The many shades of resource nationalism

© Isuru Senevi
Open pit gold mine in Burkina Faso

The nationalisation of resources has been the subject of heated debate in recent months, both within Africa and beyond.

Abroad, the Canadian government’s recent refusal to accept a foreign buy-out of a locally-owned gas exploration company has raised eyebrows. At home, emotive exchanges over the possible nationalisation of the mining sector have dominated the public discourse in the run-up to Mangaung.

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 some countries had the administrative ability to collect tax revenue, the money was not always invested into visible and viable long term national development projects aimed at building Africa’s human capital. The costs of this lapse, coupled with the plight of many of the continent’s citizens who continue to slip from the vulnerable category into destitution, is driving African countries to seek greater control over their natural resource endowments.

This trend is in line with several developed countries, amongst them Canada and Australia, which have adopted protective and anti-competitive policies largely targeting Chinese investments. Such responses have strengthened the resolve of African leaders in this terrain. Nonetheless, the difference between African and Western resource nationalism is in the modus operandi used in the pursuit of nationalistic goals.

For instance, whereas Canada’s refusal to allow Malaysia’s Petronas to buy Progress Energy Resources Corporation has been termed ‘soft resource nationalism’, Africa’s efforts are regarded as ‘hardcore nationalism’. The radical changes required in the regulatory framework to bring this sector into compliance with international corporate standards contribute to this perception. 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.

A distinct pattern in resource nationalism seems to be emerging in Africa. Where the state is strong and unionism is weak, as in Tanzania and Ghana, resource nationalism is driven from the top, often with 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, combined with high levels of urbanisation and strong civil society organisations such as 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 simply termed protectionism.

Resource nationalism in Africa thus follows these two main routes: the bottom-up, heady mix of populism combined with genuine concerns around 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. The most affected sector is the mining industry where the majority of international investors are found.

One of the rallying points for African governments in support of resource nationalism is the under-declaration of profits by mining companies. They 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 extensive mineral wealth and being Africa’s third largest producer of gold, the Tanzanian government reported that the mining sector contributed only 3.8% to the country’s GDP in 2011. A 2009 report by the World Bank and UNCTAD revealed that Tanzania lost $207 million 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 utilised by investors across all sectors. Many African countries have struggled to reign in investors who change their corporate status and assume a new company 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% of its fiscal revenue from mineral production and has plans to increase the corporate tax rate for mining operators, reduce all capital allowances and introduce an additional windfall tax. Revenue collected from private mining investors in Ghana’s gold sector in the first six months of 2012 surpassed all Official Development Assistance inflows into Ghana for the last three-years, implying that with carefully calculated and targeted taxes, good management practices and efficient tax collection systems, resource-endowed African governments can learn to do without most types of aid money.

However, wanton policy changes and shifting goal posts are not helping the laudable case of African policymakers. Shedding populist rhetoric is imperative for Africa’s position on resource nationalism to gain credence. This also includes taking responsibility for the failures to channel money derived from national resources into state coffers with the view of improving the productive capacity of African markets and building Africa’s human capital, instead of siphoning it into private slush funds.

An important first step is to gather sufficient information on the dividends deriving from investment in Africa’s mineral complex. However, government secrecy on mineral revenues in most countries may militate against gathering quality data on the proceeds from resource extraction. Such a cost-benefit analysis is important to assess which policy changes would be most beneficial. Civil society organisations could play an important role here in filling the information gap. Importantly, Africa’s mining sector will gain greater credence if more countries join initiatives such as the Extractive Industries Transparency Initiative (EITI) 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.

For South Africa, more specifically, one might ask the following questions: How much revenue derived from natural resources has been ‘lost’ in the government coffers in the last 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, especially related to South Africa’s competitive positioning in this strategic sector, its sustainable exploitation and its responsible management for future generations?

In the end, African governments, including South Africa, might just shoot themselves in the foot if nationalistic policies are not based on such a rational, cost-benefit analysis. More importantly, Africa’s approach going forward on this discourse has to be attended by appropriate policies focused on creating a stronger, more robust regulatory environment that supports the sustainable exploitation of Africa’s resources to the benefit of its people.