On the eve of the 2013 Mining Indaba, resource nationalism remains a serious investment risk which threatens both foreign investors and resource-producing states alike. With growing attention devoted to the subject, it appears that assertive resource-exporting countries in Africa risk alienating international capital. In newly resource-rich states and older producers alike, some proposals ostensibly aimed at maximising society’s benefits from resource extraction have spooked investors. Much discussion at the Indaba this week will touch on the disparate experiences often termed resource nationalism, but it is worth reflecting on what the term really means.
At one level, it seems to be a misnomer used to describe just about any assertive stance taken by governments on extractive sector governance. At another level, it has been used to denote grassroots level activism, extending in some respect to the labour unrest which the rhetoric around the nationalisation of mines in South Africa may have exacerbated.
Actions regarded as resource nationalism have thus varied widely, from tax hikes, through demand for greater state equity and indigenous participation, to renegotiation of stability clauses in mining contracts. Also, so-called beneficiation strategies - pursued by South Africa, Brazil, Indonesia, Vietnam and others - involve demands for value-added processing before exporting.
The term has generally described initiatives by host governments to secure greater financial, regulatory, and sometimes operational control over extractive activities. Recently, Zambia and Mali have pushed for 25 to 35 percent state participation in mining projects. In Ghana, public opinion supports a windfall tax on extractive firms. Similar demands are made in other African mineral producers. Ernst and Young, the global consultancy, claims in its Business Risks in Mining and Metals 2012/13 report that resource nationalism is the biggest risk for mining companies in Africa.Beyond the definitional controversy, it is true that governments that have pursued naked resource nationalism have tended to suffer adverse effects in the longer term. Given the cyclical nature of global commodity prices, producers’ hubris during commodity super-cycles can be punished when prices fall. Often, such policy imprudence discourages investors. Indeed, when governments abruptly or unilaterally revise existing agreements or break with established conventions, complaints by affected foreign companies will be legitimate.
On the other hand, when companies seek unfair concessions such as in wartime Democratic Republic of Congo (DRC), they prejudice the rights of host communities. Such behaviour inadvertently invites interventionist government actions. It is, though, a risky strategy to move against foreign mining interests without fully following the rule of law. Unlike Zimbabwe’s aggressive resource nationalism, a newly elected government in Zambia managed recent policy changes by informing and directly negotiating with foreign companies, including raising copper royalties to six percent.
African governments should not be in hock to multinationals but decisions on mining should be taken competently and constructively. Otherwise, they risk losing the big mining investments which are vital to developing new reserves for the overall benefit of the economy.
For example, BHP’s departure from Guinea after the country adopted new mining codes in 2011 led to concerns that the country could be scaring off serious industry players whilst opening the door to lower quality investors. The still ongoing review of major mining contracts being done by Guinea’s government must therefore be completed expeditiously and impartially. Nevertheless, some recent mining disputes tied to African resource nationalism really belong in a grey area.
As noted in a recent African Development Bank report, while the price of gold surged more than five-fold since 2000, Africa’s gold-producing countries did not cash in sufficiently. This is due to the approximately three percent royalty on gold production agreed by those governments in the late 1980s and early 1990s when the price of gold was low.
Attempts to update such agreements better to reflect today’s high prices cannot be dismissed as mindless resource nationalism. Other examples include calls by campaigners in the DRC for the review of the $9billion DRC-China ‘resource-for-infrastructure’ deal. Zimbabwe has similarly revised a deal with an Indian firm that secured iron ore reserves worth $20billion for a $700million investment. Yet, retrospective demands such as Uganda’s call for the abolition of a stability clause in a $10 billion oil project are more controversial.
Often, African governments use the discourse of resource nationalism to conceal governance failures. Similarly, the capacity deficit among African mineral producers has complicated relations with foreign companies. Understanding these interlinked elements is vital to resolving tensions created by resource nationalism. Some governments continue to offer excessively generous terms to companies believing that such incentives are necessary to attract Foreign Direct Investments (FDI).
Many of these governments lack the capacity to evaluate reserves, manage negotiations, enforce regulations and monitor compliance. For example, the DRC is short of qualified evaluators despite its immense mineral wealth. In these contexts, administrative fiat and misguided legislations couched in the language of resource nationalism become the norm as national regulators vainly attempt to rescue back the initiative.
An increased role for the state in mining, rather than proving rewarding, actually reveals governance inadequacies. Aggressive nationalisation policies are portrayed as beneficial to the masses whilst wealth continues to be concentrated in the hands of elites. Balancing interests with risk-sharing requires sacrifices from multiple stakeholders. Where corporate and state interests diverge, more practical approaches can provide solutions.
Instead of insisting on beneficiation principles, governments could promote planning policies which help local industrialists and small businesses localise operations and settlements around mining nodes. In this way, communities could benefit from mine infrastructures and inputs and governments can pursue more focused public-private partnership for infrastructural development. This leveraging approach can create successful African ‘resource-for-infrastructure’ models. In the end, resource nationalism is merely symptomatic. Weak governance and capacity deficits represent much more serious obstacles to achieving win-win outcomes for stakeholders in extractive activities in Africa.
Written by Dr Oladiran Bello, Head of the Governance of Africa’s Resources Programme at the South African Institute of International Affairs (SAIIA).
This article first appeared in the New Age newspaper on 31 January 2013.