“…access to formal, private finance is key to establishing responsible and economically viable ASGM enterprises, to create a long-term, sustainable sector that realizes its full development potential…”
PlanetGold (August, 2020)
This statement featured in PlanetGold’s August 2020 Issue on improving access to formal finance by artisanal and small-scale miners. The report follows two similar series published in March and May 2020 – each underscoring the chronic financing gaps in the artisanal and small-scale mining (ASM) sector. Formal private financing has been at the forefront of spurring growth in lagging sectors. It is expected that increased access to formal private financing will catapult ASM to self-sustaining levels. The evidence however, suggests that ASM will require a combination of different financing sources to close the dismal financing gaps in the short to intermediate term. Here is why we should continue to amplify efforts on all fronts.
The ASM sector accounts for 80% of global sapphire, 20% of gold and up to 20% of diamond production. Approximately 100 million people (40 million workers and their families) depend on ASM for their livelihood. This constitutes 83% of the world’s mining workforce. Moreover, ASM is considered to be fundamental for the achievement of all the 17 Sustainable Development Goals. This begs the question of why formal private financiers are not hankering to increase their investments in the ASM sector.
To answer this question, it is important to appreciate the legal and operational landscape of the ASM industry. With the exception of a few outliers like Guyana, the ASM sector is highly informal. Informality presents multiple challenges to miners, especially when faced with the stringent due diligence and collateral requirements imposed by formal financing institutions. In addition, ASM miners operate at marginal levels with meagre profits. Due to the limited scope of operations, ASM miners are unable to benefit from economies of scale – leading to high transaction costs. Yet significant proportions of the generated returns are utilized for subsistence purposes. These dynamics have disincentivized the flow of sufficient formal private financing into the sector, as private investors are often attracted to sectors that generate windfall returns.
The grim reality is that ASM activities are mainly financed by the informal sector – a mechanism that has failed to meet the sector’s growing financing needs. In desperate attempts to make ends meet, many miners are forced into exploitative transactions, illicit financial flows, and are stuck with rudimentary mining practices that offer limited health, safety and ecological safeguards. For instance, the ASM gold industry is known to produce the highest anthropogenic emissions of mercury, which are linked to serious health complications including threats to maternal health, early childhood development and death. The ASM sector has also attracted negative press concerning allegations of human right abuses, thereby adding another layer of risks for investors. Human Rights Watch places the number of minors employed in ASM at well over 1 million. The combination of these factors plus the staggering lack of strong enabling legal frameworks, limited access to data and to experience with ASM financing, have heightened the investment and reputational risks attached to the ASM industry.
To make matters worse, the COVID-19 pandemic has paralyzed financial markets, thus slowing investment cash flows. In its June 2020 World Investment Report, UNCTAD forecasts a sharp decline in global foreign investment in 2020 of 40% below the 2019 value of $1.54 trillion. A further decrease of 5% -10% is expected in 2021. The impact will supposedly be more severe for developing countries in Africa and Latin America, where the largest proportion of the world’s ASM-employed population exists. ASM miners are therefore, likely to face more stringent conditions for access to formal private finance in the short to intermediate term.
The weight of the above challenges cannot solely be borne by the private sector, as private sector financing alone would be inaccessible to most ASM miners; in this scenario, risk premiums would be high leading to high interest rates and stringent repayment conditions. CIRDI’s research in vulnerable ASM markets reveal that cooperatives are instrumental in promoting contextualized development financing that is focused on addressing community priorities and building sustainable supply-chain networks. Similarly, experts in the field, have acknowledged the value of impact investors, government-backed financing schemes, equity finance, microfinance, equipment leasing/finance and blended finance, in sustaining ASM activities. In March 2020, a PlanetGold report emphasized the significance of impact investment during the infant stage of growth where the sector is largely dependent on informal financing and the intermediate stage – where miners are concerned with capital preservation and earn below market returns. The World Bank has also acknowledged that result-based financing is gaining ground in global development. The majority of global ASM markets manifest symptoms of ‘stage 1- infant growth level’. This is a very telling indication of the magnitude of financing needs and support required to stimulate growth in the industry.
The best-case scenario would be a marriage of donor, public and private resources. The OECD has developed guiding principles on blended financing, which emphasize the need to anchor the use of blended finance in development rationale, adopt financing designs that increase the mobilization of commercial finance, tailor finance to the local context, nurture effective partnerships and monitor finance to ensure transparency and results. The principles underscore the need for continued partnerships in fostering sustainable development. Good development practices like this can support success for the ASM industry.
As a matter of priority, governments seeking to attract external and formal private funding for their ASM sector must double their efforts in streamlining the necessary legal frameworks to boost investor confidence – in addition to delivering targeted, government-backed financing initiatives. The ENAMI model implemented in Chile is a good precedent on the prospects for success when governments implement conducive initiatives for vulnerable mining groups. The UN Economic Commission for Africa through its African Minerals Development Centre, has supported efforts to apply the lessons from Chile’s mining industry in African countries.
The narrative is quite clear. Private financing is a very powerful tool to enable sustainable development. In fact, very few sectors can thrive without it. That said, we must face the reality that no single financing mechanism will unilaterally unlock the full potential of the ASM sector. Like many underserved sectors, ASM will require significant levels of financial cushioning through impact and donor investments, as well as government-backed initiatives. Community based financing schemes and microfinance will continue to play a significant role, while blended finance presents opportunities for de-risking ASM investments and enlisting sustainable partnerships with private investors. This calls for formalization of the sector through strong enabling legal frameworks that can attract and sustain investor interest. ASM host governments must step up to the challenge and provide the necessary leadership to make this happen. If we take the necessary course of action, ASM communities will be one step closer to achieving the SDGs.
CIRDI’s Research Assistant & Graduate Student, MPPGA, UBC