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Prospects And Challenges Of The Mining Sector Finance Essay

Nigeria is a country that is endowed with abundant natural and human resources, but consumed with the delusion of oil wealth. Prior to the discovery of oil in the 1960s, the Nigerian economy was largely dominated by agriculture and mining. However, this is no longer the case due to the heavy dependence of the country on oil as a major foreign exchange earner, and a source of income. In the effort to diversify the Nigerian economic base, successive governments and policy makers have embarked on various policy reforms aimed at developing other sectors of the economy, with emphasis on encouraging massive foreign and local investments and participation, so as to harness their potentials and maximise returns. This piece of research critically evaluates the role of the mining sector in the Nigerian economy, and assesses the prospects and challenges of the mining sector, as a diversification option in the Nigerian economy.

1.0 INTRODUCTION

It is the objective of every government and nation to maximise the potential of resources abound within the confines of its boundary, towards achieving strong and sustainable growth and development in her economy. A sustainable economy is one that makes efficient use of resources to create wealth and employment, promote stability and competition, encourage education and technology, develop skills and reward work, as well as ensure a stable polity. One of the surest ways of achieving growth and development is through diversification. Studies have shown that having a diverse economy, that is, an economy that is based on a broad range of functioning and profitable sectors and not just one or a few, is a major driver of a sustainable economy. Thus, there is a correlation between economic diversity and sustainability [1] , and economic diversification can limit a nation’s economic volatility and enhance economic activity.

Nigeria is one of such countries that are faced with the daunting challenge of diversifying from a monotonous economy to a diversified and robust one, being a country endowed with huge reserves of hydro carbons and multibillion dollar investments in its oil and gas industry. Amongst the numerous diversification options available in Nigeria, the mining sector has been on the lips of many scholars and policymakers, as a viable option after agriculture. This is because the mining sector which is presently underdeveloped in Nigeria has great potentials of becoming a fat cash cow, if properly harnessed and given the desired impetus.

It is estimated that each of the thirty six (36) states in Nigeria, has at least one (1) of the nation’s thirty four (34) solid mineral types, spread across four hundred and fifty (450) locations, with some states having a concentration of more solid minerals than others. Amongst these numerous mineral resources are huge reserves of coal and iron, deposits of gold, tantalum, uranium, zinc and lead. However, mining only contributes a paltry 1% to the GDP [2] at the moment, which is inconsistent with the potentials of the huge mineral endowments of the nation.

In its resolve to diversify its revenue base, the Federal Government of Nigeria is pursuing measures that will culminate in significant additional revenues from the mines and steel sector of the nation’s economy. To this end, quite a number of policy reforms have been embarked upon to reposition the sector and make it attractive for both foreign and local investments, as entrenched in the 2007 Nigerian Minerals and Mining Act.

The Nigerian Minerals and Mining Act 2007, which repealed the 1999 Minerals Act, was drafted specifically to correct some policy defects that had hitherto, been seen as unfriendly for investments in the mining sector. The new Act provides for the security of tenure of mining investments, improved fiscal regime, community development agreements and independent and transparent mining cadastre office amongst others.

However, the purpose of this study is to assess the prospects and challenges of the mining sector in Nigeria, as an option towards the diversification drive of the nation’s economy away from oil. Following this section, which is the introduction, is section two, which reviews relevant literature to this study. Section three assesses the prospects of mining in Nigeria, while section four looks at the challenges and section five concludes the study.

2.0 LITERATURE REVIEW

2.1 Structure of the Nigerian Economy

An economy basically refers to any specified collection of interrelated set of marketed and non-marketed productive activities [3] . Therefore, the Nigerian economy could refer to all economic activities taking place within the geographical domain of Nigeria, or all such economic activities of Nigerian nationals wherever they are in the world. The structure of the Nigerian economy can be broadly categorized into four: production, General commerce, services and others [4] .

Nigeria has an estimated population of 145 million people and occupies an area of 356, 700 sq miles in the western part of Africa. Nigeria is greatly endowed with hydrocarbons and mineral resources, as well as vast arable land for cultivating agriculture. However, the oil sector dominates the economy, accounting for about 95% of foreign exchange earnings, 80% of annual budget revenues and 30% 0f GDP. While agriculture employs bulk of the workforce and accounts for 40% to 50% of GDP. According to the National Bureau of Statistics of Nigeria (NBS), the following are contributions of various sectors to GDP in the 3rd quarter of 2009:

Telecommunications and postal services 3.48%

Manufacturing 3.49%

Building and Construction 1.53%

Hotel and Restaurant 0.47%

Crude production and Natural gas 15.54%

Solid Minerals 0.37%

Finance and insurance 3.20%

Agriculture 45.35%

Wholesale and Retail 16.9%

Others 7.20 % [5] .

From the information provided above, we can see that the mining sector’s contribution to Nigeria’s GDP is the least compared to other sectors. However, the sustainable development of the Solid Mineral Sector has been identified as fundamental to the diversification of the nation’s economic dependence on oil and gas, and efforts are in top gear to turn this tide around.

2.2 Overview of Mining in Nigeria.

Formal mining began in 1903 and 1904 when the mineral survey of the southern and northern protectorates were implemented respectively. Prior to the discovery of oil in Nigeria, mining played an important role in the nation’s economy. Nigeria was a major exporter of coal, tin and columbite in the 1950s and 1960s and contributed a significant proportion to the GDP. At a point in time, Nigeria was the largest exporter of columbite, and the 6th largest producer of tin [6] .However, since the discovery of oil in the late 1950s, Mining activities suffered a downturn due to its neglect by the government and dependence on oil. Presently, mining contributes not more than 1% to the GDP in Nigeria. More so, the Mining industry in Nigeria is 95% dominated by small scale mining (SSM), which are largely carried out by unregulated illegal miners [7] and smugglers of precious stones that are unaccounted for.

2.3 Mining Policy and Legislation.

Mining activities are regulated by the Federal Ministry of Mines and Steel Development (MMSD) in Nigeria, which is headed by a minister, and guided by the minerals and mining act 2007. This Act repealed the 1999 Minerals and Mining Act, which was widely criticised as defective and insufficient to encourage investments in the sector. This is because it vested too much power on the minister and did not guarantee security of tenure for title deeds inter alia. However, the new Act provides for the ownership and control of mineral resources in Nigeria to be vested in the state [8] , guarantees the security of interest in mining titles, transparency, transferability, establishes an autonomous Mining Cadastre Office (MCO) in charge of administering mining titles, provides various fiscal and tax incentives for investors, addresses community development agreement issues, environmental issues, etc.

3.0 PROSPECTS OF MINING IN NIGERIA.

Despite the current moribund status of the mining sector in Nigeria and associated challenges of revitalising and revamping it, the mining industry has good prospects and potentials for development. As such, the recent efforts by government and policy makers towards repositioning the mining industry stems from the realisation that the development of the minerals sector is a sine qua non for the overall diversification, growth and development of the economy. Therefore, the prospects of mining in Nigeria are summarised below;

Availability of Mineral Resources; With a large area of land resources, favourable topography and geological setting, as well as at least 34 mineral resources found in commercial quantities across various locations of the 36 states, the country offers virgin opportunities for international and local mining companies to invest in the sector. However, the Nigerian government has prioritised the development of seven strategic minerals, which are; coal, bitumen, limestone, iron ore, barytes, gold and lead/zinc. Table 3.1 below shows estimates of mineral reserves in Nigeria;

More so, the current minister of the mines and steel ministry puts the estimated reserve for barytes at 14 million tonnes, limestone 2.23 trillion tonnes, gold 2million ounces, iron ore 3 billion tonnes and bitumen at 27 billion barrels of oil equivalent [9] .

Mining Reforms; The 2007 minerals and mining Act, which is a recent reform embarked upon by the Ministry of Mines and Steel development in Nigeria to specifically reposition the mining sector, avails investors the opportunity of fantastic fiscal and tax incentives, security of tenure of mining titles, and stringent actions against illegal mining. These provisions were deliberately tailored towards creating an enabling environment for private investors to thrive in a competitive and transparent atmosphere, devoid of incessant government interruptions. Some of the incentives especially the free repatriation of capital, profits and dividends, three years tax holiday, reduction of company tax from 35% to 30% , reduction of capital gains tax from 20% to 10% as well as customs and excise duties exemptions, are great advantages and opportunities for investors.

In addition, the World Bank has shown significant interest and concern in the mining industry of Nigeria, and provided $120 million loan for the sector’s development in 2004 [10] .

Market Size and Demand; Through the privatization drive of the federal government of Nigeria, competition would lead to the development of a world class mineral processing industry, which could readily target the large population of the ECOWAS sub-region, as well as larger markets like China and India, whose mineral demand has been on the increase in the recent past. The figure 3.1 below gives a picture of demand and consumption of minerals across the globe.

4.0 CHALLENGES OF MINING IN NIGERIA

Despite the good prospects of mining in Nigeria, the sector is bedevilled with a number of challenges as discussed below;

1 Infrastructural Constraint; Nigeria, being a developing nation suffers the ordeal of epileptic power supply, bad roads, lack of railways and inadequate water supply. These are the ingredients needed for the proper functioning of mineral exploitations worldwide. More so, Public and social infrastructures such as hospitals, schools and leisure facilities [11] are either inadequate in some parts of the country, or nonexistent. However, most big mining companies usually provide their independent source of energy and feeder roads to mine sites as part of their corporate social responsibilities, still, the issue of water supply is lacking. Therefore, the poor infrastructural state of the nation constitutes the problem of accessibility to the market from mine sites as well as increase mining costs, which could in turn reduce revenues accruing to the government.

2 Environmental Constraints; Mining, which involves the extraction of non-renewable resources from the surface of the earth, is site specific [12] , and involves the removal of a lot of wastes. This constitutes pollution to the environment and the host community suffers the direct impact. More so, the issue of balancing sustainable development with mineral exploitation in the Nigerian economy will pose a long term challenge for policy makers and government, when the industry eventually stands on its feet.

3 Corruption; Corruption is prevalent in Nigeria. Most government officials and politicians are favourably disposed to bribery and corruption, which gives the country a bad image and the government, credibility issues. According to the transparency International 2009 rating of corrupt countries, Nigeria was ranked 130th out of 180 countries, with a corruption perceptions index (CPI) rank of 2.5. Mining companies take all these country data and rankings into cognisance before delving into any form of investment commitments. Therefore, it poses the challenge of attracting foreign direct investments (FDI) into the country, especially to the mining sector.

4 Unstable Regulatory Frameworks; Although democracy has been relatively stable in the Nigerian economy for over a decade now, the tendency for a new dispensation of government, especially law makers to amend an existing regulatory framework is high. This could be due to popular demand amongst the citizenry, or often times for political reasons. An instance was the provision for an independent and transparent mining cadastre office (MCO) in the 2007 minerals and mining Act, which was an autonomous body from the ministry, saddled with the responsibility of issuing mining titles and licenses. When a new dispensation came on board later that year, there were attempts by the then minister to restrain the powers of the body and amend the law to vest all its powers on the minister [13] , which led to the revocation of some licenses granted by the former dispensation. This scenario does not augur well for the nation, and discourages investments.

5. High Crime Rate and Insecurity; Due to the high rate of unemployment and poverty, crime rates and insecurity has been on the increase. This is further aggravated by a corrupt and ineptitude police force. Cases of political and religious crisis abound in the country, as well as the recent terrorism attempt by a Nigerian all constitute bad publicity for the nation which could discourage foreign direct investments (FDI) inflow to the mining sector.

6. Government Bureaucracy; The excessively complicated administrative procedure of government business slows down the development of the mining sector. This is seen in the multiplicity of approving agencies as regards award of licenses and mining titles, contracts approval and reaching various agreements.

7. High interest Rates and Inadequate Funding; Mining is a highly capital intensive industry with great risks and long lead time for investments to mature. Most banks in Nigeria seldom provide for long term financing instruments for a sector like mining, where there is an already established oil sector that brings more returns in the short run. The huge government deposits in banks as well as other short term returns businesses are top most priorities for the banks, as they aim to make profits sooner than later.

This attitude of the banks discourages genuine investments in the sector and encourages illegal miners, who get readily available finance from rich individuals and corporate bodies, in return for their illegally mined gem stones. Even where the funds are available from the banks, the interest rates are outrageously high, averaging 20%, which makes borrowing expensive and investments in conducive for miners.

8. Illegal Mining and Smuggling; Mining in Nigeria is currently dominated by illegal small-scale miners (SSM), who mine precious stones and metals illegally and sell in the black markets, or smuggle across the border. This problem was been compounded by the hitherto, neglect of the sector by government, which allowed the illegal miners to operate unregulated and unchecked. Although, the 2007 minerals and mining act stipulate stringent actions against the activities of the illegal miners, the country has suffered a huge loss of revenue due to their nefarious activities.

9. Technological constraint; Nigeria lacks modern mining technology and requisite skills to explore and harness the vast mineral resources at her disposal. Having neglected the mining sector for over 4 decades now, most of the mining equipments in place at the moment are obsolete and various mining techniques, inefficient and out of date. This creates a huge challenge for the mining industry in Nigeria, which is characteristically capital intensive.

5.0 CONCLUSION

The drive for the diversification of the Nigerian economic base by the Federal Government of Nigeria (FGN) using the mining industry as a springboard, prompted this study. From the foregoing, it is established that the Nigerian mining industry has great prospects as well as enormous challenges. However, the onus is on the government to surmount the challenges and translate the potentials into economic activity, this, in the researchers view would require enormous will power to implement the minerals and mining Act 2007 to the latter.


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