Mining: Squeezing the goose that lays the golden eggs

First published by ISS Today

African countries are claiming a bigger slice of the revenues from their natural resources from mining companies. Is this good and can it work?

Nana Akufo-Addo, president of resource-rich Ghana, told last month’s African Mining Indaba in Cape Town that in the past African governments, often unstable, corrupt and incompetent, had made bad deals with mining companies. They’d offered the companies too many tax and royalty incentives in order to invest.

Now a better-governed Africa had ‘come of age’ and it was time to review those contracts to give Africa a fair deal. Mining companies should no longer ‘expect to make extraordinary profits on our continent’, he warned. But what is a fair deal between an African resource-rich country and a mining company?

Akufo-Addo cited Ghana’s recent deal for AngloGold Ashanti to return to the rich Obuasi Gold Mine after a five-year absence as a good example of a fair deal. It includes fiscal concessions by the government and significant commitments to local procurement and skills transfer by the company.

But the story doesn’t always have such a happy ending. The term ‘resource nationalism’ has recently been coined to describe a surge of unilateral measures by governments in countries like Tanzania, Zambia and Democratic Republic of Congo (DRC), to get a bigger share of proceeds from their countries’ natural resources.

These measures include higher royalties, stiffer taxes and new or larger compulsory minimum ownership quotas for the host state or local citizens. This is according to mining law expert and co-chair of Herbert Smith Freehills’s Africa practice Peter Leon, speaking at the mining indaba.

Resource nationalism could also include compelling extractive companies to contribute to local beneficiation, procure goods and services locally, recruit and train local personnel, and retain their earnings in local financial institutions.

Last year, the DRC increased the state’s stake in all mining companies from 5% to 10%, plus a further 5% on the renewal of each company’s mining right. It also required at least 10% shareholding by Congolese citizens, raised royalties on most minerals, and introduced a new 10% royalty on “strategic substances” (including cobalt). A 50% tax on “super profits” was introduced and 60% of mining companies’ earnings must now be kept in local banks.

In Tanzania, President John “Bulldozer” Magufuli accused foreign mining companies of “stealing”. In 2017 he started squeezing them for a bigger share, including a minimum 16% free equity stake for the state in mining companies. This could be increased to 50% to compensate for previous tax incentives. The companies also had to cede at least 5% ownership to locals and royalties on minerals were raised to 6%.

Companies were given high quotas for local procurement and recruitment and were banned from using foreign banks and from suing the government in courts or tribunals outside Tanzania. They were also forbidden from exporting raw materials, Magufuli said, to stimulate local beneficiation.

Leon believes this surge of resource nationalism is being driven by a feeling among authorities in resource-rich African countries that they didn’t get enough out of the last commodities boom when multinational mining companies appeared to make windfall profits.

And African attitudes have hardened since 2015, after the African Union High-Level Panel headed by former South African president Thabo Mbeki reported that from 2000 to 2010, African states collectively lost at least $50-billion a year in revenue through “illicit financial flows”. Mbeki calculated that 56% of these illicit flows came from mining and other extractive companies.

Leon believes that countries highly dependent on natural resources are sensitive to commodity price cycles and therefore particularly prone to resource nationalism. In DRC, for example, copper and cobalt provide some 70% of export earnings. When these prices crashed in 2016, DRC’s GDP fell from over 7% per annum over the past five years, to 2,4%. Zambia, also dependent on mining for about 70% of forex, suffered a similar fate.

Leon feels Tanzania resorted to resource nationalism for purely political reasons, to shore up waning support for the Chama Cha Mapinduzi party which has ruled since independence. Others suggest that some countries opt for resource nationalism when they’ve squandered their natural resources through corruption and incompetence, and are seeking a bigger cut to make up the shortfall.

Although Leon used the term “resource nationalism” negatively, not everyone does. In a panel discussion at the mining indaba, Botswana’s mineral resources minister Eric Molale noted that his government had a long-standing joint venture with South African diamond producer De Beers. The government took 81% of diamond revenues and De Beers, 19%. “If that’s resource nationalism, I’m all for it,” he said.

Though semantics kick in here, it seems that resource nationalism can be a positive. When it promotes national development and even, with luck, beneficiation and industrialisation, it’s a blessing. If it’s a desperate grab for dwindling resources by a failing government – think oil-rich Venezuela – it’s a curse.

Clearly, some balance must be found between the legitimate interests of both sides. Leon said the Organisation for Economic Cooperation and Development (OECD) had drafted Guiding Principles for Durable Extractive Contracts which offered advice on how this could be done.

For starters, mining and other extractive companies should align themselves with the long-term vision and strategy of the host state. They should share financial and technical data about the risks and opportunities with governments. Put more bluntly, that would demonstrate to host states that they are not being ripped off.

Governments should create a “sound investment and business climate”, including the rule of law and transparent regulations and fair rewards to mining companies. The OECD guidelines stress that contracts should include enough flexibility to allow governments to adapt to changing circumstances – without renegotiating entire contracts.

The OECD guidelines are implicitly critical of the likes of the DRC and Tanzania for opportunistically imposing heavy windfall taxes or other drastic measures when prices are high. “Chasing the price of commodities” usually strains relationships between host governments and investors, says the OECD. It can even lead to disinvestment.

In other words, by all means, take your fair share of the golden, platinum, copper or cobalt eggs. But try not to kill the goose that lays them. DM

Peter Fabricius is an ISS Consultant