Sierra Leone Telegraph: 28 October 2016
The proposed 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 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.
In this second part of his article, Saad Barrie takes a look at some of the key factors and players that are driving what many regard as China’s Trojan horse in Africa – the proposed Mamamah Airport, which in the longterm will become another huge financial burden for the poor people of Sierra Leone – but with little social and economic benefit.
Sierra Leone is currently facing serious economic and financial meltdown. The government cannot afford to pay workers’ salaries, as well as its running costs. Senior government officials have been told to tighten their belts – “the Koroma austerity” they call it.
Aid agencies this week reported that over half the population of Sierra Leone are at risk of serious food shortage, in a country where average daily earnings is less than $1.50; and more than 60% of the population cannot afford three-square meal a day.
The recession is beginning to bite very hard. The government’s subsidy on fuel cost and other essentials are being removed. The future is bleak. The government has run out of cash, and is looking to the IMF and World Bank for another bailout.
But, with a single track economy that is heavily dependent on iron ore export revenue to balance its books, the government is being accused of bad management and incompetence.
With falling iron ore prices and a gloomy global economic forecast, should the people of Sierra Leone be expected to shoulder a $400 million loan that has little relevance to the development of the country’s human capital, health, education, poor housing and sanitation, water and electricity access?
This is Saad Barrie’s analysis:
Iron ore mining contributed about 86% of mining revenues and 24% of Sierra Leone’s GDP in 2013. GDP contracted by more than 21% in 2015 after a modest 6% growth in 2014, due to the twin effects of the EVD outbreak in 2014/2015 and the closure of the iron ore mines.
The crisis was preceded by impressive growth rates of 15.2% and 20.2% in 2012 and 2013 respectively.
Since the Ebola outbreak and the export of iron ore stopped, the Leones (the local currency) has depreciated by nearly 50%. As at December 2014, non-performing loans in the banking system was 34% and rising (against an industry target of 10%).
The country’s Post-Ebola Recovery Strategy (now “President’s Recovery Priorities”) predicted a risk of economic woes if iron ore export did not resume: “There is a significant risk that unfunded budget shortfalls could develop through the year , particularly if significant iron ore production fails to materialize, leading to pressure on suppliers and the domestic financial sector…. Further capital flight due to perceptions of an ailing banking sector could add to depreciation pressures on the currency, adding to macroeconomic instability and thwarting the recovery efforts.”
So far, SISG has been reluctant to resume full operations since taking over the mines – because doing so is not ‘economical’.
This means that Sierra Leone is not receiving the much needed revenue and foreign currency from the Tonkolili Project to finance post-Ebola recovery and stem the depreciation of the local currency.
It seems SISG is in no hurry. The off-take agreement with AML allows SISG to buy up to 30% of the ore extracted from the mines.
The agreement initially contained a “warranty” clause that imposed a penalty on AML for failure to, among other things, supply SISG with the agreed volume of ore on schedule.
Production shortfalls in 2011 and 2012 led to “warranty breach” that cost AML US$51m and US$46m respectively, payable in ore, to SISG.
Subsequently, AML and SISG reviewed the “Warranty clause” making it dependent largely on the existing production capacity at the mines and the constraints on the rollout of infrastructure expansion plans.
As a “captive producer” (a buyer owned mine), it now means that even if purchase of Tonkolili’s ore by SISG is done on an “arms length” basis the seller (SISG) suffers little or no penalty for supply delays and production shortfalls.
But the government does not have the luxury of time, as crucial multi-tier polls approach, which has left it floundering for a stop-gap measure until the mining sector recovers. (Photo: Sierra Leone’s foreign minister Samura Kamara is leading the government’s push for a new airport).
The legislative too, has had to contribute to the effort to get the mines operational again. In early May 2016 the Parliamentary Committee on Mines and Minerals Resources summoned the executives of the leading mining companies to a meeting “with the view of the urgent recommencement [of operations] of the iron ore mines”.
To hear the mining magnates lament the current global commodities market slump gives one the impression the bust had been unexpected. Not so.
Market analyst had predicted since 2010 that the price of iron ore will reach its peak above US$140/ton in 2012 – 2014 (in response to global demand for steel) and fall to its 2004/2005 trend (around US$50/ton) before 2020.
In fact, projections of future fall in price of ore was the basis on which tax concessions were granted to the iron ore mining companies in Sierra Leone to help them accelerate mining and transport infrastructure development, achieve competitive cost advantage and positive cash flow before the market readjusts to its historic lower trend.
SISG’s excuses for its failure to rollout investment in infrastructure development for the Tonkolili mines do not add up.
It cannot claim to be suffering a “buyer’s remorse”. As a key player in the project prior to its hostile takeover it knows the full potentials of the Tonkolili mines as much as it does the challenges facing it.
Also, as a major global steel producer it must have known the long term direction of global demand for steel and its attendant effect on iron ore prices.
AML too has a lot to be blamed for the current state of the Tonkolili Project. A few months after the SISG takeover of Tonkolili, a mining analyst at SP Angel in London interviewed by Bloomberg Business was quoted as saying: “[AML investors have] been sold out by Timis [AML Chairman]. With iron-ore prices where they are, it [Tonkolili] ought to still be running. Timis’s mismanagement has allowed Shandong to take possession of the assets, leaving investors with little hope of compensation.” (Photo: President Koroma and Frank Timis). Frank Timis, who is no stranger to controversies, has vehemently denied this and other similar charges against him.
The “other” justification for Mamamah
The government of Sierra Leone and supporters of the Mamamah project have stated the case for a new airport ubiquitously on the pretext of “eliminating the logistical hurdles” to international travel and tourism development in the country.
But that is not all there is to the Mamamah story.
AML’s stated goal for the Tonkolili Project was to develop the mines into a reliable global supplier of iron ore.
The strength of the Project was in the higher quality of its ore (said to be as good as Australia’s best), huge mineral reserves and the competitive advantage from producing at low costs.
To achieve its cost target, AML had planned to build an integrated mine-to-port infrastructure, which when completed in Phase 3, would have enabled the company transport 45 million tonnes of ore per annum (mtpa) out of Pepel and the proposed Tagrin ports. The port at Pepel has a limited capacity of about 8 – 12mtpa.
Also, the estuary leading to the Pepel port is too shallow for navigation by larger ships thus the need for the port at Tagrin.
At full production and export capacity (about 200mtpa), it is estimated that the iron ore reserves in Tonkolili has a mining lifespan of about 65 years. Without a larger port (like the one proposed for Tagrin), the operations of the mine will be sub-optimal and annual royalties paid to the State will continue to remain low, due to the lower volume of export.
Conversely, if the construction of the rail and port were to start today, it would be unfeasible to continue regular ferry service to Tagrin from Freetown – not to speak of when the port becomes fully operational.
Between the port and the ferry service, one has to give way to the other. Or, why not relocate the airport away from the Tonkolili Project? This is the road that the current administration seems to prefer.
Whatever the choice made by President Koroma or his successor the outcome will be consequential (politically, economically, socially and its environmental impacts).
Read Saad’s final installment to be published this weekend, exclusively in the Sierra Leone Telegraph.