Sierra Leone Telegraph: 27 October 2016
The government of Sierra Leone is determined to build a new international airport in the north of the country, financed by a whopping $400 million loan from China. Opposition to this policy decision is strong, including the Word Bank who says that the government simply cannot afford to commit the nation to further debt, with an uncertain economic outlook.
After fifty-five years of gaining independence from British colonial rule, and in spite of huge natural resource revenue potential of over $2 billion a year – with a population of just over six million people, Sierra Leone is rated as one of the poorest nations in the world.
Less than half the country’s adult population would live to see their 51st birthday; it’s health service is a death trap, because of the lack of trained doctors, poorly equipped hospitals, and poor access to medicines; education is sub-standard, compared to other countries in Africa; fewer than 30% of the population have access to electricity and clean drinking water.
Sierra Leone is one of the most dangerous countries for a woman to give birth, with a survival rate of less than 80%. Survival rate for newly born children is even more appalling – with more than 30% unlikely to see their 5th birthday.
Unemployment in Sierra Leone is disturbingly high. Over 70% of the economically active population are out of work, and more than 60% of youths unlikely to have ever worked. Less than 30% of the population can read and write.
The country’s economy has seen its fair share of bad political management, civil war and health epidemic – Ebola. The economy is struggling to survive due to lack of investments and competition from neighbouring countries in attracting foreign investors.
Sierra Leone is massively dependent on foreign aid and debt to make up its annual budget deficit. The country cannot feed itself. Millions of dollars are spent every month on importing its staple food – rice, which it can, not only grow on its doorstep for domestic consumption, but has the potential to feed the rest of West Africa.
President Koroma and senior ministers believe that to fix Sierra Leone’s economic and social problems, there is the urgent need for a new international airport costing $400 million – a decision that most analysts and the World Bank say is seriously misguided. The country simply cannot afford it, nor is the need real.
But what is the real story behind this airport project?
The country’s existing airport -the Lungi International Airport, has the capacity to receive thousands of passengers a day, but daily passenger arrivals is less than 200.
The airport which is now being partly managed by a British company, has received millions of dollars from the World Bank to pay for expansion, upgrading of the runway and facilities to bring it up to international standards. Still, passenger numbers are struggling to rise.
At a cost of $400 million, and with the competing priorities facing the government – health, access to clean water, provision of electricity, education, housing, road renewals and improvement, waste management and sanitation – why is the Koroma government determined to secure a loan package from China to pay Chinese workers to build a new international airport that will be managed by the Chinese for a fee?
Writing in a three part series of articles for the Sierra Leone Telegraph, Saad Barrie discusses the pros and cons of building a new airport, as well as the political and economic factors that are driving this decision. This is part one of Saad Barrie’s analysis:
The Mamamah Airport and New City is the flagship infrastructure project in Sierra Leone’s current medium term development plan, the Agenda for Prosperity. The indicative cost of the Mamamah Project is US$481 million. The airport alone is estimated to cost at least US$300 million (about 6% of GDP in 2014).
The 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.
Many Sierra Leoneans believe the country does not need a second airport. Not with the perennially low number of flights in and out of the country; total arrivals by air is less than one hundred thousand yearly at its peak.
The International Monetary Fund (IMF) and the World Bank, the country’s main economic advisers and lenders, have weighed in on the debate, saying “now is not the time for a new airport” and that the government “has misplaced priorities” – or words to that effect. The country’s economy has been in dire straits since mid-2014.
Some of the critics of Mamamah are more concerned about the government’s future plans for the Lungi International Airport than they are of the huge cost, method of financing, or the location of a new airport. Among these are mostly indigenes of Lokomasama and Kafu Bullom, the two chiefdoms that host the Lungi Airport.
Abandoning Lungi or placing it in the ‘wrong hands’, some say, has serious implications for the country’s security. A report in South Africa’s Daily Maverick in June 2016 alleged that the Chinese government “have their eye on the Lungi site for a military base” for an increasingly adventurous PLA Navy (PLAN).
Incidentally, a Chinese state-owned enterprise (SOE) now has control over the Tonkolili Iron Ore Project and its Transport Corridor. The Corridor stretches across three districts, about 240 Km long and includes the rail, the port at Pepel and a significant portion of land surrounding the Tagrin ferry terminal which has been earmarked as the site for a new deep sea port.
On Thursday September 29, the recently recalled Ambassador Zhao Yanbo visited President Koroma at State House to bid him farewell. In his parting words to the Chinese diplomat the President said “it’s unfortunate that you will not be here for the commissioning of the Mamamah Airport which will commence soon”.
This begs the following questions: Why has Mamamah become the focal issue in Chino–Sierra Leone relations? Is Mamamah a Trojan Horse from Beijing as the South African online paper seems to suggest? Who should pay the cost of constructing the Mamamah Airport?
Shandong Iron and Steel Group takeover of AML’s Tonkolili Project
The construction of the Mamamah Airport is crucial to the long term operational plans for the Tonkolili Iron Ore Project. No surprise therefore that it has featured prominently in bilateral engagements between the governments of Sierra Leone and China since the Chinese takeover of the Project a little over a year ago.
During the Ebola (EVD) outbreak of 2014 in Sierra Leone the country’s mining sector fell into deep crisis. The Iron ore miner London Mining (SL) Ltd suddenly went under administration.
Mining operations at the world renowned Tonkolili Project were paralysed by a rancorous power struggle between its two leading shareholders, the Shandong Iron and Steel Group (SISG) and the Bermuda registered African Minerals Limited (AML).
The government of Sierra Leone refused outright to get directly involved in the negotiations between AML and SISG. According to Alpha Kanu, the minister of information at the time and a former minister of mines and mineral resources, the government viewed the impasse as an internal corporate dispute between two sets of shareholders.
The Shandong Group was a minority shareholder in two of AML’s Sierra Leonean subsidiaries. SISG paid AML US$1.5 billion for a 25% stake respectively in the Tonkolili Iron Ore Project (SL) Limited (“Tonkolili”) and the African Rail and Port Services (SL) Limited (“ARPS” or “Tagrin”). AML held 75% control in each of the two subsidiaries.
SISG is wholly owned and controlled by the provincial government of Shandong in China. The Chinese company is among the top twenty steel producers in the world.
Another Chinese SOE, China Railway Materials (CRM), was a major shareholder in AML (Bermuda) and for a sizable fee acted as the principal marketing agent in China (and Hong Kong) for the Tonkolili Project.
The Tonkolili Project was the AML Group’s biggest earner and the two projects in Sierra Leone were the largest and most prestigious of its global operations.
Since AML obtained a mining license in Sierra Leone in 2010 major Western investment banks like Goldman Sachs, Citi, Credit Suisse and Deutscher Bank have been either significant shareholders (with at least one million shares) or brokers for the Group at one time or another.
But it was the Chinese SOEs that had been the main source of both capital and revenue for AML’s operations in Sierra Leone.
As well as being a minority shareholder at the operational level, SISG was also the most important customer with a 20 year off-take purchase agreement with AML. CRM had an off-take agreement with AML on similar terms as SISG’s, though for a lower quantity of ore.
Sales of iron ore to SISG accounted for about 53% of AML’s total revenue in 2013, its last full year of operation. Total sales to SISG and CRM accounted for 82% of iron ore sold by AML in 2013.
To show how significant SISG was to AML’s operations, in its 2013 Annual Report the Chinese company was mentioned by name 81 times, whereas African Minerals/AML 87 times and Sierra Leone/Tonkolili 52 times.
As global iron ore prices fell, Tianjin Materials and Equipment Group Corporation (Tawoo), another Chinese SOE, backed out of negotiations for a stake in AML reported to worth a total of US$990 million.
Had it gone through the deal would have given Tawoo a 10% stake (at US$390m) in the holding company and another 10%, worth about US$600m, in the Tonkolili Project.
The investment could have fast-tracked rollout of Phases 2 and 3 of infrastructure development for Tonkolili and, through a joint venture tied into the deal, would have given AML an entry point into the Chinese manufacturing sector.
According to Bloomberg Business the sharp fall in iron ore prices caused a 95% fall in the AML Group’s financial worth from about US$3 billion at its peak in 2011 to US$51 million by the time trading of its shares was halted in November 2014.
The Group had a “total debt of $766 million at the end of September, including a $400 million convertible bond, which it defaulted on in February .” About US$250 million of the AML Group’s debt was owed to SISG.
When AML faced a risk of default on its debt payment it turned to SISG to release US$102 million of restricted cash in order to help keep itself solvent.
The Chinese company refused to disburse the cash on the basis that the funds were not meant for recurrent expenditure by AML but for part financing of Phase 2 of infrastructure development linking the mines to Tagrin.
Instead, SISG acquired the debt, said to be about US$167 million, from a syndicate of AML creditors (including Standard Bank, Standard Chartered and Citi) thereby forcing the Tonkolili Project to temporarily cease its operations.
In the end the rest of the AML shareholders reluctantly agreed to a takeover by SISG. By March 2015 SISG was in full control of Tonkolili and ARPS.
Thus, SISG now controls AML’s 25 year concession granted in August 2010 to mine about 12.8 billion tonnes of iron ore reserves.
SISG also inherited from AML the 99 year exclusive lease granted to ARPS to build and operate the Tagrin port and a 240km railway connecting the mines to Pepel and the new port (see the figure below).
One might argue that the fiscally constrained government was only being pragmatic in letting the investor with the deeper pockets and a more responsible financial management regime takeover such a strategic national asset.
The government is however having a rude awakening, barely a year after the Chinese took over direct control of the mines.
Unlike the AML executives who could be easily persuaded to pay taxes in advance whenever the government needs to close a financing gap (as had been alleged by the opposition parties), the new Chinese owners of the iron ore mines are no pushovers – especially not during a crisis.
Read part two of this article in tomorrow’s edition of the Sierra Leone Telegraph.