What rising resource nationalism in Africa means for mining investors
Lately, resource nationalism in the African mining sector has increased. In some African states, which make key contributions to international mining, larger mining rents indicate greater national control. International investors should be cognizant of the dangers inherent in ignoring the main drivers of resource nationalism, leading to some of the more systemic issues that underlie inefficiencies in the mining sector.
As African governments take a more hardline approach to resource nationalism, long-term foreign investment in much of Africa’s mining sector is becoming increasingly risky. This is seen in government efforts to extract higher rents from the natural resource funding by foreign firms that have obtained mining contracts in certain regions. Investors face two distinct risks, namely higher royalty rates charged to international investors, and harsh requirements for resource procurement. Governments often present their higher charges as a means of industrializing their mining and energy sectors, exerting greater control over these industries. This pattern appears in South Africa, Zambia, Mali, and Guinea.
Resource nationalism continues to shape industrialization strategies in the sector, as seen through the recent and contentious South Africa’s draft Mining Charter (2018). Its 2017 Mining Charter predecessor aimed to bring about arrangements for broadly-based black economic empowerment (BEE) for historically disadvantaged South Africans (HDSAs). The new Charter does so more rigorously, as it enforces a minimum of 30% black ownership, which includes a 5% free-carried interest rate for HDSA mining employees.
The free-carried interest rate essentially acts as a generous tax break for black South African private equity or venture capital managers, who are stakeholders in those mining firms that, under Apartheid, were subject to the Group Areas Act. This Act mentioned ‘disqualified’ companies, i.e. those in which the managing party was a black person who was unable to own or sell shares, engage in trade, or own land. BEE in the mining sector is the latest in a series of government policies designed to address historical injustices. Others include the recent wealth redistribution through a land seizure scheme intended to reverse the Natives Land Act of 1913, which outlawed land ownership by black South Africans.
Zambia’s struggle to improve investor confidence
Given the extent of socioeconomic damage to such people under Apartheid, investors understand how sensitive the issue of wealth redistribution is in societies that are still grappling with the destabilizing effects of colonial economic policy. Nonetheless, resource nationalism taken to extremes makes foreign investment uninviting. In 2017, South Africa was ranked 48th out of 91 states on the Fraser Institute’s Investment Attractiveness Index, a lower rank than would have been expected from a stable regulatory environment with reasonably competitive taxation and no political threats. The austerity of the updated Mining Charter, together with growing wage price pressure, partly accounts for the investors’ uncertainty in this market.
Zambia is also experiencing shaky investor confidence in its mining sector, due to heavy taxation as a form of resource nationalism. It has a 30% corporate tax on mining, and a 4-6% royalty tax on minerals such as copper. Between 2001 and 2016, it experienced 15 years’ worth of short-term mining reforms, leading to eight re-draftings of national mining contracts. Its fluctuating royalty rates earned Zambia a Fraser Institute Investment Attractiveness ranking of 58 out of 91, a comparatively weak score by the above standards. This was due to a combination of factors, including the government mismanagement of mining revenue. In consequence, though Zambia has some of the highest natural copper resources of any country, an estimated 60% of its 14 million population live below the world poverty line.
The above evidence has helped erode Zambians’ trust in their government. In January, the government introduced legislation requiring 30% of bulk goods to be transported by railway. The law was introduced in order to “revive” collaboration between the transportation and mining sectors. If the changes were adopted more broadly and the volume of cargo increased, however, trains might operate above capacity. Hence foreign investors see it as yet another government attempt to draw further investment from mining firms to maintain or improve Zambia’s infrastructure.
In addition, government debt is a channel through which mining firms pay heavy fees. Canadian copper producer First Quantum, Zambia’s largest copper miner, was involved in a dispute with ZCCM Investment Holdings, the state-owned mining firm, over the interest rate it received on deposits that were meant for corporate expansion. This resulted in a $7.9 billion tax claim from the Zambia Revenue Authority (ZRA) to First Quantum on the grounds that for five years it had grossly underpaid some import duties.
Some international commentators see such practices as a way of blindsiding foreign firms with unreasonable tax demands in order to raise money to pay off international debt. According to a 2017 report from the International Monetary Fund (IMF), Zambia’s total external debt at the end of 2016 stood at approximately $8 billion (36.5 percent of GDP). But Zambia’s finance minister, Margaret Mwanakatwe, trying to restore investor confidence, announced in June 2018 that Zambia “will not fail to pay its debt”.
Elite capture of the mining sector
The current state of resource nationalism in both South Africa and Zambia – two of the world’s most prolific mineral providers – raises the question of whether natural mineral resources are being sufficiently devoted to human capital all over the continent. Zambia, with its limited transparency and tenuous trust in officialdom, is not the only country to anger mining investors.
Case studies regarding the elite capture of the mining sector have emerged from states such as Ghana, where, despite its strong record of upholding civil liberties and the rule of law, the Mineral Development Fund has been taken over, resulting in embezzlement and fund misuse, as well as a general lack of openness about the management of mineral resources.
Institutional reform that tackles better revenue collection in the mining sector may be one way of countering corruption in the industry. Similarly, mechanisms to ensure the social accountability of domestic and international mining partners may speed up the transfer of wealth to communities still uncompensated for the effect that mining has had on them.
Increased government mining rents have nevertheless sometimes helped African countries such as Mali to achieve measurable economic growth. According to a co-report from the African Development Forum and the World Bank, employees in mining firms in Mali earn on average $1,200 per month. This is higher than the average income for other employees in Mali, including agricultural workers.
Even so, increased government rents have also allowed socio-political repercussions to damage local mining communities. In the DRC, for instance, where the revenue from mineral sales supports warlords who control the mining areas, violence has increased. In economies such as Zambia or the DRC, where mining generates a disproportionately large share of the national revenue, unreasonable government rents in the form of taxes and royalties should be reviewed urgently, to restore investors’ confidence in the industry and redirect the flow of wealth.
