The resurgence of resource nationalism in Africa

Peter Leon contrasts what is happening in Tanzania and SA


An extended version of comments by Peter Leon, Partner and Africa Co-Chair, Herbert Smith Freehills to HSF/AAMEG Breakfast Panel Discussion at Africa Down Under, Herbert Smith Freehills, Perth, 31 August 2018

1. Different underlying causes appear to be promoting a resurgence of resource nationalism in some key African mining jurisdictions: the DRC, South Africa and Tanzania. What are these underlying causes and how does the position in Tanzania and South Africa differ from that in the DRC?

The resource nationalism ‘cycle’ seems attributable to what economists call the ‘obsolescing bargain’,[1] which sees bargaining power shift from foreign investor to host state after an investment has been made (and cannot physically be moved to another jurisdiction):

Countries that are rich in natural resources, but lack the capital, operational and technological resources to extract them profitably, have historically tended to adopt liberal legal frameworks and fiscal incentives to entice foreign investors (who may otherwise invest elsewhere, if another jurisdiction promises a better return on their capital outlay).

Once investments have been immovably made (or ‘sunk’) and are generating returns (typically after at least ten years, in extractive industries), the host state might flex its legislative muscle to claim a greater share of the returns than the prevailing laws or licence terms allowed.

The drivers of resource nationalism are complex and country-specific, although some factors are common.

Dr Sangwani Ng’ambi, a Zambian jurist, observes “a correlation between the rise in the price of the host state’s natural resource and the rise of resource nationalism”.[2] This often follows a period of price depression, during which the state receives less revenue from royalties and export duties on key minerals. A subsequent surge in prices can be seen as presenting an opportunity to remedy the fiscal deficit.

This is well illustrated by recent experience in the DRC, where copper and cobalt alone accounted for over 70% of export earnings in 2016.[3]

- Over the four years before the DRC enacted its investor-friendly 2002 Mining Code (as well as its liberal 2002 Investment Code), the price of copper had been vacillating around US$ 1,600 per tonne, while the price of cobalt was around US$ 40,000 per tonne and falling.[4]

- Then, the commodities boom began. By 2008, the copper price had more than quadrupled to US$ 7,000 per tonne, while cobalt had more than doubled to US$ 93,000 per tonne.[5]

- By 2016, however, when copper and cobalt alone accounted for over 70% of the DRC’s export earnings, the copper price had fallen to a 10-year low of US$ 4,800 per tonne, and cobalt had plummeted to a 25-year low of US$ 23,800 per tonne.[6]

- Unsurprisingly, the DRC faced new fiscal depths: tax revenue fell below 10% of GDP for the first time since the 2008/09 global financial crisis; the fiscal balance dipped into deficit; and annual GDP growth slumped to 2.4% (from an average of over 7% for the preceding five years).[7]

- While prices recovered – by January 2018, copper and cobalt were back above US$ 7,000 and US$ 80,000 per tonne respectively – the DRC government was preparing a revised (resource nationalist) Mining Code, which President Joseph Kabila signed into law on 9 March 2018.[8]

- Justifying the new Code’s 10% windfall profit tax for “strategic minerals”, Prime Minister Bruno Tshibala explained at the time: “If we look at the situation today, cobalt – where a tonne cost $30,000 in 2007 and now goes for $85,000 per tonne – is a metal that is both rare and strategic, so the state wants to extract profit… We cannot accept a situation where, despite a price evolution for commodities, this does not profit the country, it only profits investors.[9]

- It remains to be seen how the government will adapt to the ensuing downturn in the prices of its key commodities – since the signing of the new Mining Code, copper has declined from over US$ 7,000 to below US$ 6,000 per tonne, while cobalt has fallen from US$ 95,000 to US$ 64,000 per tonne.[10]

As Dr Ng’ambi notes, however, resource nationalism is “influenced not only by the desire to capture more revenue from a windfall in prices but also a desire by states to retain their political hegemony”.[11] Thus, owing to its populist appeal, resource nationalism also arises where political rulers fear losing office.

- This is not the case for authoritarian regimes, such as that prevailing in the DRC – while this December’s election will end Joseph Kabila’s 18-year presidency, there is little doubt that his chosen successor will win.

- By contrast, in Tanzania, electoral support for the Chama Cha Mapinduzi party has declined from 80% in 2005 to 58% in 2015, and another national election looms in 2020.

- Similarly, in South Africa, support for the African National Congress (ANC) in municipal elections fell from 66% in 2006 to 54% in 2016, and the party now fears losing its majority in the 2019 national and provincial elections (especially in the Gauteng province, which contains both the political capital, Pretoria, and the commercial capital, Johannesburg).

- In particular, the ANC appears anxious to offset electoral gains being made by the Economic Freedom Fighters (EFF), a breakaway party led by Julius Malema, the firebrand former youth league leader, expelled from the ANC in 2012. The EFF advocates the uncompensated nationalisation of land, mines and banks.

- This goes some way to explaining President Cyril Ramaphosa’s announcement last month that the ANC will amend the Constitution to “outline more clearly the conditions under which expropriation of land without compensation can be effected”. In doing so, the party pre-empted the outcome of a nationwide public consultation process currently being conducted by Parliament’s Constitutional Review Committee, following a motion tabled by the EFF. 

2. Although the underlying cause for the rise in resource nationalism in South Africa and Tanzania appears to be the same, the rate at which the measures are implemented differs. Why is this so and what are the consequences for foreign investors? 

The main difference between resource nationalism in Tanzania and South Africa is one of degree. The phenomenon is most likely and most extreme in democratic countries with weaker constitutional institutions (in Dr Ng’ambi’s words, “where the executive is still accountable to the people through set elections but where once in power it is less susceptible to checks and balances”).[12]

Tanzania’s radical and far-reaching 2017 laws were rushed through Parliament in six days, under a Presidential “certificate of urgency” (effectively an executive fiat, akin to declaring a state of emergency), with no prior public participation and with immediate effect. Similarly extreme regulations on “local content” (January 2018) and a draconian “integrity pledge” (July 2018) were also promulgated with no prior public participation, and affording companies only three months to comply.

In stark contrast, far more modest amendments to South Africa’s mining law have been entangled in Parliament for six years, following two years of well-publicised ANC policy development.[13] In 2010, appeasing a demand by the youth league (led then by Julius Malema) for the nationalisation of mines, the ANC commissioned an expert study, which found in 2012 that this would “clearly be an unmitigated economic disaster for our country and our people”,[14] and instead recommended a range of lesser reforms, some of which were incorporated into an amendment Bill the following year.

The Bill’s most extreme proposal was to empower the executive to impose quotas of designated raw minerals to be offered to local beneficiators at discounted prices, failing which they may not be exported without prior ministerial consent.[15] Citing the prospect that this (among other aspects of the Bill) would be struck down by the courts as unconstitutional, the President referred it back to Parliament in 2015 for reconsideration and further public participation.

Remarkably, last week, Mineral Resources Minister Gwede Mantashe announced that he was seeking Cabinet’s permission to withdraw the amendment Bill entirely, expressing regret for the regulatory uncertainty it has wrought on the industry.[16]

This vast difference between Tanzania and South Africa is largely attributable to the relative strength of checks and balances on the power of the executive:

- On the 2017-2018 Rule of Law Index compiled by the World Justice Project (an initiative of the American Bar Association),[17] Tanzania ranked 96th overall (out of 113 countries assessed), 71st for “constraints on government powers”,[18] and 100th for “open government”.[19] Possessing far stronger independent institutions, South Africa ranked 44th overall, 41st for “constraints on government powers”,[20] and 34th for “open government”.[21] 

- The independence of the press – the fourth estate – is relevant too. On the 2018 World Press Freedom Index compiled by Reporters Sans Frontières, Tanzania ranks 93rd globally, whereas South Africa ranks 28th (even higher than France, the United Kingdom and the United States).[22]

[1] See Sangwani Patrick Ng’ambi, Resource Nationalism in International Investment Law, Routledge, 2016, at 25 to 31.

[2] Id, at 33.

[3] According to the Observatory of Economic Complexity, based at the Massachusetts Institute of Technology (MIT), in 2016 the DRC exported US$ 2.37 billion of refined copper (52.4% of its total US$ 4.52 billion of exports), US$ 760 million of cobalt (16.8% of total exports), and US$ 181 million of raw copper (4% of total exports). Seehttps://atlas.media.mit.edu/en/profile/country/cod/.

[4] See www.metalary.com/copper-price/ and www.metalary.com/cobalt-price/.

[5] Id.

[6] Id.

[7] World Bank, Macro Poverty Outlook for Sub-Saharan Africa, April 2008.

[8] See “Heightened risk? Resource nationalism on the rise in Sub-Saharan Africa”, Creamer Media’s Mining Weekly, 15 June 2018.

[9] See “Cobalt a ‘strategic’ metal under new Congo mining code”, Financial Times, 14 March 2018.

[10] According to the London Metal Exchange: see www.lme.com.

[11] Ng’ambi (n 1 above), at 34.

[12] Id, at 4.

[13] The Mineral and Petroleum Resources Development Amendment Bill, 2013 (the Bill) originated

[14] “State Intervention in the Mining Sector (SIMS)”, ANC Policy Discussion Document, March 2012, at 28.

[15] Clause 21 of the Bill, amending section 26 of the MPRDA.

[16] See “Mantashe wants to axe long-delayed MPRDA Amendment Bill”, Business Day, 22 August 2018.

[17] See https://worldjusticeproject.org/our-work/wjp-rule-law-index.

[18] With a score of 52%, including sub-scores of 49% for “limits by legislature” and 51% for “limits by judiciary”.

[19] With a score of 38%, including sub-scores of 24% for “publicized laws and government data” and 49% for “civic participation”.

[20] With a score of 61%, including sub-scores of 54% for “limits by legislature” and 66% for “limits by judiciary”.

[21] With a score of 62%, including sub-scores of 54% for “publicized laws and government data” and 65% for “civic participation”.

[22] See https://rsf.org/en/ranking