Resource nationalisation policy lacks rational basis

Published Nov 27, 2012

Share

The nationalisation of resources has been the subject of heated debate in recent months, both within Africa and beyond. In South Africa, emotive exchanges over the possible nationalisation of the mining sector have dominated the public discourse in the run-up to Mangaung.

Further afield, the Canadian government’s recent refusal to accept a foreign buy-out of a locally-owned gas exploration company has raised eyebrows.

While nationalisation is often equated with ownership of resources, there are in fact many variations of this phenomenon. One means by which the state can exert control over resources in its territory is through taxation. Africa has lost significant revenue over the years through its failure to adequately capture proceeds from resource extraction on the continent.

In the few cases where countries had the administrative capacity to collect tax revenue, the proceeds were not always invested in visible and viable long-term -national development projects aimed at building Africa’s human capital. The cost of this lapse, including for citizens, continues to drive African countries to seek greater control over their natural resources.

This trend is not limited to developing countries. Canada and Australia have adopted protective and anti-competitive policies largely targeting Chinese investments. Such responses have strengthened the conviction of many African governments keen to exercise stricter control over the extractive sector. Nonetheless, a crucial difference separates African and Western resource nationalism in terms of the deployed modus operandi.

For instance, whereas Canada’s refusal to allow Malaysia’s Petroliam Nasional to buy Progress Energy Resources has been termed “soft resource nationalism”, Africa’s efforts are regarded as “hardcore nationalism”.

In the West, because of the strength of regulatory, business and environmental frameworks, incremental changes suffice to cater for the protection of national interests. Just like African governments, Canada’s federal government reviews all big foreign acquisitions to ensure desirable “net benefits” to the country’s economy.

The radical changes required to bring the African regulatory framework into compliance with international corporate standards partly feeds the perception of aggressive resource nationalism.

A distinct pattern in resource nationalism seems to be emerging in Africa. Where the state is strong and labour unions weak, as in Tanzania and Ghana, resource nationalism is driven from the top. This promotes radical policy shifts that cause ruptures in production and markets.

In countries with strong unions where the state’s influence is mediated by other actors, and where high levels of urbanisation and strong civil society organisations exist, such as in South Africa, the process is driven by demands for transformation from below. Both scenarios create a very uncertain operating environment for investors. This is in stark contrast to the West, where policy changes to block specific foreign investments are termed protectionism.

Resource nationalism in Africa thus follows these two main routes: the bottom-up, heady mix of populism combined with genuine concerns about the sustainability of the sector, as in South Africa; and the top-down, state-led model as in Tanzania, Ghana and the extreme case of Zimbabwe.

One of the rallying points for African governments in support of resource nationalism is the under-declaration of profits by mining companies. These governments believe that this has been as costly to the welfare of African societies as corruption and weak governance.

Tanzania serves as a good example; despite being endowed with significant mineral wealth and being Africa’s third-largest producer of gold, the Tanzanian government reported that the mining sector contributed only 3.8 percent to the country’s gross domestic product in 2011. A 2009 report by the World Bank, Unctad and the International Council on Mining and Metals revealed that Tanzania lost income of $207 million (R1.8 billion) due to under-declaration of profits in 2007 alone.

Tanzania’s pronouncement in July that all gold mining companies operating for more than five years must start paying corporate tax is partly a response to the tax evasion and avoidance tactics used by investors across all sectors. Many African countries have struggled to rein in investors who change their corporate status and name each time the company is due to pay corporate taxes, thus prolonging the period of tax-free benefits. Weak tax regimes and low management capacity to enforce tax compliance are evidently some of the key challenges.

Ghana, like many other African countries, collects only 5 percent of its fiscal revenue from mineral production and has plans to increase the corporate tax rate for mining operators. It also plans an additional windfall tax and reduction of all capital allowances. Revenue collected from private mining investors in Ghana’s gold sector in the first six months of 2012 surpassed total official development assistance inflow for the last three years. This implies that with carefully targeted tax regimes, good management practices and efficient tax collection systems, resource-endowed African governments can gradually wean themselves off foreign aid money.

However, erratic policy changes are not helping the laudable campaign of African policymakers for fairer returns to the state and society. Shedding populist rhetoric can lend credence to Africa’s position on resource nationalism. This also demands greater responsibility for tackling the entrenched mismanagement of resource proceeds, ultimately to improve the productive capacity of African markets and invest in the continent’s human capital.

An important first step is to gather sufficient information on the dividends deriving from mining investments in Africa. However, the official secrecy surrounding mineral revenues in most countries may militate against gathering quality data, which is fundamental to holding governments accountable. Such a cost-benefit analysis is important to assess which policy changes would be most beneficial.

Importantly, Africa’s mining sector will gain greater credence if more countries join initiatives such as the Extractive Industries Transparency Initiative which compels big and smaller corporations to improve compliance with global business ethics and governments to be more transparent in reporting on revenues extracted from the mining, oil and gas sector. Civil society organisations increasingly play an important role here, but many of the flagship initiatives, including Publish What You Earn, remain largely voluntary and riddled with loopholes.

For South Africa, more specifically, one might ask the following questions: how much revenue derived from natural resources has been “lost” from government coffers in the past 10 years?

How can the various stakeholders in the mining sector help design a common, national agenda that addresses socio-economic justice issues? Have all parties adequately considered the potential costs versus the gains of the current “nationalistic discourse” in the long-term? What about considerations concerning South Africa’s competitive positioning in this strategic sector, sustainable exploitation practices and responsible management for future generations?

In the end, African governments may be shooting themselves in the foot if nationalistic policies are not based on a rational, cost-benefit analysis. Africa’s future approach has to be based on appropriate policies focused on creating a stronger, more robust regulatory environment that supports the sustainable exploitation of Africa’s resources to benefit its people.

Annie Barbara Chikwanha is a senior researcher in the Governance of Africa Resources Programme at the SA Institute of International Affairs.

Related Topics: