“The people shall share in the country’s wealth! The mineral wealth beneath the soil … shall be transferred to the ownership of the people of the whole.” So says the Freedom Charter resolution adopted by the Congress of the People, Kliptown, South Africa, 26 June 1955.
Resource nationalism refers to a government seeking greater participation in a country’s mineral wealth. It can take many forms, including nationalisation, higher mining-specific taxes, compulsory local ownership, export controls on unrefined ores and, more recently, mandatory local beneficiation requirements. In 2010, the Australian Government’s announcement of its intention to introduce a “super profits” mining tax had a major impact on resource-rich countries around the world. Although straightforward nationalisation is now rare, the boom in the demand for minerals over the last decade has encouraged an increase in resource nationalism in Africa and other developing regions. African countries in particular have used the Australian precedent to justify their own proposals and the introduction of measures designed to increase the state’s share of the exploitation of resources.
Kenya has introduced a law requiring 35 per cent local equity participation in each mineral right. It is not yet clear whether making such participation available on commercial terms will be sufficient. Guinea recently raised the state’s share in mining projects to 15 per cent, while Liberia has announced a mining code review to boost state share in resource profits. Algeria asserts a right of preemption in relation to investments held by foreigners. The Democratic Republic of the Congo is reviewing its mining laws to give the state higher mining royalties and increase its stake in mining projects from 5 per cent to 35 per cent. The increased stake may need to be given freely and will be non-dilutable; the changes probably will not affect existing agreements.
Since 2002, Mozambique has had a liberal mining law that has helped attract inward investment. New laws introduced in 2011 and 2012 demonstrate a refreshing approach to resource nationalism. Large mining firms must make available to the Mozambican public between 5 per cent and 20 per cent of their equity via the Mozambican stock exchange on commercial terms. Rather than taxing windfall profits, Mozambique requires that they be held in reserve against losses or reinvested in Mozambique. Less encouragingly, Mozambique is considering introducing a flat 32 per cent capital gains tax, which will apply regardless of how long an asset has been held, and a tax on capital gains made on sales of shares of companies incorporated outside of Mozambique if the underlying asset is a Mozambican natural resource.
The political aspirations driving resource nationalism are easy to understand. Australia, however, ultimately had to modify its proposals because of the strong negative impact they would have had on investment in Australia. So what can be done to mitigate the risk of resource nationalism having a negative effect in Africa?
Worker participation can be a powerful antidote. In South Africa, the employee share scheme run by Kumba Iron Ore, a member of Anglo American plc group, distributed around US$45,000 to each of its 6,000 employees in 2012. This is obviously preferable to some other South African “black economic empowerment” schemes, which can favour a few lucky individuals.
Involving the community around a mine acts as an anchor. The Royal Bafokeng Nation created a business arm in the form of a company that owns shares in various mining companies. This makes it easier for mining companies to have structured commercial interaction with the community.
Voluntary local beneficiation is increasingly popular. De Beers will migrate most of its international sales from London to Gaborone by the end of 2013. It has invested in upgrading its Gaborone facilities to accommodate its increased aggregation and sales activities. The Botswanan Government also hopes to buy and sell up to 15 per cent of Debswana’s production in line with its new sales agreement.
Sometimes the host state may be willing to partner in local beneficiation projects. In South Africa, the state-owned Industrial Development Corporation has a specific mandate to support South Africa’s beneficiation aspirations, and so will help fund local beneficiation projects.
Social support is often an obvious and real need, as well. The practice in South Africa of migrant mine workers returning to their homes only once or twice a year is common and is detrimental to communities. Improving basic living conditions would help to avoid tragedies like Marikana, where labour unrest at Lonmin’s platinum mine in Rustenberg led to the loss of 46 lives. The dispute was rooted in deep dissatisfaction among workers with extremely poor living and social conditions, far from their families and support networks.
Structuring can help mitigate risk for investors. Using a blocker company permits a transfer of ownership to take place in a way that reduces the chances of state interference. Convertible loan notes can be used to allow equivalent economic participation while preserving high local ownership prior to listing.
A bilateral investment treaty, entered into between sovereign states, grants a number of guarantees to qualifying investments that are made by an investor from one contracting state in the territory of the other contracting state. These include treatment equivalent to that enjoyed by local and other foreign investors; protection from expropriation without adequate compensation; freedom to transfer funds into and out of the host country without delay, using a market rate of exchange; and limitation of the circumstances in which performance requirements, such as local content requirements or export quotas, can be imposed. Treaties often provide for alternative dispute resolution whereby an investor whose rights have been violated can have recourse to international arbitration rather than trying to pursue rights in the host state’s courts. Where a treaty is available, care must be taken at the time of making the investment that all conditions for protection under the treaty are met.
Close attention must always be paid to incountry procedural requirements to ensure licences cannot be challenged. The recent Centamin dispute in Egypt was widely reported as evidence of increasing resource nationalism. Although the court case against Centamin was instituted by an individual politician whose motives appear to be political, the case is, however, being fought purely on administrative law grounds.
Mitigating the risks of resource nationalism allows investors to take advantage of the numerous investment opportunities available in Africa as it emerges from a violent past, driven by the rapid growth of a fast expanding middle class, rich and often unexploited mineral resources, much improved governance and a reduction in corruption.
Significant hurdles remain. Existing infrastructure is often inadequate and building or refurbishing railway lines and/or ports can place additional burdens on a project. Larger projects often represent a substantial proportion of the local economy, placing strains on private supplies as well as on supplies of power and water. Unclear local laws, coupled with opportunities for local administrative discretion, can create uncertainty that is hard to build into the economic valuation of a project. It is vital, therefore, to work with advisors who have real knowledge of the region.