislated fiscal regime, such as royalty and corporate income tax. But discussions indicated that once a mining company has recouped its initial investment, sharing is triggered, and adjustments are made at the end of each year to achieve the agreed split. This sharing arrangement is a significant shift away from the fiscal regime set out in Tanzanian legislation and common across the world.

There are several other countries that require mining companies to pay a specified share of their profits to the government, such as Ecuador and the Philippines. However, Tanzania has taken a different approach. While Ecuador and the Philippines impose only a floor on the government share, the Tanzanian arrangement also imposes a ceiling. This ceiling—which in the Barrick example limits the government share of profit to 50 percent—has several consequences.

My modeling of the impact of the regime on both a gold mine and a nickel mine suggests that the 50-50 regime results in a lower government take than the country’s underlying regime set out in legislation. The underlying regime is likely to result in the government receiving a share of profits greater than 50 percent for much of a mine’s lifetime. Under the 50-50 arrangement, the government therefore must make a payment to the mining company or forgo future tax payments to rebalance.

This does not necessarily mean the 50-50 regime will generate less government revenue overall. The competitiveness of the underlying regime is uncertain, and companies could develop fewer mines under it. However, modeling suggests that the 50-50 regime also results in lower taxes than in many other countries in a comparative sample. A slightly larger government share, which I understand the government has negotiated in at least some other deals, could therefore represent a better balance.

Tanzania sharing of benefits across the lifetime of a gold mine making average profits125

The ceiling on government share has another consequence. It links all government revenues to mine profitability. The government can receive only a total amount capped at 50 percent of total benefits, irrespective of which tax initially provided its revenues. Low profits, which translate to minimal total benefit, could therefore impact even the payment of taxes not directly based on profit. This greater reliance on profitability introduces two risks for the Tanzanian state: it makes revenues less reliable and increases the risk that the mining company will seek to avoid tax payments.

Modeling suggests that there may be years in which the government receives no revenues from a mine that is producing but making low profits. The figure below shows how the government may not receive revenues for two years because of the build-up of benefits that the government receives prior to the point that sharing is triggered. With a mine of average profitability, total benefits are large enough that the government does not have to forgo all its tax payments in any year. However, with low profits, the mining company must retain all benefits for a period to rebalance. The example in the figure below shows the potential impact of the government’s accumulation of benefits prior to the sharing trigger, however periods of no or low profits at other points in the mine’s lifetime could also make revenues volatile.

Tanzania sharing of benefits across the lifetime of a gold mine making low profits, with all benefits shared

The sharing mechanism also significantly increases the government’s exposure to the risk of mining companies avoiding taxes. All government revenues become dependent on government capacity to effectively assess profit rather than just the government revenues from profit taxes. The figure below shows the potential impact of tax avoidance practices increasing costs and therefore reducing total benefits. With the underlying regime, only profit-based taxes such as corporate income tax would be impacted by such tax avoidance practices. These practices would not affect input and production taxes such as royalties. However, with the sharing mechanism, such practices could result in artificially low profits. This could trigger the cap for the government share of benefits and mean reductions in payments such as royalties, even though these payments are not usually dependent on profitability—which is one of the main reasons they are included in fiscal regimes.

Hypothetical exposure to tax avoidance risk with Tanzania's fiscal regimes126

The government may not have anticipated these risks because the sharing arrangement was initially developed for mines that were already producing, for which the risks are lower. The largest costs for producing mines have already been incurred, and so there is a lower risk of the sharing mechanism making revenues unreliable and there are fewer opportunities for tax avoidance. However, the government should consider whether this approach is optimal for new mines.

A larger government share of benefits reduces the risks of unreliable revenues and of tax avoidance. The higher the ceiling, the less likely government revenues are to hit it. Payments of input and production taxes such as royalties are therefore less likely to be reduced. However, a larger government share does not eliminate this risk.

The flurry of framework agreements that the Tanzanian government has signed since the Barrick deal suggests that investors like the sharing arrangement. It does not appear to be beneficial for Tanzania, however. This is particularly concerning given that the energy transition and resulting surge in demand for many of Tanzania’s minerals mean there is even more to lose.

Negotiating the split on a project basis, without any guardrails in legislation on the approach to this split, increases the risk of a bad deal for the country. The Mining (State Participation) Regulations allow the government to negotiate the sharing of economic benefits. However, legislation provides only a limited methodology for calculating economic benefits and does not provide a range within which the split will be agreed. Given that the split essentially overrides the underlying fiscal regime set out in legislation, this lack of guardrails is concerning. It increases the impact of uneven capacity between the government and company negotiating teams, the likelihood of costly mistakes, and the risk of corruption. An uneven fiscal regime is also more difficult to administer.

The government could look to Ecuador and the Philippines’ regimes for ideas on how to refine its approach. Those countries have avoided these risks by setting only a floor on the government share. By allowing the mining company to earn its minimum return before sharing is triggered, Ecuador’s sharing mechanism performs more like a windfall profit tax. It therefore reduces the risk of making marginal mines unviable.

However, removing the ceiling from Tanzania’s sharing mechanism will likely result in most mines paying the tax level in the underlying regime. This is because the relatively high taxes of Tanzania’s underlying regime will make the floor on the government share redundant. The government could therefore decide not to pursue a sharing mechanism of any form in new deals, since it becomes an unnecessary complication.

Unless the government has identified benefits to the sharing mechanism that a more typical regime does not offer, it is better for the country that the government focuses on improving the underlying regime. Tanzania’s taxes are less responsive to mine profitability than most other regimes, which risks making some of Tanzania’s mines unviable. The government could therefore consider a royalty rate that varies with prices. It could also review its approach to tackling tax avoidance risks from inflated financing costs. For example, rather than taking a share of shareholder loan repayments, which may not have the intended effect, it could prohibit the interest rate on any loan from exceeding the lowest market rate available for such loans.

Even if the government decides not to incorporate a sharing mechanism in any new deals, explaining to the public how the mechanism works in existing deals is critical. The lack of public information and understanding of the mechanism risks undermining public trust in the government’s management of the sector. Part of this public sensitization should include disclosure of the contracts that contain the “benefit sharing” approach, as already required by law.

Introduction

In 2019, Tanzania and Barrick Gold renegotiated the mineral development agreements (MDAs) for three of the country’s gold mines. The renegotiated deals provide for a 50-50 share of “economic benefits.” Since then, the government has entered a 55-45 sharing arrangement with Petra Diamonds for Tanzania’s only large-scale diamond mine, with the government receiving the larger share.127 These mines are already producing, but the government has also applied this sharing approach to deals for at least some new projects. The largest mine in the pipeline—Kabanga, which will produce nickel and cobalt—has signed a framework agreement with the government that provides for economic benefits to be “equitably shared.”128

This sharing arrangement is a significant shift away from the fiscal regime set out in Tanzanian legislation and common across the world. The typical regime is based on royalties and corporate income tax, without any adjustment mechanism to achieve a specified government share of mine profits overall. I analyzed this regime previously, benchmarking it against a range of other mining countries.129 I now analyze the Tanzanian sharing arrangement to establish whether it represents a better deal for the country. I then explore how the government could refine it as it negotiates deals for new projects in the pipeline. Lessons are drawn from the approach of Ecuador and the Philippines, which also target a specified share of a mine’s profits for the government but in different ways.

The economic model and data that I used for this analysis are available on the Natural Resource Governance Institute’s website here. I provide further information on my modeling approach in subsequent sections and the appendix.

1. Key difference between benefit-sharing approaches: Tanzania’s ceiling on the government share

Public information on the structure of Tanzania’s sharing arrangements is limited. While the Mining (State Participation) Regulations 2022 provide for the government to negotiate the sharing of economic benefits on the basis of an “equitable sharing principle,” they do not fully set out its structure. The Barrick MDAs and agreements for other projects have not been disclosed. The framework agreement between the government and Barrick that informed the MDAs provides the most comprehensive outline of the structure that is publicly available.130  I therefore focus on this 50-50 arrangement, but also discuss the implications of a different split, such as the 55-45 agreed with Petra Diamonds, in my analysis. The three key elements of the sharing arrangement are set out below.

Definition of economic benefits. “Economic benefits” could be interpreted to mean different things. The broadest definition would entail not only direct financial benefits from the mine in the form of government revenues and company profits, but also benefits such as the creation of jobs and demand for goods and services. However, the Mining (State Participation) Regulations state that “economic benefits” comprise of government revenues directly payable by the company to the government,131  shareholder dividends and shareholder loan repayments. Therefore, by the end of a typical mine’s lifetime, its economic benefits should be broadly equivalent to its total pre-tax profit. These benefits are calculated on a cumulative basis from the start of a mine’s operations (that is, from the start of the license period). I understand that cumulation in this case is based on actual not discounted cash flow, and therefore does not account for the time value of money.132

Trigger for sharing mechanism. Sharing is triggered once cumulative, post-tax cash flow is positive, meaning that all exploration and development costs have been recouped. My understanding is that the timing of this trigger is set in advance using the mine life plan rather than based on actual performance.

Sharing mechanism. The mining company pays the taxes set out in the fiscal regime, such as royalty and corporate income tax, in line with the typical approach. However, after the sharing trigger, if one party’s cumulative share of economic benefits is greater than 50 percent at the end of a year, it must pay the other party the amount required to rebalance. This payment could be made at that point in time or, if the company has overpaid, treated as an advance payment of future taxes.

Several other countries require mines to pay a specified government share

There are several fiscal regimes across the world that require mines to pay a specified share of their profits to the government. However, the approach to setting this share differs across countries. I have analyzed two of these regimes—those of Ecuador and the Philippines—given they could provide useful insights into whether and how Tanzania’s arrangement could be refined.

The Ecuador and Philippines regimes also require a government share of profits of 50 percent. Each country’s definition of profits differs slightly. However, a more significant difference is that, unlike under the Tanzanian approach, if the Ecuador or Philippines government receives a share of more than 50 percent, the government does not have to compensate the mining company. In other words, their mechanisms act as a floor but not a ceiling on the government’s share.

Another key difference between the regimes is that, while the Tanzania and Ecuador regimes calculate the benefits accrued by the government or mining company on a cumulative basis, the Philippines regime does not. However, while cumulation is based on actual cash flow in the Tanzania regime, it is based on discounted cash flow in the Ecuador regime. This means that sharing is triggered in Ecuador only once the mining company has earned its minimum rate of return—that is, the return the company needs to be willing to develop the mine initially.133

Further details of the Ecuador and Philippines regimes are set out in the appendix.

Modeling the benefit-sharing arrangement for gold and nickel mines

I modeled how the Tanzania, Ecuador and Philippines approaches may work for a gold mine and a nickel mine of average profitability. I assumed a gold price of USD 1,600 per ounce and a nickel price of $17,000 per tonne, which are around the 10-year average between 2013 and 2022.134  In the figures below, “initial government benefits” are the revenues the government would have received without the sharing mechanism and “final government benefits” the revenues it ultimately receives after any rebalancing. I show only the results for the gold mine below, but the results for the nickel mine were similar. 

Tanzania. As Figure 1 shows, the government receives benefits from the mine prior to the sharing trigger from input taxes, royalty and some corporate income tax payments. Sharing is triggered in year 7 of the project’s life. The government will have a cumulative share that is significantly greater than 50 percent at this point. It therefore must make a payment to the mining company or forgo future tax payments to rebalance. I modeled the latter, given it will probably be politically difficult for the government to make a direct payment to the company. Following this initial rebalancing, the fiscal regime continues to generate a larger initial share of the benefits for the government than for the company. The government therefore continues to forgo a portion of future tax payments to rebalance. At no point in this scenario does the sharing mechanism result in an increase in government revenue.

Figure 1. Tanzania sharing of benefits across the lifetime of a gold mine making average profits135

Ecuador. As Figure 2 shows, sharing is triggered in year 8 of the project’s life. This is a year later than with the Tanzania approach because, unlike with the Tanzania approach, the mining company is permitted to earn its minimum return before sharing. From this point until year 12, annual company returns are significantly greater than government revenues. Therefore, despite the government having received revenues in previous years, its share of cumulative benefits falls below 50 percent, and the company makes an additional payment. However, these payments do not result in the government and company receiving the same monetary amount each year. Sharing is based on discounted cash flow. The revenue the government received in the early years of the mine is worth more than the same monetary amount received by the company later. This reduces the size of the additional payments the company needs to make for cumulative benefits to be shared equally.

Figure 2. Ecuador sharing of benefits across the lifetime of average gold mine136

Philippines. As Figure 3 shows, the recovery period ends after three years of production, in year 7 of the project’s life. Because the basic government share is less than 50 percent of net mining revenue at this point until year 16, the mining company pays an additional government share. For the following few years, the basic government share is at least 50 percent of net mining revenue. This means the company does not make any additional payments. However, unlike with the Tanzania approach, the government does not have to compensate the company for receiving more than 50 percent of net mining revenue.

Figure 3. Philippines sharing of benefits across the lifetime of average gold mine137

2. Tanzania’s benefit-sharing arrangement could leave the country shortchanged

I reviewed the Tanzanian approach against the typical objectives of a fiscal regime: maximizing government revenue without deterring investment; reliable revenues; flexibility as profits change; and simplicity to limit tax avoidance risks.

I set out below how the 50-50 regime performs against these criteria in relation to a new gold mine. I compared the performance of the 50-50 regime with the underlying regime. I also compared it with the Ecuador and Philippines regimes—with and without their sharing mechanisms to isolate their effect and draw lessons for Tanzania—as well as with some of the world’s other gold producers. Tanzania is competing with these countries for investment, and therefore how they compare is important. I also analyzed the impact of these regimes on a nickel mine and found similar results.

The benefit-sharing arrangement reduces government take

Tanzania’s 50-50 regime has a lower government take than the country’s underlying regime set out in legislation. This is because of the ceiling it imposes on the government’s share. This does not necessarily mean it will generate less government revenue overall, however. More mines could potentially be developed under the 50-50 regime if investors prefer it, thereby resulting in higher aggregate government revenues.

Figure 4 sets out how the government take differs between Tanzania’s two regimes, and how they compare to the regimes of Ecuador, the Philippines and several other gold producers. I used the average effective tax rate (AETR) to make this comparison.

The 50-50 regime appears to strike a reasonable balance between generating government revenue and competitiveness for a mine with average profitability. As Figure 4 shows, I estimate it has an AETR of around 54 percent.141 However, this is lower than for several other countries in my sample. Tanzania therefore probably has scope for slightly higher taxes than the 50-50 regime entails without reducing the country’s competitiveness. This is particularly the case given government efforts to improve the wider investment climate appear to be paying off. Control Risks considers Tanzania’s legal and tax risks to be on a downward trend.142  Indeed, I understand the government has negotiated a larger share in at least some other deals.

In contrast to the Tanzanian mechanism, Ecuador’s and the Philippines’ mechanisms both increase government take from a mine with average profitability, compared to the regimes that would otherwise be applicable. However, the Ecuador mechanism has a larger impact. This is because it does not count several significant taxes—such as import duties and withholding taxes on interest and dividends—toward the government’s share of benefits. The exclusion of these taxes increases the additional payment the mining company must make for the government to receive 50 percent of cumulative benefits.

Figure 4. Average effective tax rate for average gold mine with gold price of USD 1,600 per ounce143

The benefit-sharing arrangement both limits windfall profits capture and makes revenues unreliable

Figure 5 shows government take at different profit levels—measured in terms of government share of total benefits.144  A regime should set government take from low-profit mines to generate reliable revenues while still providing the minimum return to investors. A flexible regime would then have much higher government take from higher-profit mines. The AETR for these mines would be flat, with flexible instruments to capture windfall profits balanced out by reliable instruments such as royalties. This translates to government share of total benefits slightly increasing with profit.145

Figure 5. Government share of total benefits at different profit levels146

The instruments in Tanzania’s underlying regime make it relatively inflexible. Its corporate income tax and minority state equity mean that it should capture windfall profits reasonably well, if effectively administered. However, the regime also places high taxes on low-profit mines, largely because of a high royalty. As I noted in my previous analysis, the government could consider adjusting these instruments to make the underlying regime more flexible.147

The sharing mechanism also limits the flexibility of the regime since it is designed to preserve the share of government in total benefits, regardless of economic conditions. The mechanism results in the regime capturing a similar share of profits whether a mine generates low or high profits.148  This means the government must decide, when determining the split between government and mining company, whether to impose a large government take on low-profit mines and capture a large share of any windfall profits; or to provide more relief to low-profit mines but in doing so to capture a smaller share of windfall profits. The 50-50 split takes the latter approach, making low-profit mines more likely to be viable than with the underlying regime. However, the sharing mechanism means that this must come at the cost of a smaller government share of windfall profits.

The sharing mechanism also makes government revenues unreliable. This is because it makes all government revenues dependent on the size of total benefits. The government can receive only 50 percent of total benefits irrespective of which tax they were initially derived from. Low profits, which in turn mean total benefits are small, could therefore impact even the payment of taxes not directly based on profit.

As Figure 6 shows, my modeling suggests there may be years in which the government does not receive any revenues from a mine with low profits. In this scenario, these two years of no government revenues are caused by the build-up of benefits that the government receives prior to the sharing trigger. Once sharing is triggered, the government must forgo tax payments to rebalance and for 50-50 sharing to be achieved. With a mine of average profitability, total benefits are large enough that the government does not have to forgo all its tax payments in any year, as shown in Figure 1. However, with low profits, the mining company must retain all benefits for a period to rebalance.

While this example shows the potential impact of the government’s accumulation of benefits prior to the sharing trigger, periods of no or low profits at other points in the mine’s lifetime could also make revenues volatile. Therefore, while the sharing mechanism may still generate reasonable government revenues over the project’s lifetime, it appears to undermine the reliability of revenues from year to year. As a result, it appears to create a regime that neither captures a significant share of windfall profits compared to many of the countries in our sample nor provides reliable revenues when profits are low.

Figure 6. Tanzania sharing of benefits across the lifetime of a gold mine making low profits, with all benefits shared149

This lack of reliability could have significant repercussions for public trust. As noted above, I do not think it will be politically feasible for the government to make a direct payment to the mining company when the government has captured a greater share of the benefits than the agreed split. It is more likely that the government will forgo future tax payments. However, a scenario in which the government will need to forgo all tax payments in a given year will also be politically difficult. As a result, the sharing arrangement could create situations in which the government feels forced into entering supplementary arrangements to ensure it receives some revenues each year—for example, an arrangement that spreads the amount required to rebalance over several years.

Such arrangements, whether fully disclosed to the public or not, could lead to the sharing approach reducing public trust. This loss of trust would put pressure on the government to change the fiscal regime and even the wider legal and regulatory framework. If acted on, this could shake confidence in policy predictability and deter investment, as the country experienced following the sweeping reforms in 2017.150

In contrast to the Tanzania mechanism, the Ecuador mechanism helps increase flexibility. The mining company being able to earn its minimum return before sharing, and sharing being based on cumulative benefits, means the mechanism has a limited impact on low-profit mines. For higher-profit mines, it increases government take. In this way, it operates much like a windfall profit tax. Nonetheless, its flexibility could be improved further. The exclusion of some taxes from the government’s share of benefits means that even low-profit mines may need to make an additional payment. This is particularly impactful because the rest of the Ecuador regime imposes a relatively high burden on mines even when profits are low.

The Philippines’ mechanism improves the government’s ability to capture windfall profits. However, it risks increasing the burden on low-profit mines. This is because, while the limited taxes during the recovery period provide some relief, sharing is triggered before the mining company earns its minimum return and is based on annual not cumulative benefits. This also limits the scope to capture an even greater share of windfall profits through the sharing mechanism, as a larger government share would risk a higher burden on low-profit mines. A separate windfall profit tax would therefore be needed for this purpose instead.

The benefit-sharing arrangement increases tax avoidance risks for Tanzania

The Tanzania mechanism significantly increases the government’s exposure to tax avoidance risks. As noted above, all government revenues become dependent on profit. They therefore all become dependent on government capacity to effectively assess profit rather than just the government revenues from profit taxes.

Figure 7 shows the potential impact of tax avoidance practices increasing costs and therefore reducing total benefits. The increase in costs does not affect the payment of input and production taxes with the underlying regime. However, it does with the sharing mechanism as it means 50 percent of total benefits includes a lower value of the input and production taxes that would have been due to the government.

Figure 7. Hypothetical exposure to tax avoidance risk with Tanzania's fiscal regimes151

This feature of the mechanism exists regardless of the size of the split. A larger government share reduces the risk that tax avoidance will lower total benefits to the extent that the government’s share is less than the value of input and production taxes. However, it does not eliminate that risk.

The Ecuador and Philippines mechanisms, in contrast, do not significantly affect government exposure to tax avoidance risks. Determining the need for additional payments to government depends on government capacity to effectively measure profits. But because these regimes do not place a ceiling on the government’s share, tax avoidance that reduces profits would not affect the payment of input and production taxes.152

The Tanzania regime does contain measures intended to reduce tax avoidance risks related to financing costs. I understand that the Barrick MDAs treat related party loans as being interest free in the calculation of total benefits. The Mining (State Participation) Regulations also unusually provide for mandatory state equity in projects to give the government a share of any shareholder loan repayments. This provision is intended not only to generate larger government revenues directly, but also to reduce the incentive to shift profits through inflated financing costs.153

These protective measures are not tied to the structure of the sharing mechanism, however. They could be included in any regime. Indeed, the sharing mechanism appears to neutralize the impact of taking a share of loan repayments. The government can receive only 50 percent of economic benefits regardless of whether they are generated from a share of loan repayments or other revenue streams.

3. Tanzania may do better by not including the benefit-sharing mechanism in new deals

Setting not just a floor but also a ceiling on the government share has introduced three main risks into Tanzania’s regime: it potentially sets an unnecessarily low ceiling on government revenues (depending on the agreed split); it makes those revenues less reliable; and it increases their exposure to tax avoidance.

The government may not have anticipated some of these consequences because it initially developed the sharing arrangement for mines that were already producing. The largest costs for these mines have already been incurred and they are now profitable. This reduces the risk of the sharing mechanism making revenues unreliable and increasing the potential for tax avoidance. However, it would be advisable for the government to consider whether this approach is optimal for new mines. Particularly given the energy transition and resulting surge in demand for many of Tanzania’s minerals, there is even more to gain from a good deal and even more to lose from a bad deal.

A larger government share of benefits reduces the risk of unreliable revenues and tax avoidance. However, it does not eliminate this risk. Negotiating the split on a project basis, without any guardrails in legislation, increases the risk of a bad deal. Legislation provides only a limited methodology for calculating economic benefits and does not provide a range within which the split will be agreed. Given that the split essentially overrides the underlying fiscal regime set out in legislation, this lack of guardrails is concerning. It increases the impact of uneven capacity between the government and company negotiating teams, the likelihood of costly mistakes and the opportunity for corruption. An uneven fiscal regime is also more difficult to administer.154

The government could look to Ecuador and the Philippines’ regimes for ideas on how to refine its approach. By setting only a floor on the government share, their sharing mechanisms do not exacerbate the risk of unreliable revenues and tax avoidance. By allowing the mining company to earn its minimum return before sharing is triggered, Ecuador’s sharing mechanism performs more like a windfall profit tax. It therefore reduces the risk of making marginal mines unviable.155

Removing the ceiling from Tanzania’s sharing mechanism is complicated by the relatively high taxes of Tanzania’s underlying regime. A floor of 50 percent of profits results in Ecuador and the Philippines receiving additional payments because government take from other taxes in their regimes does not reach that threshold. This is not the case for Tanzania as government take already exceeds that floor.

Figure 8 shows my modeling of a gold mine of average profitability. The mechanism—without a ceiling and the calculation of benefits based on discounted cash flow to allow mining companies to earn their minimum return before sharing is triggered—does not have any effect on the share of benefits between the government and company. My modeling suggests the mechanism would also not have any effect on this share for mines of higher and lower profitability.

Figure 8. Tanzania sharing of benefits across the lifetime of a gold mine making average profits with no ceiling156

Removing the ceiling from the sharing mechanism will therefore likely result in most mines paying the tax level in the underlying regime. The government could of course increase the floor so that the mechanism does result in mines making additional payments. My modeling suggests a floor of close to 60 percent would trigger additional payments from a range of mines. However, this would not be advisable given the underlying regime already has higher taxes than most other countries in my sample. Increasing government take would further challenge Tanzania’s competitiveness, even if these additional payments were payable only once the mining company had earned its minimum return.

The adjustments I suggest would therefore make the sharing mechanism superfluous for most mines. The government could therefore decide not to pursue a sharing mechanism of any form in new deals given it becomes an unnecessary complication. Indeed, the government is better focusing on improvements to the underlying regime. As set out above, Tanzania’s taxes are less responsive to mine profitability than most other regimes I analyzed. The government could therefore consider a royalty rate that varies with prices.157 This would provide some relief to mines when prices are low, and capture more revenue for government when prices are high. The government could also review its approach to tackling tax avoidance risks from inflated financing costs. For example, rather than taking a share of any loan repayments, it could consider adopting a rule for the mining sector that is currently only in the Petroleum Act: that the interest rate on a loan should not exceed the lowest market rate available for such loans.158

Conclusion

The Tanzanian government should be commended for its willingness to pursue an innovative approach to mining taxation after years of frustration at the deals it had previously struck. However, without reassessing this approach, it risks leaving itself shortchanged again—particularly given the lack of guardrails in legislation. Considering the challenges with the arrangement I have identified, there may be a sense of déjà vu in the longer term with a public backlash against both mining companies and the government.

The government could adjust the mechanism before finalizing deals for new mines by borrowing elements from the Ecuador and Philippines regimes. However, unless the government has identified benefits from the sharing mechanism that a more typical regime does not offer, the best option is not to pursue a sharing mechanism of any form and instead to focus on improving the underlying regime.

Even if the government decides not to incorporate a sharing mechanism in any new deals, explaining to the public how it works in existing deals is critical. The current lack of public information and understanding of the mechanism risks undermining public trust in it. Part of this public sensitization should include disclosure of the contracts that contain the mechanism, as already required by the Tanzania Extractive Industries (Transparency and Accountability) Act 2015. The government could also consider publicly reporting the expected or observed economic benefits from the mines to which a sharing arrangement applies. This should also help increase public trust that the country is receiving the amount that it is due.

Appendix: Ecuador and Philippines regimes

Ecuador’s approach

The Ecuador regime requires mines to provide a government share of at least 50 percent of “accumulated benefits.” This requirement is established in the constitution of the country. It is primarily set out in the general regulations of the mining law.

Definition of accumulated benefits. “Accumulated benefits” are the sum of the government revenues specified in the regulations and any free cash flow available to the mining company.159 These benefits are calculated on a cumulative basis from the start of a mine’s operations (though the applicable government revenue streams are payable only from the start of production). This cumulation accounts for the time value of money. Cash flows are discounted to reflect that, the earlier they occur, the more they are worth to either party.160

Trigger for sharing mechanism. Sharing is triggered once cumulative, discounted free cash flow is positive. At this point, the mining company has recouped all exploration and development costs. Because the trigger is based on discounted cash flow, it will also have earned its minimum rate of return.

Sharing mechanism. The mining company pays the taxes set out in the fiscal regime in line with the taxes and royalties defined in legal and contractual provisions. After the sharing trigger, if cumulative government revenues are less than 50 percent of accumulated benefits at the end of the year, the company must pay a “sovereign adjustment” to increase the government share to 50 percent. However, if government revenues are more than 50 percent of accumulated benefits, the government does not have to compensate the company.

Philippines’ approach

The Philippines regime requires mines that operate under a financial or technical assistance agreement (FTAA) to provide a government share of at least 50 percent of annual “net mining revenue” after a cost recovery period. Any mine licensed to a foreign company must have a FTAA.161 This arrangement is primarily set out in a publicly available model FTAA. The financial or technical assistance agreement for a given project is subject to negotiations and therefore may differ slightly from others.162 I focus on the regime set out in the model FTAA.

Definition of “net mining revenue.” Net mining revenue is sales revenue (net of transport and processing charges) minus deductible expenses in a given year. Deductible expenses include, among other things, development costs after the start of production, operating costs, interest payments and royalties.

Trigger for sharing mechanism. The sharing mechanism is triggered at the end of the “recovery period.” The recovery period ends the earlier of five years from the start of production or the point at which all pre-production expenses have been recouped. The timing of this trigger is based on the actual performance of a mine rather than set in advance.

Sharing mechanism. The mining company pays the “basic government share” throughout the project’s lifetime. However, the composition of this basic government share up to the end of the recovery period and after the recovery period differs. A comprehensive list of the taxes included in the government share during these two periods can be found in the model FTAA and applicable legislation. The main components up to the end of the recovery period include excise tax, royalties and local business tax. The basic government share after the recovery period includes these taxes as well as import duties, corporate income tax, and withholding taxes on interest and dividends.

After the end of the recovery period, if the basic government share is less than 50 percent of net mining revenue in a given year, the mining company must pay an “additional government share” to increase the total government share to 50 percent of net mining revenue. However, if the basic government share is more than 50 percent of net mining revenue, the government does not have to compensate the company.

Modeling approach

I used an adapted version of the IMF’s Fiscal Analysis of Resource Industries (FARI) economic model published in 2016 for this analysis.163

I based my analysis on two mines: one produces gold doré and the other produces primarily nickel sulfide but also some cobalt. As the effects of a fiscal regime can differ depending on the specific cost, production and ultimate profitability of a mine, I created a range of mine profiles. I based the gold mine profiles on the characteristics of actual mines in Tanzania, using S&P Global Market Intelligence’s Capital IQ Pro database. The S&P database does not yet contain detailed economic data for any of Tanzania’s upcoming nickel mines, and therefore I developed rough approximations based on their potential size and the cost of other nickel mines across the world. I also made assumptions about the financing structure of these mines. I based these assumptions on the values used as common practice by industry and government analysts.

The assumptions I used for the two gold mine profiles referenced in this analysis are set out in Table 1. These assumptions result in a pre-tax internal rate of return of 42 percent for the average-profit mine and 17 percent for the low-profit mine.

Table 1. Key assumptions for modeled gold mine profiles

The assumptions I used for the nickel mine profiles in this analysis are set out in Table 2. These assumptions result in a pre-tax internal rate of return of 35 percent for the average-profit mine and 16 percent for the low-profit mine.

Table 2. Key assumptions for modeled nickel mine profiles

I applied the fiscal regimes in my sample to these mine profiles. To keep the model and my analysis as simple as possible, I did not include taxes that are likely to comprise a relatively small proportion of total government revenue for a large-scale mine, such as annual license fees. I also did not model employment taxes that are ultimately paid by the mine employees rather than the companies. I also simplified some elements of the regimes. For example, while import duties vary according to trade agreements between countries (e.g., East Africa Community trade rules) and according to the goods and services imported, I assumed one rate for all imported inputs.

The mining sector is at the nexus of important global phenomena: climate change and the push to transition to low-carbon energy, the development of new technologies affecting labour markets, and global momentum against inequality and for tax reforms. These trends are raising the importance of mining for both its mineral and financial outputs. In this context, governments need new and innovative fiscal measures to protect the public’s financial interests during the next generation of resource extraction.

The Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) partnered with the African Tax Administration Forum (ATAF) to rethink how developing countries benefit financially from their mineral resources. They launched The Future of Resource Taxation in 2020, a research project to discover how the existing system of mining taxation can be improved and identify new, innovative fiscal options for resource-rich countries to maximize the returns from their mineral wealth. The project crowdsourced and developed policy ideas from governments, civil society, academia, and industry. The end result is the IGF's handbook for policy-makers: The Future of Resource Taxation: 10 Policy Ideas to Mobilize Mining Revenues. It presents a menu of innovative fiscal measures to strengthen revenue collection in the mining sector.

Current and former NRGI team members were among many experts who contributed to this volume. 

The petroleum industry is volatile, and governments in “new producer” countries have operated at a significant information disadvantage when negotiating with international oil companies. This challenge is growing today; new producer countries face intensifying questions around whether to offer fiscal incentives to maintain investment in the face of 1) the pandemic-induced volatility in oil prices and 2) long-term questions about the future of the industry in the face of the climate crisis and the global energy transition.
This confluence of short-term and long-term uncertainty is prompting a reexamination of the narrative that once took hold in many new producer countries. The traditional story was one of linear progression from being non-producers to small levels of production to ultimately having oil and gas become a major economic contributor over the long term.

This notion of progression was associated with a commonly held theory: After a country’s first major discovery, the geological risk that wells will be dry was expected to decrease. Countries could therefore shift from a position of having to grant tax breaks (and other concessions) to international investors, to taking a tougher stance in laws and negotiations for new projects going forward.

In this paper we examine whether this theory has been borne out in practice and make recommendations to support new producers in their navigation of the uncertainty associated with the energy transition.

Among the eight “new producer” countries, for which we analyzed a total of 26 contracts signed before and 25 contracts signed after discovery events (all occurring between 2001 and 2014), the evidence is mixed.