Foreign Direct Investment in the Mining Industry in Burkina Faso - Essay Example

Foreign direct investment in the mining industry in Burkina Faso of the of the Number Introduction The Government of Burkina Faso wishes to catch the attention of foreign direct investors in order to attract more foreign direct investment and has been implementing strategies over the past few years. Despite the fact that the country is currently ranked 151 out of 183 according to the ‘Doing Business 2011’ report published by the World bank, Burkina Faso was cited as one of ten economies take took the largest stride towards making their regulatory environment more constructive for conducting business and henceforth the country was ranked fourth for among countries who narrowed the distance to frontier between 2005 to 2011. Later in 2013 the country was ranked 153 out of 185 in according to the ‘Doing Business 2013’ report (US Department of State, “2011 Investment Climate Statement - Burkina Faso”; Ficci, “Burkina Faso”; US Department of State, “2013 Investment Climate Statement - Burkina Faso”). Openness to Foreign Investment The government of Burkina Faso revised its investment code in the year 2010 that demonstrates the government’s interest in attracting Foreign Direct Investment in order to be able to develop industries producing goods that can be exported. In addition to that such industries would also provide adequate training and jobs for the domestic workforce. The code also provides standardized guarantees to all the firms which are legally established, whether domestic or foreign, that are operating in Burkina Faso. The code constitutes of four different investment and operations preference scheme which are evenly valid to all mergers and acquisitions as well as Greenfield investments. Exhibiting its new status as a significantly large mining industry, the Government of Burkina Faso is revising the mining code stipulated in 2003 in order to better capitalize in the mineral resources generated from the industry as well as to create a suitable climate for the mining industry. The announcements for privatization bids made by the country’s government are extensively distributed targeting both domestic and foreign investors. The bids announcements are published in the regional and local newspapers, international magazines, e-mailed to interested investors based in foreign countries, mailed to diplomatic missions and are also hosted over the internet (US Department of State, “2012 Investment Climate Statement - Burkina Faso”). The strategies implemented by the government of Burkina Faso have proven to be highly successful in grabbing the attention of foreign investors. The investment code was revised in order to strengthen the business environment that exists in the country. The policy has brought about important reforms in the procedures of import and export, ease of conducting business, starting new business, issuance of business licenses, trading across countries, payment of taxes, registering properties, enforcing contracts and so on and so forth (Embassy of Burkina Faso in the US, “Trade and Investment”). Under the revised investment code, all legal and personal entities established in the country whether domestic or international are entitled to fixed property, concessions, access to permits, administrative authorizations, industrial and forest rights, contribution in state contracts (US Department of State, “2013 Investment Climate Statement - Burkina Faso”). Because of this revision in the investment codes there has been a gradual increase in FDI inflows in the mining industry. The FID inflows have had a significant impact in both the mining industry as well as in the economy of Burkina Faso as a whole. Alongside generating local value addition, the gradual increase in the amount of FDI inflows has generated numerous employment opportunities in the formal sector. The preliminary draft of the mining code was prepared in order to bring clarity, correct existing flaws and define obligations imposed on the mining operators distinctively. The mining code has been revised in order to ensure the validity of the preliminary conventions of mining. These strategies have led to a sharp increase in the FDI inflows in the mining sector of Burkina Faso. Consequently, the government has been able to bring about several developments in the country’s infrastructure and at the same time has been able to reduce the rate unemployment to a certain extent. The strategies were also aimed towards minimizing the level of poverty which has been a growing concern for the country over the last decade. In order to make the regulatory environment more constructive that promotes business and further investments, the government established the Presidential Council for Investment in the year 2008. The council is an advisory body that is governed by the head of state whose major responsibility is to make recommendations on the formulation and implementation of regulations/policies that stimulate business investments and henceforth economic growth. Flexible regulations were stated in order to encourage foreign as well as domestic investors to extend their presence in the mining industry in Burkina Faso. The government established eight enterprise registration centers which were called Centres de Formalités des Entreprises (CEFOREs) in order to simplify the process of registration for companies who wish to establish their presence in the country. The CEFOREs served as a hub that deals with company registration. The overall registration process for a business which took a considerable amount of time before was brought down to only 13 days through the establishment of the CEFOREs. Only 3 steps had to be followed while registering a company which is quite easy considering the fact that a business registration process can often become very complicated. The centre for Construction Facilitation (CEFAC) was established by the government of Burkina Faso in order to enhance the permit issuance process for construction oriented works. Due to the establishment of CEFAC, companies are able to process all their paperwork related to construction permits from a single office. On an average, the process requires a bit more than 3 months and close to 12 procedures. This made the work for mining operators relatively easier when applying for construction permit for constructing mines (US Department of State, “2013 Investment Climate Statement - Burkina Faso”). Foreign Direct Investment in the Mining Industry in Burkina Faso Proposition Burkina Faso is a landlocked sub-Saharan country located in the middle of West Africa. Its population is estimated at more than sixteen million people. Burkina Faso experiences limited rainfall and their natural resources are minimal and therefore it is referred to as one of the poorest countries in Africa. Poor farming activities and the existing drought have ruined the environment resulting in decrease of food stuff. The main export product for Burkina Faso is cotton accounting for about 60% of the country’s total exports, or 5% of GDP. Gold mining also plays a significant role in Burkina Faso economy. Burkina Faso has become Africa 4th biggest producer of gold in 2012. Foreign Direct investment is the acquisition of ownership of assets by a foreign country in another country with the intention of having direct control over manufacture, distribution, and sales of a firm in the host country. Foreign investment basically means the gap in a country’s requirement for investment and its savings rate. The host country for FDI stands to benefit in a number of ways in terms of capital formation, export diversification, technology import, management system improvement, and enhanced market competition, infrastructure development to support economic activity, financial sector growth, and markets development . FDI is a powerful engine in helping to achieve country objectives such as those about poverty reduction, development, and international integration and it is perceived to be an international investment route that most developed economies have embraced. Low income countries in Africa, for example, have not taken this advantage and are thus being excluded from the globalization benefits of FDI. This research paper seeks to support the thesis that encouraging and attracting foreign direct investment in the mining industry of Burkina Faso is a good bet for boosting its economic growth, just like other emerging markets in Africa have benefited. Evidence Foreign direct investment, net inflows (in US $) 2006 2007 2008 2009 2010 2011 2012 83,774,773 21,683,122 33,056,780 56,426,882 38,832,813 42,302,264 40,091,169 (World Bank, “Foreign direct investment, net inflows (BoP, current US$)”) Burkina Faso has limited resources and is highly prone to external vulnerabilities because its economy is heavily reliant on imports rather than exports, despite the country entering into intraregional trade liberalization agreements. Burkina Faso has embraced a number of FDI projects including those undertaken by the French, British, and certain private companies. An article by ‘The Economist’ in 2012 titled foreign direct investment stated that global inflows of FDI rose by about 17% to hit $1.5 trillion with developing economies accounting for at least half of this. The article noted that FDI inflows into Africa were on the decline in 2011 with largest decline recorded from Egypt, Tunisia, and Libya. For the developed economies, FDI growth was mainly attributed to mergers and acquisitions across border. This paper shall illustrate evidence in connection with the above thesis using examples from the Chinese, Indian, and Malaysian economies and their FDI experiences. China is the largest recipient of foreign direct investment among developing countries. An article by the Dow Jones in 2011 on India’s Foreign Investment Approach in Retail Industry stated that India holds great potential for the retail market. Foreign single brand retailers are allowed to make up to 51% direct investment in India but there are considerations to open it up to 100% and encourage such investments to decentralized locations in the country (Jones 15). FDI growth particularly through mergers and acquisitions has benefited China in terms of the good outcome of large current account surpluses (“Role Reversal & foreign Direct Investment”). A country that acquires renowned and established companies through FDI gets the advantage of introducing already marketed brands in its markets as opposed to nurturing its own brands that could take many years and substantial financial input. FDI from countries whose economies are developed is usually cheaper and provides a reliable source of financing. With a deep industry economy from various FDI projects, countries such as India and China have benefited from a growing workforce hence minimizing the problem of unemployment. China, for example, has gained a speedier access to emerging markets like India through the merger and acquisition strategy and is Jaguar Landover Range (JLR’s) fastest growing market where it manufactures the parts and ships them to India for assembly. This makes the cars in India cheaper because minimal import duty is imposed and creates job opportunities for the Indian economy (The economist, 2011). China’s successful FDI performance which has boosted capital and technology gains has been attributed to a number of policy and institutional factors such as relaxation of FDI controls entailing removal of sector and geographic bottlenecks regarding FDI projects, import substitution and excess investment demand. To explain China’s FDI success and use that information to recommend appropriate FDI approaches to other countries such as Burkina Faso, there would be need for a wider look at other areas not just government policy. Such areas may include but not limited to assessment of the level of country’s economic development, available country resources and institutional structure. India receives FDI estimated at about 5% of GDP. Some of the reasons that have been given for India’s below par performance in attracting FDI include uncertainties brought about by the September 11 attacks, global economic downturn, and lack of trade liberalization to open up ceilings and restrictions on level of foreign investments, and failure by the government to undertake comprehensive privatization program. India also has not improved the environment for doing business by foreign investors in the country, with a range of requirements which when fulfilled are still filtered on a case by case basis. Burkina Faso should take these experiences from India seriously, evaluate them and decide on how to improve. FDI in the mining industry in Burkina Faso The government of Burkina Faso had been able to attract very few foreign investors, a majority of which was through privatization. These investments were by and large of smaller size and were directed towards the production of services and goods for the domestic market. Despite the limited size, the FDI inflows had a significantly positive impact, in as much as they have generated employment in the formal sector and added value to the country. Presently the mining sector has witnessed an unprecedented increase in the level of FDI inflows. At the beginning the inflows were directed towards prospection and exploration and more recently it has been directed towards exploitation. This development exemplifies two things, one of which is the strength of the prospect for investment in the mining sector in the country. The other factor illustrated by the development is the formulation of a favorable regulatory framework. Regardless of the rapid increase in the FDI inflows as a result of the investments in the mining sector, the foreign investments have been very limited in all the other sectors. Burkina Faso continues to face steep structural challenges and constraints (Tekin 868-878). The production capabilities of the mining sector are restricted because of the weaknesses present in terms of infrastructure (electricity, transport, water and sanitation) and human capital. The government of the country incurs huge costs as far as conducting international trade operations are concerned particularly because of its landlocked situation. Despite these barriers, the country has the potential to attract foreign direct investment in order to diversify the operations performed within the mining industry so that the sector can have a significant contribution towards the overall economic development of the country thereby helping in the reduction of poverty. In order to be able to achieve such an outcome, enormous effort would be require at several level. On the one hand, it is very crucial that the government intensifies the efforts in order to increase the level of training and education among the population (Rothgeb 21-43). The Government of Burkina Faso should also join hands with the international community to develop the physical infrastructure of the mining sector that includes facilitating private and public partnerships whenever possible. This will lead to a significant development of the mining industry which there will enable the country to attract even more foreign direct investment towards this particular sector. On the other hand, it is apparent that Burkina Faso’s potential to attract foreign investors is restricted because of the small size of the domestic market and its landlocked position which proves to be a big hindrance in the export business. It is thus very important that the country seeks the help of the West African Economic and Monetary Union and the Economic Community of West African States. The government needs to make sure that they integrate with these authorities and intensify the relation in order to facilitate smooth flow of international business operations. The potential for growth of the FDI inflows in the mining sector has been moderately tapped in Burkina Faso. However, improvements can still be made within the sector in order for the country to be able to attract larger inflows as a result of FDI and henceforth maximize the impact on development. The enhancements in the regulatory framework over the past few years as well as the drastic increase in foreign investments in prospection, exploration and exploitation illustrates that the improvements in the regulatory framework can have a profound impact as well as rapid effects on activities that are conducted in sectors that have genuine business potential. The same is true for the mining industry which has been witnessing rapid developments over the past few years. Without anticipating this business to create opportunities where very little prospect prevails, reforms should be made in the legal framework for foreign investment in Burkina Faso in order to encourage the development of a more vibrant and flourishing private sector, that will be supported as well as sustained by a more diversified foreign investment inflows (Nations Unies, “Investment Policy Review Burkina Faso Main conclusions and recommendations”). Burkina Faso has implemented a de facto policy that demonstrates entire openness to FDI for more than a decade. However, the legal basis has been formulated in a way that it allows the Government to put arbitrary barriers to foreign direct investment. In addition to that, certain factors of the investment code needs to be improved in order to facilitate smooth inflows of foreign investment especially in the mining industry which is a very prospective industry in the country. The modifications envisaged by the government to the code for investment should serve as an opportunity for the country to better establish the legal foundations of the policy that would actually exhibit openness to FDI thereby providing certainty to foreign investors in the long run. The main modifications that need to be done as far as the FDI in the mining industry is concerned are: To do away with the procedure of previous authorization to the investment and swap it with a simple declaration. The use of any investment would remain provisional upon obtaining certain licenses which would depend upon the assessment of the environmental impact of mining. The foreign trader’s card as well as the minimum capital requirement for foreign investors needs to be removed. This will attract a greater number of foreign investors. The Burkina Faso government needs to define the entry restrictions of sectoral FDI. The probable restrictions should be distinctly and precisely defined and should be reasonably limited. The provisions of the code for investment regarding the right to transfer funds, compensation against nationalization and expropriation as well as investor-state dispute resolution mechanism must be strengthened. Nature of mining industry in Burkina Faso Burkina Faso has been emerging as one of the most favorable mining destinations in the continent of Africa. Although GDP figures of less than US$10 million in the year 2011 categorizes the country as being one of the poorer countries of Africa, the Fraser Institute’s mining index for the year 2011/2012 ranks the country as the third most favorable mining destinations in Africa following Botswana and Ghana. Burkina Faso has become one of the largest producers of gold over the years. The economy has witnessed companies such as Blackthorn Resources Ltd and Perkoa zinc are prospecting for full production of gold and zinc respectively. The country is also known for the significant amount of manganese deposits and thus there are number of mines which deals with the extraction of manganese and it is expected that there will be a sharp increase in the production of Manganese in Tombao within the next two years or so. The rating given by Fraser Institute can be attributed to the massive influx of international mining companies in this landlocked country. The significant prospects of the mining industry in Burkina Faso appeared to have increased the appetite of international mining companies to come and explore mining opportunities in the country. With the increasing in mining activities in the western countries, the virtually unexplored areas in less developed areas recombines more tempting and compelling for foreign investors. This is evident from the giant waves of mining companies who have ushered into Burkina Faso and at the moment there are close to 20 mining companies listed in the Australian Stock exchange who are exploring the region actively (Mining Journal, “Burkina Faso”). SWOT analysis of mining industry in Burkina Faso Strengths The government of Burkina Faso has enhanced the regulatory environment significantly in order to encourage business and investments in the mining sector. The regulations stated for foreign investments are very flexible which has influenced many foreign investors to come and explore the mining regions of the country. This has led to a gradual increase of FDI inflows in the country over the years. Large deposits of gold zinc and manganese have also compelled many corporations to expand their operations in the mining sector of Burkina Faso. In addition, given the fact that it is a relatively poor country, labor is very cheap. Weaknesses Relatively poorer infrastructure facilities which proves to be a huge barrier in the mining operations. Low capabilities of innovation and thus relatively lesser growth prospect. Labor force is considerably inexperienced and unskilled leading to minor mistakes and sometimes fatal accidents. Lack of training and development facilities. Inadequate R&D facilities. Opportunities Potential field for mining exploration ventures include gold, lead, copper, diamond, molybdenum, nickel, cobalt, zinc, silver, platinum, chromites and manganese ore, other rare metals and fertiliser minerals. The major opportunities that lie in the mining sector of Burkina Faso are in the production and development of surplus commodities like mica, bauxite and iron ore, small gold deposits, base metals, and potash. Prospective exist that can support the establishment of manufacturing units for producing value added products. Opportunities exist for the discovery of sub0surface deposits. Opportunities for the application of modern technology in the field of mining. Threats Political crises as a result of union strikes called by miners working in different mines based throughout the country, due to inadequate work facilities provided to them by the government. Higher level officials benefit from the hard work done by the underground miners. Strikes have often resulted in violent clashes between workers and police. Such occurrences deteriorate the financial performance of mining companies. Consequently, the economy of Burkina Faso is negatively affected. The mining industry prospects Len Brownlie, the president and chief executive officer of Goldrush Resources, a Vancouver based junior gold mining company stated that, “Burkina Faso is one of the best places to be.” The country has been able to achieve a rapid growth rate and is one of the best areas suitable for profit as well as development. Close to 60 mining companies are working in the country out of which there are 20 Canadian firms. The president of the company said that, despite the fact that the country is relatively poor, but it has an incredibly stable government with a well formulated mining code. The code is very transparent and is compliant with the transparency initiative of extractive industries that is associative with declaring payments and disclosing sales. In addition to that, majority of the conflicts that erupt is resolved peacefully that makes it easier for the foreign direct investors to conduct their business. The government officials understand the benefits associated with intelligent mining and the country is quite accessible as far as mining is concerned. The landscape is very appropriate for mining as it has no jungles and few mountains. Moreover, the flat Sub-Saharan desert is very easy to explore. The president also added that the country is geologically a marvelous place precisely because it is covered in birmian greenstones that are similar to the Archaean Shield. Burkina Faso witnessed numerous modern explorations in the 90s when a number of deposits were found. In the year 2012, nearly 30 tons of gold were exported from the country (Hall, “Burkina Faso is a good place for gold mining: Goldrush Resources”). These facts stated by the president of Goldrush Resources explains the prospects of the country’s mining industry and also justifies the facts regarding the country’s potential greater amount of foreign direct investment. Burkina Faso Mining Industry: Statistics In the year 2007, High River Gold Mines Ltd (HRG), a Canada based company, that has significant proportion of U.S investments, opened the first commercial gold mine in Burkina Faso. The company’s upcoming project is to develop the Bissa gold mine that is situated in the Burkinabe province of bam. This project also involves the processing of gold from nearby Bouroum. It has been estimated that these two gold mines have an approximately combines reserve of 8.8 million tons of ore, that averages about 2.99 grams per ore. The gold production from these two sites has been estimated to be 3.5 tones every year. The country expects the new gold mines to attract close to 260 million USD in new investments. Burkina Faso publicized three more mines that are slated for development within the next two years and it will start to welcome bids very soon for the reopening of the Poura Gold mine. This gold mine situated in the southern province of Mouhoun was opened in the year 1950 but was later closed down due to falling prices of gold. During its closure, it was approximated that this gold mine contains close to 450,000 tons of ore at a grade of 12 grams of ore per ton. The country is home to one of the highest grade deposits of manganese in the world situated near Tombao which is in the northern province of Oudalan. Recent studies conducted by the Coronation International Mining, which is mineral consulting group based in the city of Johannesburg identified a reserve of 4.6 million tons at 56.8 percent manganese. There is a heavy concentration of Australian mining companies in the country. Aim resources, which is again a mining company based in Australia has been developing the deposit of Perkoa Zinc in the Sanguin province. The company asserts that this place has the richest deposit of Zinc compared to any other place in the world with Zinc deposit. However, progress on the company has been stalled off late because of falling prices of Zinc all over the world. Burkina Manganese, a company with significant amount of investments from U. S, has opened Kiere mine in December 2008. According to estimates done by analysts the mine holds a reserve of about 600,000 tones of manganese at grades of 44 to 45 percent. These facts highlight the significant economic improvements in Burkina Faso that was possible as a result of foreign direct investments in the mining industry (International Business publication staff 140; International Business publication staff 212). Putting in place an integrated framework Even though Burkina Faso’s code of investments within the mining sector has been well formulated, still there is room for modifications. The government, in order to attract greater foreign investments can put in place an integrated framework in order to generate an increase in the FDI inflows particularly in the mining sector. Alongside that, the government should also formulate a proactive investment promotion policy in order to encourage more number of foreign investors to come and invest in the mining industry. The county is absolutely aware about this dual need to bring about reforms in the investment promotion and investment climate and thus they are determined to modify the integrated institutional framework. After the framework is modified it will then be articulated around the investment promotion agency as well as the Presidential council for investment. The primary responsibility of the investment promotion agency is to promote and facilitate investment in the mining sector while the role of the Presidential council for investment is to bring about improvements in the in the investment climate in the mining industry and henceforth formulate FDI attraction strategies. The two newly formed entities should work in close coordination and cooperation and integrate themselves with the already existing institutional framework. As far as the operational perspective is concerned, it is advisable that the investment promotion agency unites and coordinates the efforts with all the agents who are involved in the promotion of FDI in the mining industry in Burkina Faso. Conclusion The government of Burkina Faso should start thinking about the possible ways to optimize the impact of FDI on the development of the overall economy as well as reducing the rate of poverty. Adopting such a step is particularly very crucial with respect to the investment that has been made in the mining industry, which has recently become sizeable. The potential for development of the mining industry in Burkina Faso is huge. Thus, it is the right time for the government to revise its investment codes for FDI besides improving the regulatory framework as well as framing policies related to proactive investment promotion. Additionally, the government needs to identify the prospects of infrastructure development that the outgrowth of a recently sizeable mining sector could elevate. The financial and economic viability of certain infrastructure oriented projects could be ensured by the development of certain mines and as a result public-private partnerships could be witnessed in the future. By doing so, the government will be able to bring about rapid developments in the mining industry and thereafter can influence more number of foreign investors into investing in the mining industry within the Burkina Faso. Works Cited “Role Reversal & foreign Direct Investment”. The Economist. The Economist, 2011. Web. 15 Feb. 2014. Embassy of Burkina Faso in the US. “Trade and Investment.” Burkina-USA, Burkina Faso Embassy in the United States of America, 2014. Web. 24 March 2014. Ficci. “Burkina Faso.” Ficci, Ficci, no date. Web. 13 February 2014. Gall, Kerry. “Burkina Faso is a good place for gold mining: Goldrush Resources.” Mining, Mining, 21 June. 2013. Web. 13 February 2014. International business publication staff. Burkina Faso Mineral & Mining Sector Investment and Business Guide. Wahington DC: USA International Business Publications, 2007. Print. International business publication staff. Burkina Faso Mining Laws and Regulations Handbook. Washington DC: USA International Business Publications, 2008. Print. Jones, Down. Factiva: Dow Jones Breaks News on Malaysias Investment Goal. Dow Jones & Company, 2011. Print. Mining Journal. “Burkina Faso.” Mining-Journal, Mining Journal, November. 2012. Web. 24 March 2014. Nations Unies. “Investment Policy Review Burkina Faso Main conclusions and recommendations.” Unctad, Nations Unies, 2009. Web. 13 February 2014. Rothgeb, John M. Direct foreign investment in mining and manufacturing in underdeveloped states. The Social Science Journal 25.1 (1988): 21-43. Print. Tekin, Rifat Baris. E-mail the corresponding authorEconomic growth, exports and foreign direct investment in Least Developed Countries: A panel Granger causality analysis. Economic Modelling 29.3 (2012): 868-878. Print. US Department of State. “2011 Investment Climate Statement - Burkina Faso.” US Department of State, Bureau of Public Affairs, March. 2011. Web. 13 February 2014. US Department of State. “2012 Investment Climate Statement - Burkina Faso.” US Department of State, Bureau of Public Affairs, June. 2012. Web. 13 February 2014. US Department of State. “2013 Investment Climate Statement - Burkina Faso.” US Department of State, Bureau of Public Affairs, April. 2013. Web. 24 March 2014. World Bank. “Foreign direct investment, net inflows (BoP, current US$).” World Bank, The World Bank Group, 2014. Web. 24 March 2014. Read More