Tanneke Heersche of Fasken Martineau DuMoulin LLP in South Africa considers the legal and practical pan-African developments in the mining sector in 2011.
Despite the fact that Africa is resource rich many African countries are still struggling with the after effects of the 2008 global financial crisis and, with some notable exceptions like Botswana, much of its population has seen limited benefits of resource development to date. Within this environment, and as in many emerging economies, African governments have come under increasing pressure to ensure that the wealth derived from their natural resources is more broadly distributed to the benefit of the general population.
Africa is on the cusp of, or arguably already in, another resources boom and this, together with the fact that the resources sector has made a relatively quick recovery from the credit crisis, has made the mining sector an attractive prospect for governments seeking to restore or improve treasury conditions, or both.
The year 2011 saw many countries actively taking steps to increase the benefits they derive from their natural resources. In a number of African jurisdictions these steps have increased the level of uncertainty in doing business and highlighted issues of nationalisation and transparency. What remains as an underlying principle however, is that countries’ natural resources should be used for the greater benefit of their people.
From the developments in 2011, several broad trends have emerged in the measures that governments have taken. Many of the measures tend to fall broadly within four categories with most governments choosing to utilise a combination of one or more of these. These measures include: acquiring an increased equity stake in projects; increasing taxes and royalties; undertaking policy reviews; and introducing greater oversight and attention to linkages programmes.
Government equity participations in resource development projects have long been a feature of the mining industry in Africa. Such participations are generally viewed positively from a political perspective and are increasingly being considered by governments as a means to extract not only economic benefit, but also as providing a measure of control and a means of knowledge transfer.
Within the course of 2011 alone, and by way of example, we have seen the governments of Guinea, Zimbabwe and Zambia all introduce or go on record as considering, increased equity participations in mining projects. Mozambique has structured a state vehicle to hold participation interests in mining projects and governments in various African states, including Mali, have equity participations on the agenda as they consider and introduce legislative reform in the mining sector.
The government of Guinea passed legislation allowing the state a free carry interest of 15 per cent in all new mining projects with the right to purchase a further 20 per cent interest on specified terms. In addition, its newly elected president Alpha Condé has expressed interest in the government obtaining certain “blocking minority” rights in mining projects. With the new legislation in place and with a view to achieving greater control and influence, Guinea’s government have begun undertaking a review of mining rights granted by the previous government, following a similar process undertaken by
the Democratic Republic of Congo some years ago.
Similarly and also through public declaration of intent, following the election of Michael Sata as Zambia’s new president in September of 2011, there has also been a renewed focus by the Zambian government with regards to the distribution of wealth derived from its mineral resources.
Although declarations of intent of the government to increase its shareholding in mining projects have been unconfirmed at the time of writing this article, the government has moved quickly to demonstrate its commitment to negotiate additional benefits from the mining sector (see below) and there remains a concern that increased state participations may yet be introduced. Many of these declarations of intent from African governments have given rise to the industry identifying resource nationalism as one of the biggest risks affecting the sector.
The perceived association between increased equity participation and the risks of nationalisation and corruption are aptly demonstrated in Zimbabwe, where the Zimbabwean government took a very firm stand on the transfer of 51 per cent of foreign owned mining companies to indigenous Zimbabweans pursuant to Zimbabwe’s indigenisation and empowerment legislation, without the necessary clarity from a legal, political or economic perspective as to how this was to be achieved. The resulting uncertainties and their impact on the investment climate in the country has led to Zimbabwe’s government engaging in direct negotiations with mining companies in relation to the implementation of its stated objectives. The outcome of these negotiations is, at the time of writing this article, unknown and highly anticipated.
During 2011 there were also vocal calls for the nationalisation of mines in South Africa, principally driven by a powerful lobby within South Africa’s ruling party, the African National Congress (ANC). The government has been at pains to assure investors that mine nationalisation is not the formal position of the ANC. Nevertheless, it has been firmly thrown into the political spotlight, being supported by its proponents as a means of ensuring that the benefits of the country’s resources remain with its people.
ROYALTIES AND TAXES
Given the fact that many African countries are resource rich yet cash poor, increasing taxes applicable at various stages of mine and project development as well as increasing royalties is perhaps one of the most effective means of extracting both greater immediate and longer term financial benefits from mineral resources. Amending fiscal regimes, including tax legislation, has been undertaken in numerous jurisdictions throughout the continent, at times as part and parcel of broader development initiatives.
In Tanzania, Africa’s third largest gold producer, where gold exports have tripled but government project tax revenues have remained static, lawmakers have approved a US$27.4 billion economic development plan (EDP), which proposes the imposition of a levy on ‘super-profits’ from mining in order to fund the EDP. The government has also engaged directly in talks with mining companies to negotiate increased royalty payments on exports of key minerals from 3 per cent to 4 per cent. Minerals and Energy Minister William Ngela was reported as saying that the government had reached substantial agreement with mining companies and that they accordingly expect the migration to the new rates to have commenced by the end of 2011.
Royalties are also on the way up in Zambia where, in announcing its 2012 budget proposals in November of 2011, the government highlighted proposals to increase royalties from 3 per cent to 6 per cent.
Other jurisdictions where increasing commodity prices have led to calls for amended fiscal provisions include Ghana, where the Finance Minister, Kwabena Duffuor, has been reported as saying that the ministry was in talks with gold miners in the country with regards to the introduction of additional taxes, including the possible introduction of a windfall tax, so as to ensure that Ghana benefits from the soaring price of gold. Similarly in Guinea, as part of its new regulatory framework applicable to mining, Guinea’s new Mining Code increased customs duties from 5.6 per cent to 8 per cent as well as imposing a new royalty structure enabling royalty rates to fluctuate as commodity prices vary.
The mining industry is not alone in experiencing this wave of increased taxation to benefit from commodities pricing and boost national treasuries, and neither are African nations the only ones considering amended tax structures. Thus oil and gas rich nations like Nigeria are moving to introduce legislation that would fundamentally reform the oil and gas sector (the Petroleum Industry Bill) including through the introduction of new taxes as well as a sliding scale royalty structure. And outside of Africa, with Australia being one the most obvious recent examples, established markets are looking to tax the mining sector in a manner that provides access to market-upside.
As commodity prices fluctuate and the global environment for resource demand shifts, so too must countries continually evaluate their policies as well as their regulatory frameworks. The scope of such reviews extends to related project development issues like transportation logistics infrastructure and associated industries like beneficiation.
Governments have demonstrated a certain amount of caution as commodity interest within their borders shift. Thus when the uranium wave swept the globe, the Namibian government implemented a moratorium on the issuance of uranium exploration and development licences while reviewing its broader development objectives. More recently, and with the increased global interest in coal, the government of Botswana temporarily suspended the issuance of prospecting licences for coal, coal-bed methane and related minerals pending the finalisation of a new development strategy for the coal sector. It is expected that such caution will continue to prevail within those countries home to some of the resources in greatest demand.
Coupled with broader strategic policy reviews, governments are reviewing their mining legislation to ensure a framework conducive to continued development of their resources on a secure and transparent basis. New and improved mining codes/laws have become of particular interest as governments struggle to overcome perceptions of lack of governance and transparency and risks associated with political stability. New mining codes being considered or introduced recently, or both, including, for example, in Mali, Guinea and Burundi, are being viewed as positive developments providing for a strong foundation for continued resource development. The paramountcy of a transparent and clear regulatory framework and its impact on investment into the sector has also been aptly demonstrated in South Africa, where a significant review is underway of the Mineral and Petroleum Resources Development Act to address inconsistencies, ambiguities and lack of clarity.
Policy reviews must extend to integrated development needs or objectives and infrastructure requirements, or both. In many instances this is introducing a cross-border, and therefore political, element into project development time lines and viability. Without integrated policy review and a certain level of co-ordination both within and between governments, issues like transportation logistics infrastructure and power availability can delay or prevent resource development, or both. Both of these issues are, for example, currently highly relevant to the development of large coal deposits in Mozambique and Botswana. Similarly, cross-border and logistics infrastructure matters continue to have a significant impact on the development of iron-ore deposits in Guinea and Liberia.
An overview of policy would not be complete without a reference to beneficiation. At the beginning of 2011 South Africa’s Cabinet approved a beneficiation strategy for South Africa in order to maximize the multiplicity of associated benefits that mining provides, particularly in the supply chain industries, extraction and processing, application and downstream industries and related industries. Notwithstanding the ongoing economic debates in relation to the viability of in-country beneficiation, beneficiation continues to be seen by many governments as presenting a significant opportunity both in terms of unlocking the wealth of the countries’ minerals and in the creation of employment for local populations. This is therefore likely an area that governments will continue to pursue.
Continued global emphasis on corporate social responsibility and sustainable development has provided governments also with an opportunity to incorporate frameworks for community and social benefits, including local procurement, into their efforts to increase the benefits of resource development. The continued emphasis by governments on mining companies providing directly social benefits to affected communities and regions reflects a general view that simply increasing government participation and taxes does not always equate with immediate additional benefit for the local communities affected.
Although not always reflected in formal legislation, there are examples of increased involvement and an increasing role of regulators in this area. Such frameworks can include the development of an appropriate policy and regulatory context to encourage local procurement and to provide an enabling environment for enterprise development and investment; the provision of linkages and investment along the mining supply chain; and requiring that mining companies ensure that local companies have full, fair and reasonable access to information on their procurement needs and have access to tenders, requests for qualifications and other opportunities. The government of Ghana has taken a pro-active approach in this area and is working closely with the national Chamber of Mines to agree a common framework to boost local procurement. In South Africa, local procurement forms an integral component of that country’s Mining Charter, implemented by the government in connection with its empowerment objectives.
INCREASED OVERSIGHT AND GOVERNMENT CAPACITY
In many jurisdictions in Africa, government resources and capacity continue to be a significant issue in the implementation and enforcement of increasingly complex and integrated regulations and procedures. Shortfalls in this area, which can include the availability of basic operational infrastructure, have become a renewed focus as governments review tools at their disposal to increase the returns from their resources. Government capacity and oversight roles will become increasingly important as projects cross borders and as the array of global investors into Africa expands. As evidenced by recent observations and experiences in various African jurisdictions, it is not sufficient to have a well developed and thought-out regulatory environment in place if the government support structures and mechanisms required to implement and enforce such frameworks are not developed in parallel.
* * *
The various measures canvassed in this review do not seem to suggest a return by African governments to the rampant nationalisation of mines 20 years ago. There is a general recognition that for many countries outright nationalisation of their mineral resources did not yield the desired results. So, while governments are actively looking at means of ensuring a wider distribution of the benefits derived from their countries’ natural resources, it appears that this is being done with the recognition that it remains important to be able to attract new (and retain existing) private investment in order to achieve those objectives.
This article represents developments
as at November 2011