JOHANNESBURG (miningweekly.com) – The resource nationalist measures being implemented in the Democratic Republic of Congo (DRC) and Tanzania are significantly more extreme than those being adopted and even considered in most other African countries.
One likely reason for this is that the DRC and Tanzania both suffer from significant institutional weaknesses. In that sense, they are outliers, but the general trend is undoubtedly in the direction of greater fiscal control and greater State intervention, as espoused in the African Mining Vision adopted by the African Union in 2009. This calls for transparent and equitable revenue collection and distribution; and leveraging mining to stimulate beneficiation, procurement and the development of infrastructure, technology and skills.
Attitudes have hardened since 2015, after an African Union high level panel reported that, from 2000 to 2010, African States collectively lost at least $50-billion of revenue a year owing to “illicit financial flows”, 56% of it from the mining sector.
The speed and severity of major regulatory changes tends to depend on the strength of checks and balances on executive power, that is, on the competence, independence and vigour of public institutions such as the legislature and judiciary; as well as private institutions such as the media, civil society and chambers of mines.
These are among the points made by Herbert Smith Freehills Africa mining head Peter Leon in his presentation to the International Bar Association's annual conference on resource nationalism trends in sub-Saharan Africa in Rome on Wednesday.
According to Leon, modern resource nationalist measures include the introduction of higher royalties and windfall profit taxes, as well as the issuing of severe adjusted tax assessments; introducing or increasing compulsory minimum quotas for free-carried shareholding by the host State or local citizens; local beneficiation, often through export restrictions or duties; procurement of local goods and services; recruitment and promotion of local personnel, which entails phasing out expatriate personnel; retention of earnings in local financial institutions; and renegotiating investor-State contracts that stand in the way of these measures.
Leon identified the draft guiding principles for durable extractive contracts of the Organisation for Economic Cooperation and Development as a document that could ameliorate the trend. These involve aligning with the long-term vision and strategy of the host State; sharing financial and technical data to build a common understanding of the risks and opportunities; a sound investment and business climate, supported by a fair, transparent and clear legal and regulatory framework; a fiscal system that provides for a fair sharing of economic rent, taking into consideration the risks and potential rewards; and flexibility for the host State to introduce regulatory changes that are not arbitrary, reflect good practice and give due regard to the adverse impact on the project.
Influencing resource nationalism are investment, commodity and electoral cycles. “Resource nationalism only manifests after significant investments have already been made and have started yielding returns,” he said. Steps taken any earlier would avert investors from making the capital outlays necessary for prospecting and mining.
More immediate are commodity cycles, which drive economic resource nationalism, in States that are highly dependent on raw mineral exports and electoral cycles, which drive populist resource nationalism in countries that have regular elections with close margins.
Countries, like the DRC, with economies that are highly dependent on raw mineral exports, are extremely sensitive to commodity price cycles as during a period of price depression, the State receives less revenue from royalties and export duties on key minerals.
As happened in the DRC, a subsequent surge in prices is seen as an opportunity to remedy the fiscal deficit, by taking a greater share of mining revenues. In 2016, when the copper price fell to a ten-year low and cobalt to a 25-year low, copper and cobalt comprised more than 70% of the DRC’s export earnings. As a consequence, tax revenue fell below 10% of the DRC’s gross domestic product (GDP) for the first time since the 2008/9 global financial crisis and yearly GDP growth slumped to 2.4% (from an average of more than 7% for the preceding five years).
As prices rose after the 2016 slump, the State revised its liberal 2002 mining code in March 2018 to entitle the State to a doubled free-carried nondilutable 10% stake in any mining right holder, plus 5% on each renewal. A shareholding of 10% by Congolese citizens became a requirement; a 10% royalty was imposed on cobalt; a 50% tax on profits earned when a mineral’s price is more than 25% higher than the price used in the holder’s feasibility study and local banks are required to hold 60% of earnings to be kept in local banks.
Even in countries not mainly dependent on raw mineral exports but with close mining margins, incumbent governments may seek to increase their electoral support by exploiting the populist appeal of resource nationalism.
Tanzania is a country in point, with incumbent president John Magufuli branding foreign mining companies generally as “people who call themselves investors with the intention of stealing from Tanzanians” during a public address in 2017.
Owing to a lack of effective constitutional checks and balances, the Magufuli administration has been free to make swift and severe regulatory reforms, with little transparency or public participation.
In July last year, three major laws enacted with immediate effect mandated the renegotiation of “unconscionable” investor-State contract terms, entitled the State to a minimum 16% free-carried equity stake in any mining right holder, which may be increased to 50% to compensate for previous tax incentives, banned the export of raw minerals, raised royalties to 6% and prohibited foreign investors from suing the government in courts outside Tanzania.