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Article by: Consultancy Africa Intelligence CAI
Published: 04 Apr 2012
|Mining nationalism in Africa: Justified redistribution of wealth or an obstacle to growth?|
Historically Africa’s vast natural resources have been a driving factor for colonisation and imperialism. Still today, the true extent of Africa’s wealth of resources remains uncertain. Nevertheless, the continuous discoveries of immense mineral deposits and therip-roaring Chinese demand contributing to soaring commodity prices, have led to Africa being perceived as the future for the world’s mining industries.(2)
In recent years, increasing commodity prices have boosted the returns from mining projects to all time high levels. Unsurprisingly, this has inspired Governments to seek to enhance their revenues from the mining sector. Highlighting this, South Africa has been reported to be considering imposing a 50% windfall tax on mining, Ghana has announced a review and possible renegotiation of all mining contracts, and Zambia recently doubled its royalties on copper.(3) However, increasing the role of the state has not necessarily led to higher returns. Across Africa, the nationalisation of mining has illustratedthe positive opportunities for public-private partnerships, but also the negatives of enhancing the role of the state in mining operations. This CAIpaper discusses what has beendescribed as theemergence of resource nationalism on the African continent, paying particular attention to the potential disadvantages of this trend and the role of society in effecting change in the way Governments handle their nations’ mineral wealth.
Resource nationalism and its detractors
In the last decade, Africa’s economies have consistently been among the world’s fastest growing.(4) As an example of the globalisation of Africa’s economy, trade between Africa and the rest of the world has increased by 200% since 2000.(5) This is a remarkable development, whichprobably played a rolein the World Bank statingin 2011 that “Africa could be on the brink of an economic take-off, much like China was 30 years ago and India 20 years ago.”(6) Underscoring this, from 2000 to 2010, Angola ranked among the fastest growing economies in the world.(7)
Much of Africa’s economic growth has been spurred by the high prices of commodities and across the continent states controlling vast mineral resources are increasingly seeking to boost their revenues through exploring opportunities to play a greater role in the mining sector. In South Africa, a panel established by the ruling African National Congress (ANC) has suggested a 50% windfall tax on mining “super profits”, and a 50% capital-gains tax on the sale of prospecting rights.(8) In Ghana, officials recently announced a review and possible renegotiation of all mining contracts to ensure that mining profits are “maximised…[for] the good of the country”, as well as an overall tax increase for mining companies.(9) Similar measures have been considered in Zambia, while Namibia recently decided to award a state-owned company the responsibility for new mining and exploration activities in the country.(10) In Zimbabwe, a policy of “indigenisation” will force foreign firms to “cede” a 51% stake to locals.(11)
It can be argued that Africa’s Governments have every right to seek increased revenues from mining activities as mineral wealth belongs to local people, and Governments are only doing their jobs by extracting the maximum rent over the long term.(12) However, the possible negative consequences for the mining industry have sparked much debate about moves to increase states’ stakes in mining. As Chief Executive of South Africa's Impala Platinum, David Brown,notes, mining nationalismcould prove to be a threat to the mining industry, which wouldimpair the ability of mine operators to access funding sources, invest and boost production.(13) Furthermore, mining projects require large-scale investments and large time frames in order to produce returns.(14) As few Governments are in possession of the requisite expertise to undertake large and complicated mining projects, states are potentially facing a difficult dilemma between maximising their returns and ensuring the success of their mining projects through enlisting the expertise of large, private mining companies. Forcing international firms into partnerships with local actors which lack sufficient industrial experience might not prove very successful in the long run.(15) Enhanced state ownership would require the state to bear the brunt of losses on failed exploration projects. Failed mining projects and unpredictable business climates may also scare off much-needed foreign investment.
It is, therefore, in the interest of Governments to approach negotiations of contracts with caution. The Zambian Governmenthas demonstrated such caution by, for example, notifying the involved companies well in advance of contract’s expiration dates, as well as consulting the companies on the details of contracts.In Botswana, the Government has experienced a rewarding cooperation with the diamond giant De Beers which now accounts for about half of Government revenues, contributing to the country ranking among the richest African nations based on gross domestic product per capita.(16) Both these countries stand out as positive examples.
However, in many countries economic growth, achieved largely on the back of commodities,(17) has not necessarily benefitted the masses. Despite African economic growth, severe income disparities persist across much of the continent, and disease and malnutrition remain problems for the poor.(18) Experiences from Equatorial Guinea, Chad and Nigeria, amongst others, show that much of the nations’ wealth has been privatised and ended up in the hands of crony managers and individuals within the circles of Government officials.(19) This has enabled the insiders and profiteers to utilise oil revenues to establish monopolies in key business sectors.(20) This practice has arguably been upheld by the fact that many African Governments have been able to come to agreements with foreign investors without widespread public scrutiny. This seems to be about to change.
The rise of the middle class as a catalyst for change
To ensure the fair distribution of mining revenues, Mining Sovereign Wealth Structures should, as pointed out by Brian Menell, Chairman of Kemet Global Ltd,beaccompanied by open, transparent and fair acquisition processes andregulatory regimes.(21) In other words, a larger role for the state should be established with sound operating principles and objectives. The enforcement of such practices may come, not from the multinational mining companies operating in Africa, but rather from the citizens of resource-rich countries.
Across the continent, the resource boom has contributed to the emergence of a middle class, as well as the decline of poverty. According to the African Development Bank, a third of Africans now live on at least US$2 per day.(22) It should, however, be noted that the African ‘middle class’ is defined as citizens having between US$2 and US$20 to spend a day.(23) Fluctuating definitions of low-income groups and the lower middle class, and the massive challenges in terms of providing electrical power and clean water, transport networks that can boost regional trade, schooling and primary health care for all, make the distinction of an African ‘middle class’ a fine line to tread.(24)
Social media was seen as the driving force behind the Arab Spring revolutions in North Africa. With the emergence of a middle class with enhanced access to technology, social media has also become a pivotal tool for development and the promotion of human rights further south.(25) Combined with a general trend of democratisation, this proliferation of technology and access to information has contributed to increasingly puttingcontracts for natural resource exploration under public scrutiny. Democratic Governments’ natural sensitivity to public perceptions may potentially force Governments to operate their mining projects according to principles ofbest practice and ensure the fair and equal distribution of mining revenues.
As natural resource extraction and production projects can cost many billions of dollars and take up to a decade to produce returns,(26) Africa remains dependent on foreign investments in order to promote growth in the related sectors and to be able to integrate into the global economy. Uncertainty created by the changing of laws necessary to increase Governments’ stakes in the mining sector may be problematic for long-term foreign investment.Governments should be wary of being perceived as unpredictable or unreliable. Few companies are willing to commit to long-term investments in countries offering an unpredictable business climate in which fiscal policies constantly change.(27) As African mining is expected to grow in the coming decades, political stability and consistent records of good governance, both nationally and in the mining sector,should not be forgotten in the quest to secure long-term viable economic development.
It is understandable that cash-strapped African Governments are seeking higher rents and bigger ownership stakes from foreign miners. However, natural resources in many regions have been a source ofconflict and human disasters, and unequal distribution of wealth due to illegal contracts and Government corruption has deprived citizens of natural resource wealth. There is clearly a need for change in the handling of Africa’s mineral resource wealth. African Governments need to strike the right balance between justified redistribution of its mineral-based revenues and the stability in the mining sector required to ensure sustainable growth of this transformative source of wealth.
(1) Contact Anders Brudevoll through Consultancy Africa Intelligence’s Africa Watch Unit (email@example.com).
(2) ‘Wish you were mine’, The Economist, 11 February 2012, http://www.economist.com.
(4) ‘The sun shines bright’, The Economist, 3 December 2011, http://www.economist.com.
(6) ‘Africa’s future and the World Bank’s role in it’, World Bank, November 2010, http://siteresources.worldbank.org.
(7) ‘Spread the wealth’, The Economist, 10 February 2011, http://www.economist.com.
(8) ‘Wish you were mine’, The Economist, 11 February 2012, http://www.economist.com.
(12) ‘More for my people’, The Economist, 11 February 2012, http://www.economist.com.
(13) Verma, S., ‘South Africa’s mines nationalization talk: The danger of hot air’, FT Tilt, 30 June 2011,http://tilt.ft.com.
(14) ‘Wish you were mine’, The Economist, 11 February 2012, http://www.economist.com.
(15)‘More for my people’, The Economist, 11 February 2012, http://www.economist.com.
(17) ‘The sun shines bright’, The Economist, 3 December 2011, http://www.economist.com.
(21) Brian Menell Group website, http://www.brianmenellgroup.org.
(22) ‘Pleased to be bourgeois’, The Economist, 12 May 2011, http://www.economist.com.
(24) ‘Spread the wealth’, The Economist, 10 February 2011, http://www.economist.com.
(25) ‘Sub- Saharan Africa: The Other Social Media Revolution’, Digital Journal, 13 February 2012, http://digitaljournal.com.
(26) ‘More for my people’, The Economist, 11 February 2012, http://www.economist.com.
Written by Anders Brudevoll (1)