Growing government control over resources sounds alarm bells
BUSINESS LIVE / 12 OCTOBER 2018 - 05:05 / LISA STEYN
Resource nationalism takes various forms including higher royalties and taxes imposed on companies
Alarm bells are sounding for the mining industry over growing government control of resources in Sub-Saharan Africa, as states try to cash in on higher commodity prices and secure votes ahead of elections.
Resource nationalism is unlike outright nationalisation seen in the 1960s and 1970s when governments took full control of mines. Instead it takes various forms, including higher royalties and taxes imposed by states on companies, and the introduction or increase of compulsory minimum quotas for ownership. Picture: UPSPLASH/DOMINIK VANYI
This phenomenon — dubbed resource nationalism — is unlike outright nationalisation seen in the 1960s and 1970s when governments took full control of mines. Instead it takes various forms, including higher royalties and taxes imposed by states on companies, and the introduction or increase of compulsory minimum quotas for ownership. An emphasis is also placed on aspects such as local beneficiation and procurement of local goods and services.
It has taken hold in Tanzania, the Democratic Republic of Congo and even SA, according to Peter Leon, partner and Africa cochair at law firm Herbert Smith Freehills, who presented at the International Bar Association Annual Conference in Rome from October 7-12.
It is a concern for mining investors who are easily spooked when rules change in the middle of long-term investments.
While some examples are more extreme than others, “the general trend is undoubtedly in the direction of greater fiscal control and greater state intervention”, Leon says.
The Tanzanian government in 2017 claimed an “economic war” between itself and mining companies and passed various laws that, among other things, raised royalties and imposed compulsory government equity stakes in operations. In the Democratic Republic of Congo (DRC), in 2018, the government signed a new mining code into law that introduces a range of changes expected to negatively affect major companies invested there, including JSE-listed Glencore and London-based Randgold Resources.
In SA, the newly gazetted Mining Charter is an example of resource nationalism, although to a lesser degree than Tanzania and DRC, Leon said. The third version of the charter raises minimum quotas on certain aspects for mines, including black ownership.
Resource nationalism is influenced by certain cycles specific to each jurisdiction, with the first and most fundamental being the investment cycle. “It only manifests after significant investments have already been made and have started yielding returns. Any earlier would avert investors from making the front-loaded capital outlays necessary for prospecting and mining,” Leon says.
A more immediate driver is the commodity cycle in states that are highly dependent on raw mineral exports.
Author Sangwani Ng’ambi, who is also head of public law at the University of Zambia, observes that when prices begin to experience a sustained upward trend, the perception is that foreign investors make a larger profit. There may also be a sense, owing to low tax and royalty rates, that the state is not fully maximising the benefits of this windfall in the price of the nation’s natural resource, Ng’ambi says.
Attitudes have also hardened after an AU African Union report showed that, from 2000 to 2010, African states lost at least $50bn a year owing to ‘illicit financial flows’, 56% of which came from the oil, gas and mining sectors.
Another immediate driver is the electoral cycle, especially in countries where regular elections have close winning margins. “Incumbent governments may seek to increase their electoral support by exploiting the populist appeal of resource nationalism”, Leon says.
Underlying it all is a sentiment that African mining countries did not derive proportionate benefits from the last commodities boom, when multinational mining companies appeared to make windfall profits, says Leon. Attitudes have also hardened after an AU report showed that, from 2000 to 2010, African states lost at least $50bn a year owing to ‘illicit financial flows’, 56% of which came from the oil, gas and mining sectors.
However, Jesse Ovadia, assistant professor in political science at the University of Windsor in Canada, views resource nationalism as being about a a range of policies aimed at increasing social investment that help ensure a development benefit to citizens. “The mining industry already acknowledges the need to deliver such a benefit through corporate social responsibility and other initiatives to secure a social licence to operate,” Ovadia says.
“But I think resurgent resource nationalism is a response to a long history of [multinational companies] not contributing to local development and not doing enough to mitigate the negative impacts of the extractive [mining, oil and gas] industries.”