A number of African countries are proposing radical changes to their tax codes to gain a greater share of their mining industries’ economic benefits and to capitalise on rising commodity prices.
The term being used to describe governments’ more active role in managing their natural resources is resource nationalism, a softer version of nationalisation, which has more sinister connotations.
Even developed countries, plagued by the hangover from the global financial crisis of 2008 and under immense strain to deal with ballooning fiscal deficits and bloated public sector debt, are resorting to radical methods in their mining sectors to get their fiscal houses in order. Australia stunned investors last year when it announced a 40 percent “supertax” on mines, while the Canadian government’s refusal to accept a foreign buyout of a locally owned gas explorer raised eyebrows.
According to Ernst & Young’s yearly “Business risks facing mining & metals 2011/12” report, at least 25 countries increased or announced intentions to increase their governments’ take of mining profits through taxes or royalties during 2010/11. Taxation has been heavily targeted in order to generate revenue.
In this context, Africa is no different. The continent has lost significant revenue over the years through its failure to adequately capture proceeds from resource extraction and is now attempting to redress this. From Zambia, the region’s largest copper producer, to Ghana, which stands on the cusp of an oil bonanza, to South Africa as well as Zimbabwe through its controversial indigenisation policy, a wave of recent developments has caused much consternation within the global business community.
The underlying principle is that countries’ natural resources should be used for the greater benefit of their people. In itself, this is a sound principle, however, it has created anxiety among investors who fear a return to the rampant nationalisation that ensued two to three decades ago.
While nationalisation is often equated with ownership of resources, there are variations. There is the wholesale and direct expropriation of resource rights and plants without compensation by government decree (which spooks investors), and a more subtle form currently afoot known as “creeping” nationalism, which is more accommodating of business considerations. Among the more amenable measures being proposed are: acquiring an increased equity stake in projects; increasing taxes and royalties; undertaking policy reviews; and introducing greater oversight and attention into projects.
This approach reflects a global wave of “soft” or “passive” resource nationalism, in which governments seek a greater share of mining company profits through changing regulation, taxation and contractual terms rather than wholesale expropriation. While governments seek a wider distribution of the benefits derived from their natural resources, it seems this is being done with the recognition that it is important to be able to attract and retain investment.
The need for such measures is apparent. In Zambia, for example, mining revenues are a fraction of what one would expect. According to the World Bank, the industry accounts for 15 percent to 18 percent of gross domestic product and exports more than $3 billion (R16.6bn) worth of copper a year (about 80 percent of exports), but the sector has not contributed revenues of similar proportions to government coffers. Despite a slow improvement in tax revenue from the mining sector, it remains very low, rising from a mere 12.6 percent in 2010 to only 17.7 percent in 2011.
Similarly, Ghana collects only 5 percent of its fiscal revenue from mineral production. The country’s total mining tax revenue as a percentage of total government revenues has remained comparatively low at less than 30 percent.
The global credit crunch forced governments to focus on strategies to finance development, such as growing their tax bases, deepening domestic capital markets, and reducing dependency on donor funding.
Increasing their tax base is a priority for African governments, but it is difficult to achieve. Unlike the developed world, African countries have limited sources of funding and revenue at their disposal. Whereas the developed world can rely on its taxpayers to fund a significant portion of its fiscal budget, incomes in Africa are extremely low. Furthermore, there are only a handful of taxable corporate entities, due to the underdevelopment of industries on the continent. Therefore, policymakers must seek alternative measures.
The International Monetary Fund (IMF) has been a strong proponent of these new tax-reform measures, expressing the view that African countries have not benefited enough from rising commodity prices. In a recent statement on Ghana, the IMF supported additional tax policy measures, particularly on natural resources.
Despite the rationale, debate around this issue has been extremely polarised. The business and investment community sees changing policies and regulations as the greatest risk to the mining industry, and many perceive it as an attempt to dismantle the effective functioning of capitalism. The threat of resource nationalism haunts explorers, producers and investors to such an extent that Ernst & Young put it as the top risk factor affecting mining companies in its 2012/13 forecast.
Unions, on the other hand, have lauded recent initiatives as a way to protect finite resources and ensure a fair share of revenues for governments, stating that such measures are long overdue and imploring governments to go further in their efforts.
While some of the concerns expressed by the business community are legitimate, such as the impact the measures would have on their earnings, the need to maintain profitability needs to be viewed against the backdrop of the vast socio-economic needs of many post-conflict states, the relatively low levels of tax, antiquated investment codes and substantial infrastructure and energy needs.
However, such measures will only be effective and create the envisaged spin-offs if complemented by other steps. For one, the ability of governments to collect and manage tax revenue needs improvement and better transparency. Sovereigns must develop the capacity and regulatory bodies to effectively channel resources into productive sectors such as energy and infrastructure. If successful, such moves can stimulate local economic growth by spurring knowledge transfer, developing the growth of the manufacturing industry and ancillary business and helping to modernise a country’s infrastructure. It will also allow governments to accumulate reserves and improve their fiscal positions.
The key to ensuring resource nationalism does not undermine a country’s growth agenda is effective communication. African governments must avoid reckless and populist political rhetoric, and make sure that changes are communicated well in advance and are not unduly punitive. Mining houses must be treated as partners rather than adversaries.
Mining companies are highly unlikely to delay or cancel projects if changes are communicated properly, given the lucrative nature of the industry. Instead, they are likely to better equip themselves to adapt to the changes. If they can quantify and qualify the risks associated with their planned operations, mining companies will build relationships with the relevant stakeholders and plan accordingly.
Although the uncertainty around nationalisation persists, the solutions being tabled are, by and large, pragmatic. Few governments think they can do a better job of extracting the minerals themselves; they simply want a bigger pay-off. This would suggest the alarmist talk around resource nationalism is overblown.
The challenge for African sovereigns will be to strike a balance between increasing the demands they make of foreign mining operators and maintaining an investment-friendly environment as they look to encourage industry expansion and attract funding for new ventures. Although a wholesale change (that will unnerve investors) to a country’s mining policies is unlikely in the near term due to the fact that administrations are unlikely to harm the proverbial golden goose, changes to antiquated mining legislation is necessary and inevitable, as governments attempt to ensure that the sector contributes its fair share of revenues.
Ronak Gopaldas is a country risk analyst at Rand Merchant Bank.