Tuesday, October 28, 2008

Critical Resource - Assesment of ArcelorMittal Liberia

Risky resource projects: Can Mittal deliver in Liberia?
EC Newsdesk
27 Oct 08
The world’s biggest steel company, ArcelorMittal, could struggle to meet local expectations in Liberia
By Juliet Hepker and Daniel Litvin

When the Indian chief executive of ArcelorMittal, Lakshmi Mittal, visited the west African state of Liberia last December, there were smiles all round.

The steel magnate, one of the world’s richest men, delighted the government of this poverty-stricken, and until recently war-torn, nation by announcing his company would boost spending on its iron ore project (already the country’s biggest foreign investment) from $1bn to $1.5bn. "We are here to assist. We are you", he was quoted as saying.

But how will Mittal be viewed by Liberians five or ten years from now? Will his company be praised for bringing wealth and development to the country? Or will Liberians come to resent the firm, blaming it for their economic frustrations?

The latter is at the least a strong possibility. One reason is that the market price for iron ore, as for other commodities, has slumped in the wake of the global financial crisis. This reduces the potential wealth countries such Liberia can generate from their minerals. It could also cause extractive firms to reconsider their foreign investments, although ArcelorMittal as yet has given no hint of doing this in Liberia.

Secondly, even assuming the global economy and commodity prices pick up and ArcelorMittal powers ahead in Liberia, it may face a familiar dynamic for resource firms with operations in poor parts of the world: popular expectations over its contribution to development may start to outpace its capacity to deliver.

From Peru to Nigeria to Papua New Guinea, frustrated local expectations have often made it difficult for mining and oil firms to protect their assets from community opposition and host-government clampdown over the long term.

This need not be the case: De Beers, for example, has succeeded in helping develop Botswana’s once very poor economy over recent decades and continues to operate successfully in the country as a result.

But an initial analysis of ArcelorMittal’s investment in Liberia by Critical Resource - based on our methodology for rating the health of the "socio-political license" of resource projects - suggests the world’s biggest steel firm will need to do more if it is to avoid the risk of unmet expectations fuelling a socio-political backlash.

Ore struck

At first glance, it may seem churlish to make such predictions. Liberia has progressed in leaps and bounds since it emerged from 14 years of devastating conflict (1989-2003).

Under the presidency of Africa’s "iron lady", Ellen Johnson-Sirleaf, a former World Banker, the country has become the "fastest improving African nation" in terms of governance standards, according to the latest Ibrahim Index of African Governance.

The security situation is stable, though still reliant on UN troops, and the economy grew at a respectable 8% last year. This is expected to increase with embargos on timber and diamonds recently lifted.

Meanwhile Liberia’s commitments to the Kimberley Process, which aims to tackle conflict diamonds, and the disclosure standards of the Extractive Industries Transparency Initiative, should make it more likely that resource revenues are put to good use.

Liberia’s ability to attract major investment from a firm such as ArcelorMittal is in many ways an indicator of this progress. The 25-year concession to develop the iron ore deposits, situated in the northwest of the country near the border with Guinea, was first negotiated in 2005 by Mittal Steel (Mittal took over Arcelor, the European steel firm, a year later).

Another positive sign is that ArcelorMittal has already adapted its approach following concerns raised over its economic contribution to the country. Amid pressure from NGOs, notably Global Witness, it re-negotiated in April 2007 its initial contract with Liberia providing terms more favourable to the country.

The new contract is based, for example, on market prices for iron ore, addressing concerns that allowing the company itself to set the price might have effectively given it control of royalty rates and tax payments. A five-year tax holiday was also removed, as was an exemption through a "stabilisation clause" from new human rights and environmental laws.

Nor can the positive local impacts which will be generated by the project be easily dismissed. As ArcelorMittal’s personable head in Liberia, Joe Mathews, points out, it involves refurbishing a port and roughly 250km of derelict railway line, which one senior Liberian official describes as having been "the economic life-blood of the region" before the war.

Some 2,800 people are currently working on the railway. ArcelorMittal anticipates creating a total of 3,500 direct and 20,000 indirect jobs as a result of its investment. It has also committed to invest $3m each year in a community development fund.

The company says in its CSR report: "As the first major company to enter Liberia since the end of the war, we understand we have a particular responsibility to the country and its people."

Big problems to iron out

But amid these promising signs, there are two basic reasons for thinking the reception for ArcelorMittal may become less warm over time.

The first is the sheer scale of the development challenge facing Liberia: it remains one of the poorest and least developed countries on earth, with per capita income of $195 per year, and life expectancy at birth of only 35 years in 2007. The formal unemployment rate is a staggering 80% in a country of some 3.8 million people.

In this context, ArcelorMittal’s new jobs are a drop in a very large ocean. As the biggest and most powerful private economic entity in the country, pressures on it to deliver more in this respect are bound to escalate.

Responsibility for development, of course, does not lie solely with the company. A more important driver of long-term economic outcomes is how the Liberian government spends tax revenues raised from the project - in particular whether it does so in a way that supports peaceful, broad-based development.

The omens here are not entirely encouraging. Despite its progress, Liberia receives low scores in most international governance and anti-corruption indicators. Widespread public anger at the governing elite, in particular for the mismanagement of the country’s natural resources, was one of the original causes of the civil war. Such resentment conceivably could rear its head again.
Should these pressures re-emerge, ArcelorMittal will likely find itself targeted. Even when governments are to blame for inadequate development in resource-rich states, the reverberations frequently rebound on big extractive companies. Politicians divert criticism by demanding greater benefits from foreign firms, while dissatisfied populations may view extractive facilities as suitable proxies for protests against the state.

The second basic reason for concern is that ArcelorMittal’s publicly-stated responses to these enormous socio-political challenges appear insufficient given the task at hand.
Development failures often affect companies whether or not they are ultimately responsible. Leading resource firms increasingly see that their own interests lie in working hand-in-hand with governments and international donors to drive positive outcomes at the national level. And they also attempt to build a broad external understanding of the limits of their own responsibility. Admittedly, most companies still struggle in both respects.

It is judged against this overall industry standard that ArcelorMittal’s efforts, though laudable in many of their details, appear insufficient for the challenges that the company will face in Liberia.
At the global level, ArcelorMittal is only just developing a full suite of corporate responsibility policies and procedures (on human rights, for example). Established miners such as Anglo American and BHP Billiton have had these basics in place now for years.

In Liberia, ArcelorMittal indicates that it is discussing a range of potential public-private partnerships. For example, it may work with the World Bank on building electricity infrastructure. But arguably, such joint development projects ought to have been at the core of its strategy in the country from the start.

And there are signs that ArcelorMittal’s approach to stakeholder relations lack sophistication. According to local media reports, in September this year ArcelorMittal donated 100 Toyota pick-up trucks to members of the national legislature to be used for "agricultural purposes in their respective constituencies". ArcelorMittal should have done more to explain why it gave these donations to ensure its actions were not misinterpreted.

Rocky license

Admittedly, the recent tumble in global commodity prices may mean governments of resource-rich countries such as Liberia now become less demanding partners for mining and oil firms: holding on to foreign investment is likely to be seen as their main priority in the difficult times immediately ahead.

Even so, for an example of what could materialise in Liberia over the long term, ArcelorMittal need only look across the border at the recent controversy surrounding Rio Tinto’s $6bn Simandou iron ore project in Guinea.

Rio Tinto has much longer experience developing mines in high-risk locations; and with the International Finance Corporation as a partner, it has applied high environmental and social standards to the project.

Yet earlier this year, Rio Tinto said it had received a letter from the Guinean president "purporting to rescind" the concession. Some in the government appeared to want the company to speed up development of the project - and the benefits it would bring.
Meanwhile, the Liberian government has already proved itself capable of forthright treatment of foreign miners, recently disqualifying two companies from participating in a tender, citing "acts of violation" in an earlier bidding process.

Taken together such factors explain why Critical Resource’s rating of the long-term health of the "socio-political license" of ArcelorMittal’s project in Liberia is downbeat.
Our methodology assigns projects a rating score of between AAA (indicating the license is secure) to D (indicating the license is at great risk). Our provisional analysis of ArcelorMittal’s operations in Liberia suggests a rating of between BB and CC, that is, from the mid to the lower end of the scale. (See endnote).

In short, while external stakeholders such as the government, international NGOs and local media may currently support ArcelorMittal’s project, long-term and structural factors present significant risks to the company. Stakeholder attitudes easily could change in future.

Managed well, the project has the potential to make a hugely positive contribution to the Liberia. But ArcelorMittal’s approach to managing its stakeholder relations and potential negative impacts, real or perceived, appear insufficient given the risks.

And while the government is ultimately accountable for delivering on development hopes, ArcelorMittal will be made to feel the heat. Put another way, Lakshmi Mittal may not feel quite as welcome when he visits Liberia a decade or so into the concession.

Juliet Hepker is a senior associate and Daniel Litvin is director of Critical Resource, an advisory firm specialising in sustainability and stakeholder issues in the natural resources sector. Juliet.Hepker@c-resource.com, Daniel.Litvin@c-resource.com, www.c-resource.com.

Critical Resource rates the health of the "socio-political license to operate" of resource projects using its own methodology, LicenseSecure™. Ratings are based on a range of factors, including potential risks surrounding the project, the views of stakeholders, and also the way in which the company itself manages these issues.

Please note this article provides a provisional rating for ArcelorMittal’s project, based on publicly-available information, and hence sets out a range of potential scores. A full rating has yet to be calculated for this project.

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