Mining in Fiji and the Natural Resource Curse Research has demonstrated that some countries with significant endowments of natural resources have fallen victim to a phenomenon referred to as the resource curse (Humphreys, Sachs, & Stiglitz, 2007). Many naturally wealthy countries have experienced slower economic growth, higher rates of political turmoil and corruption, and a host of other economic and political challenges compared with countries with fewer resources (Humphreys et al., 2007). The tendency for states to consume revenues (capital) originating from the sale of non-renewable resources, rather than investing the revenue into assets, is just one of the many pitfalls of natural resource wealth. Other side-effects of natural resource wealth include Dutch Disease, a decline in other domestic economic sectors; boom-bust cycles, which result from volatility in income derived from natural resources; increased corruption; weakened democratic political systems; militarization and meddling of foreign powers in local politics; and an uneven distribution of knowledge and power, where extracting corporations have the upper hand in negotiations with governments (Humphreys et al., 2007). Furthermore, mineral rich economies in particular, have been prone to government failure (Auty, 1998). Although Fiji has achieved some level of economic diversification, a closer examination of the mining industry in isolation reveals an experience plagued by many of the common pitfalls associated with the natural resource curse. Unfortunately for Fiji, when Emperor announced the sudden closure the mine the morning after the country's fourth military coup within two decades, a number of serious challenges related to the sale and negotiation process were created for the interim administration. The negotiation process relating to natural resource contracts is usually dependent on time-sensitive factors. The changing price of the resource, and perhaps more importantly in Fiji's case, the current economic and political conditions in the country are critical factors which influence the negotiation process (Radon, 2007). Immediately following the initial shut down of operations at Vatukoula, EML stated that the company intended to keep the mine under a care and maintenance program, and conduct further exploration before selling the mine (Gordon, 2007). However, they claimed that the presence of the military at the mine site beginning in January, 2007 compromised their ability manage the mine and this placed an additional financial burden on the company. The company stated that this military presence, combined with conditions imposed by the interim government after a subsequent cabinet meeting (that EML claimed would cost the company more than FJD $51 million) led the company to sell the mine shortly after it was shut down (Gordon, 2007). By any account, the sudden and significant unemployment created by the closure of the mine made negotiating an agreement with a new mining company a pressing task. This was not an unfamiliar situation for the government of Fiji. Beginning in the 1950's, the government granted an increasing number of concessions to EML and its principal Fiji subsidiary, Emperor Gold Mining Company Ltd. (EGM) (Grynberg, Fulcher, & Dryden, 1997). The desire to maintain levels of employment at Vatukoula was a significant factor in the series of concessions that were granted to Emperor over the next three decades, which reached their height with the signing of the VTA in 1983, after which EML and EGM paid negligible amounts of tax and royalties (Grynberg et al., 1997). In their 1997 financial analysis of EGM and EML, Grynberg et al. showed that EML, domiciled in the tax haven of the Isle of Man, reported profits of approximately A$50 million for the period 1986-1992 and a return on assets of approximately 12%, clearly demonstrating that the Vatukoula operations were profitable (Grynberg et al., 1997). However, while the operations were profitable, the company paid little or no tax. The VTA provided the necessary conditions for this to occur, by offering concessions on all of the taxable portions of mining revenues, including income tax, royalties, customs duty, and fiscal duty (replaced in 1992 by a general goods and services tax) on imported chemicals and explosives, the only exception being export tax (Grynberg et al., 1997). With a history of subsidizing mining operations, the government was finally in a position to renegotiate a better deal with the new mining company, however, the timing and conditions of the negotiations left the government in a weakened bargaining position. The problems began with the sale of the mine to Westech, a small newly incorporated company, owned by Brian and Amelia Wesson, who were actually former Vatukoula residents. In fact, Brian Wesson was previously employed by the former owners, EML, as chief engineer for a period of seven years (A. Wesson, personal communication, August 15, 2007). Thus, it appeared that the new company had an information advantage when purchasing the mine. Similar conditions of asymmetric information have been a documented to cause resources to be sold at lower values during the privatization and bidding processes (Radon, 2007). Although this case differs because the mine ownership was being transferred between private entities, the timing of the sale, coupled with an informational advantage on the part of Westech, at the very least allowed the new company to enter into the negotiation process in a powerful position. The government did make one attempt to secure a better deal by placing an ad in the Fiji Times for expressions to operate the Vatukoula mine on August 4, 2007 (Department of Lands and Mineral Resources, 2007). However, the fact that Westech had clearly been associated with the former owners surely did not encourage other interested parties to submit bids that would lead to the best deal for the mine (Radon, 2007). The sale eventually took place through the legal transfer of all assets and liabilities from EML to Westech (estimated at over FJD $20 million), with a cash check issued by Westech to EML for a total of AUD $2.00 (A. Wesson, personal communication, August 15, 2007). Further empowering Westech, the interim administration's negotiating team probably did not have the technical expertise to successfully argue for its fair share of the remaining resources at Vatukuola. The team did not include key members of the Fiji Mineral Resources Department (MRD), many of whom held valuable technical expertise (I. Fong, personal communication, August 9, 2007). Information about the negotiations was also not available publicly, even though the Vatukoula community expressed repeatedly that it wished to be involved in the negotiation process. The Vatukoula community indeed holds a wealth of technical expertise, having produced three generations of experienced miners and engineers. Community advocates were reportedly pressured by police officers and the military to stop speaking out about community concerns relating to the lack of transparency in the negotiation process (Ravula, 2007). The negotiations eventually resulted in key concessions to Westech, including:
In another important concession, Westech was not required to post a bond for future environmental damage. Westech stated that, In return for these concessions, a Community Rehabilitation and Social Assistance Deed (RASD) was signed, in which Westech agreed to contribute to rehabilitation of certain social and environmental issues at Vatukoula. However, the specifics of this deed have not been released publicly by the interim administration. Amelia Wesson did disclose in an interview that the assistance called for under the RASD amounted to approximately FJD $6 million (A. Wesson, personal communication, August 15, 2007). In addition Westech will refund to the government the expenditures incurred for care and maintenance since May, 2007 which amounts to approximately FJD $5.4 million (River Diamonds PLC, 2007). It follows from the above analysis that, as a result of the timing of the closure (and the associated economic and social pressures to resume mining operations), a lack of appropriate negotiation and technical expertise on the part of the interim administration, a lack of public participation and transparency during and after the negotiation process, and the conditions of the mine sale to a company with an informational advantage, the government again failed to secure the best deal for the remaining gold resources at Vatukoula. This is evidence that the country did fall into one of the major traps associated with the resource curse - foreign companies having the upper hand in negotiations (Radon, 2007). Additionally, while not directly linked to mining as a result of this study, Fiji's history of four military coups in the past 20 years, weakened democratic system, and the military intervention at the mine are also issues commonly attributed to the resource curse. In a larger sense, however, Fiji was able to escape the more severe resource curse fate. Unlike its close island neighbor, Nauru, which was totally dependent on phosphate mining for economic development (McDaniel & Gowdy, 2000), Fiji also derives wealth from tourism, agriculture and several other small economic sectors. This has allowed the country to escape the dismal fate it may have encountered if gold was the sole source of national wealth. |
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