Dec '11/Jan '12

Eye on Business

Protecting the family jewels

By R. B. Phiri and D. Cavvadas

African governments likely to increase benefits from resources in 2012

The resource sector’s relatively quick recovery from the 2008 global financial crisis and the anticipated boom in resources are prompting African governments to find ways to distribute mining profits to the general population. These initiatives reflect the widespread view across the continent that the local people must benefit from any future resource sector activity. The pressure for local gain is particularly strong now that government budgets have been squeezed by the global recession and aid payments have been cut back by cash-strapped Western donors.

There are indications that 2012 will bring a shift in attitudes and African governments may look to revise tax regimes, royalty regimes, and joint venture and equity ownership arrangements to restore treasury conditions. A case in point is the government of Guinea, which passed legislation earlier this year allowing the state a free carry interest of 15 per cent in all new mining projects, with a right to purchase a further 20 per cent interest. Newly elected president Alpha Condé has also announced that he wants a 33 per cent “blocking minority” state ownership in all mining projects. These measures are being introduced by the Guinean government in an effort to increase benefits of being the world’s largest supplier of bauxite.

Taking a different approach, but with similar aims of increasing economic benefit, lawmakers in Tanzania have approved a US$27.4 billion economic development plan (EDP), which proposes the imposition of a levy on so-called “super profits” from mining to help fund the EDP. However, the government has moved to assure markets that the tax will not be implemented unless it is justified by economic conditions. Tanzania is Africa’s third largest gold producer. If the price of gold remains high, Tanzania looks set to be rewarded handsomely from the imposition of this proposed levy.

Nigeria appears ready to dust the cobwebs off its Petroleum Industry Bill (PIB) that has languished in the National Assembly since 2009. The PIB seeks to fundamentally reform the oil and gas sector to benefit Nigerians. It replaces the current standard royalty of 20 per cent for onshore and 18.5 per cent for swamp/shallow water operations, with a 25 to 50 per cent sliding scale. It also contains new taxes, namely a hydrocarbon tax, 30 per cent company income tax, Niger Delta Development Commission levy rent on acreages, education tax and penalty for flared gas.

The government of Namibia will be looking to increase the participation of Epangelo Mining, the newly created state-owned mining company, in the sector. The country’s Minister of Mines and Energy, Isak Katali, told Parliament in April that the Namibian government would give Epangelo Mining exclusive rights to all mining and exploration of strategic minerals. These include uranium, gold, diamonds, copper, coal, rare earths and zinc. The minister has, however, indicated that this would not impact existing exploration and mining rights. Namibia is the world’s fourth-largest uranium producer.

This is just a short list of the many proposed changes within Africa aimed at giving governments greater access to minerals and the wealth derived from them. Such a list would not be complete without a mention of Africa’s largest economy, South Africa, and its neighbour, Zimbabwe. Over the past few months, the Zimbabwean government has blatantly stepped up the implementation of its indigenization policy that calls for the transfer of 51 per cent of all foreign-owned mining properties to indigenous Zimbabweans, including the government, which will likely pursue these measures with greater enthusiasm during 2012. The outcome of negotiations between the government and miners over the coming year is also highly anticipated.

In South Africa, the jury is out on the direction the country will take. All eyes will be on the outcome of the ruling political party’s elective conference in 2012, wherein the party is expected to discuss the possible nationalization of strategic sectors of the economy, including the resource sector. There is uncertainty as to the form that this nationalization may take and its potential impact on the resource sector.

Still, this trend towards resource nationalism does not suggest a regression by African governments to the rampant nationalization of mines of 20 years ago. It appears that measures will be largely aimed at boosting the state’s share of joint ventures, increasing royalties and reducing fiscal concessions. It also does not appear that many of these measures will be retrospective.

Mining companies doing business in Africa and seeking to ease their exposure to resource nationalism should make better use of existing national legislation, development and investment agreements, state agreements and bilateral investment treaties. They should also look more closely at the ambit of clauses dealing with hardship, political force majeure, expropriation, political risk insurance and stability in their arrangements with African governments.

Reitumetse Benedict (Ben) Phiri is an associate with Fasken Martineau in Johannesburg. His practice spans mergers and acquisitions, joint ventures, asset and business acquisitions and disposals, and loans and financings. 

Dimitri Cavvadas is a partner with Fasken Martineau in Johannesburg. His commercial law practice focuses on mergers and acquisitions and capital market transactions within the resource sector.

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