Sierra Leone Mamamah airport project: A twist in China’s tail – part three

Saad Barrie

Sierra Lone Telegraph: 31 October 2016

good-governance-freetown-poverty-courtesy-of-national-geographic

Sierra Leone government’s proposed new airport has been harshly criticised by some of its key stakeholders, either for its location, huge cost, or method of financing and the lack of transparency in the negotiations with its financiers and contractors – the Chinese.

In this, his concluding article on the real reasons behind the government’s obsession with constructing a new international airport in the north of the country, amid massive poverty, illiteracy, poor health care, lack of access to clean drinking water and electricity, Saad Barrie argues that; if the Chinese desperately needs Sierra Leone’s minerals, they must themselves invest in constructing the necessary infrastructures – as long as there is no impact on the environment, and that they pay their taxes and royalties, just like all other investors should.

The poor people of Sierra Leone should not be expected to pay $400 million for a new airport which they consider to be of little – if any benefit to their human development.

They want an investment that could see the flow of clean, safe drinking water running uninterrupted through their taps; three million children educated up to university level with employment potential, and acquired technical skills that are fit for the 21st century by 2026; two-hundred thousand new low-cost homes for people living in sub-human shacks; over half of the population living healthily to celebrate their 80th birthday.

But for now, it seems the only game in town is the price of Sierra Leone’s main export earner – iron ore.

From a macroeconomic perspective, one cannot over-emphasise the importance of resumption of iron ore mining for the full recovery of the economy from the debilitating effects of the Ebola outbreak.

According to the IMF and the Bank of Sierra Leone (BSL) the country’s foreign currency reserve is a little over US$500m or equivalent to less than 4 months of import (import fell after the Ebola outbreak).

The level of foreign reserves is one of four Primary Criteria under the West African Monetary Zone (WAMZ) Convergence Criteria. The equivalent of three months of import is the minimum reserve required by WAMZ.

As import increases in volume and value (due to recovery in manufacturing, services, retail trade and an expected rise in the price of crude oil) foreign reserves will have to increase to improve the Bank of Sierra Leone’s (BSL) capacity to control depreciation of the Leone and maintain the 3 months (of import) minimum reserve.

iron ore production in sierra leoneExport growth and diversification is the most sustainable means to increase foreign currency reserves. Sierra Leone’s total export in 2013 (pre-Ebola) was US$1.92 billion. The mining sector contributed 93.4% of total export value. This shows that the export basket is made up of predominantly minerals.

Export of iron ore was 13.6mtpa, worth US$1.1 billion (average of US$78/ton) or 59.4% of total export in 2013. The iron ore mines have been the main source of foreign currency earnings for the government since export began in 2012.

The government received from the Tonkolili Project alone about US$48m in total taxes – US$20m from royalties and about US$27m from PAYE taxes. Other taxes paid by the company are negligible; about 2.4% of its total taxes.

Right now government is getting zero in royalty payments from SISG and only a fraction of what it used to receive in PAYE taxes since the Chinese owners started downsizing their workforce.

The growth projection for non-iron ore GDP is a modest 4.5% average in 2017 and 2018. If SISG resumes full operations – production, export and rollout of infrastructure development plan – the government forecasts GDP to increase by 20% in 2017 and 18% in 2018.

The growth forecast for non-iron ore GDP means that, without recovery in the iron ore subsector, GDP will still be slightly below its 2013 (pre-Ebola) level three years after the country was finally declared free of EVD.

The country’s iron ore subsector poses a classic “chicken and egg” causality dilemma for the government:

(a)   Tagrin is a prerequisite for the long term commercial viability of the Tonkolili project; and

(b)   On the other hand, unless it gets a concrete guarantee that Mamamah will be constructed, SISG is unlikely to embark on construction of the Tagrin Port and its connecting rail from Pepel.

Given that SISG inherited the status quo from AML you might say the government’s dilemma is its AML chickens coming home to roost.

Prior to the takeover by SISG, the government of Sierra Leone had a 10% interest in ARPS – the AML Group’s port and rail services.

Infrastructure expansion will increase capital expenditure by SISG in the short term but will reduce significantly its average transportation cost in the long term. And ARPS will yield greater returns on the additional investment.

African minerals2014In 2013, expenditure by AML (port and rail services) for transporting its ore from the mines to the port was US$217m; accounting for about 33% of the Group’s Cost of Sales for that year.

Therefore the (future) earnings from the government’s 10% interest in the Rail and Port Services (ARPS), assuming it is still there, could more than repay the full cost of Mamamah in the long term.

That is motive enough for the government to want the port and rail infrastructure expanded in order to maximize the future revenues from its interest in the project.

However, since the takeover, both the government and SISG have been characteristically silent on the status of its 10% interest.

President-Koroma-and-African Minerals Frank-TimisNo Hubris

For the Mamamah project to be realized the government of Sierra Leone needs to disabuse its opponents of their growing list of misgivings.

This will require senior government officials like the present minister for transport and aviation to change their hubristic attitude towards citizens who dare to raise objections on the construction of a new airport or question the nature and extent of China’s involvement in it.

The relationship with China is arguably the most opaque of our foreign engagements. Similarly, since independence the mining sector has been the least transparent of our economy. Those two fault lines seem to have converged when SISG took over Tonkolili.

 Is Mamamah a Trojan horse for China’s alleged interest to establish a so-called Dual Use Logistic Facility at Lungi?

Let us just say that is one more “known unknown” in our recent dealings with China. The evidence suggesting that the Chinese government has military interest in Sierra Leone is inconclusive – at least for now,

China Jin ping in ZimbabweChina professes to conduct its relationship with African countries on the precepts of its “Beijing Consensus” – mutual friendship, respect for national sovereignty and neutrality in each other’s domestic politics.

A PLA base on Sierra Leonean soil would not only be against the spirit of the “Beijing Consensus” but will also have dire consequences for long term peace and stability in the West African sub-region.

On the other hand, the opposition parties, citizens and other non-state actors critical of Mamamah will have to be more constructive in their views on the project.

Opposition to the project must be weighed against the country’s present economic reliance on iron ore mining and the Chinese government influence behind SISG. Government must take the onus to facilitate that process by giving out more details on the project.

The Sierra Leone government can only negotiate from a position of strength when it has its citizens, on whose behalf it acts, firmly behind it.

For a start, the specific terms and conditions of the 99 year port and rail lease granted to AML, now held by SISG, should be made public. Why the secrecy? After all, the Mining Lease Agreement is already in the public domain.

Poverty in Sierra Leone In conclusion: Financing Mamamah

A new airport is the by-product of the 99 year port and rail lease granted to African Minerals Limited to develop and operate Tagrin and Pepel.

 The US$300 million question is: who should pay for the construction of the Mamamah Airport? The Chinese government of course.

As the owner of SISG, the Chinese government is now the principal beneficiary of the Mamamah Project, thus should bear the cost (at least the greater portion) of constructing the new airport. Otherwise SISG’s Lease Agreements should be reviewed to make the company bear the cost of constructing the airport.

Fortunately, the government has some leverage on the Chinese. It can choose to do nothing.

Without Mamamah, SISG will have to either relocate the proposed  port and rail infrastructure away from Lungi or ‘tolerate’ the intrusive ferry service from Freetown to Tagrin to continue during construction and after the port starts full operations.

Relocating the port from Tagrin will mean redirecting the rail further north, away from Lungi and Pepel, at far greater cost – possibly more than the US$300 million estimated cost of the Mamamah airport.

The benefit that the Mamamah Airport holds for travel and tourism development in Sierra Leone is only (what economists call) “a positive externality”, which does not justify the country paying the full cost of the project now or in the future.

2 Comments

  1. I think the desperation is not borne out of enhancing economic growth, rather it is borne out of assuming political legacy in a bid for the current political operatives to retain their firm grip on power.

    You must not forget Sierra Leone’s population is hugely illiterate and they dont delve into cost benefit analyses for projects and it’s possible consequences in the long-run. This is the more reason why we are still entrenched in prolonged poverty, with no signs of coming out of the quagmire.

  2. A few things jumped at me upon reading the series about the potential Mamamah airport, and the iron ore mining operation in northern Sierra Leone. First, the current APC government believe that scarcity of economic resources does not exist in the real world, and therefore they can waste resources like drunken sailors without any real impact on the real sector of the economy.

    This is an anomaly, as scarcity is the first law of economics, and it postulates that ‘there are no free lunch’ in economics, as economic resources are scarce because societies cannot produce all the goods and services people would like to have.

    Thus, when the game was good for this government, when the prices of iron ore were at their peak in the world market, they did not think about planning ahead for some rainy day, especially when they know that mineral prices have a cycle as reported in Mr. Barrie’s brilliant piece. Instead, they were over spending, traveling around the globe at every opportunity they got, as if iron ore production will continue ever, and price of the product will continue to rise forever.

    The second law of economics this government has failed to pay attention to is that which states that there are opportunity costs (what people must give up to acquire a unit of each) to economic resources.

    Thus, countries and even individual citizens should prioritize their spending when they come into some windfall or extra resources in their possession. For in a country that lacks all the basics of life, such as clean drinking water, hospitals, clinics, housing and schools, investment in these basic needs of life is what should concern a government that cares for its citizens, not just spending on roads, when majority of the citizens do not have enough to eat, and not even well enough to use the roads, not to talk about use an airport.

    Thus, certainly, the priorities of this government are not in line with the aspirations of the people of Sierra Leone.

    The third thing that jumped at me is this constant projection that (all other things being equal) says the economist, the Sierra Leonean economy will grow at 20%, and the so-called Agenda for Prosperity factored this growth figure into their GDP calculations to project their spending and expenditure needs.

    Well, I am sorry to say that projections are just that – projections. They are mere predictions and extrapolations from available data. Therefore, how well a projection becomes reality, crucially depend on the assumptions that underlie that projection, and the quality of the data that informs it.

    I do not know the assumptions that underlie the rate of the nation’s GDP growth, of 20%. However, according to Barrie’s report, the projection is based on expected mineral export of 20 million tons export that was initially made by Frank Timis’s African Minerals Ltd, now SISG. The fact that African Minerals revised that forecast twice (from the original 20 million tons to 10 million, and later to 5 and 6 million tons for the year) did not dampen this government’s penchant for relying on GDP projection that was, and still obviously is based on unreliable data.

    Thus, the decision to continue with this Mamamah project, against all odds is not based on any serious economic thinking and logic, but other considerations – solely on political calculations.

    The most viable way forward for Sierra Leone in my opinion, is to diversify the economy with other means of production, and wealth generation such as development of the human resource base of the country that we can use to launch 21st century industries, that can be innovative, and create quality jobs in education, technology, healthcare, as well as technology, as companies such as Google, Facebook, Microsoft and others are in dire need of qualified technology experts. They are now hiring experts from Nigeria, Kenya, and others places in Africa. There is nothing that will stop them from hiring from Sierra Leone if our universities can produce the type of graduates they are looking for.

    This is not rocket science, but common sense and being honest as well as forthright with the Sierra Leonean people.

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