State-run miners: best of a bad bunch
Chris Cann in London, 15 December 2011
THE trend toward resource nationalisation that has taken hold across the globe is here to stay and miners need to get on board and embrace the limited opportunities that this trend brings or face a painful future, according to resource development guru, Brian Menell.
“We, as the mining industry, cannot hide from the growing trend that is resource nationalism,” Menell said during his keynote Mines & Money presentation last week. “And, in my view, this trend is a long-term one.”
The nationalisation wave would concern all mining companies regardless of their location as the number of countries flexing their muscles continues to increase – from the usual suspects such as Zimbabwe, Venezuela and South Africa to, more worryingly, typically mining friendly places such as Zambia and Australia. Countries with developing industries, such as Guinea and Mongolia, have started in line with recent thinking, locking in large government stakes wherever possible.
“Resource nationalisation comes from growing democratisation and an increasing sensitivity, even amongst autocratic regimes, to populist and media sentiment,” Menell said. “In much of the developing world, the mining industry is perceived as having been a largely exploitative tool of imperialist interest.
“Regimes looking to get re-elected in volatile environments … must therefore be seen to be redressing this perceived historical wrong. The combination of this imperative together with fiscal demands in times of economic stress and perceived unreasonable profits with commodity prices still relatively strong, creates an irresistible political momentum.
“The effects on the mining industry of this macro trend are magnified by both the growing capacity on the part of many growing world governments, giving them more tools to use, and by their growing populous. Western powers are no longer seen as quite as frightening as they once were, particularly given their current structural challenges and the presence of the Chinese, [which] has brought choices to balance their influence.”
The face of change
Menell said nationalisation took several forms, some of which he could not stomach, and others that he believed represented the best chance of a sustainable and profitable future for all parties.
Australians would be most familiar with punitive increases in taxes and royalties. This is also the form nationalisation has taken in Zambia and Peru. He said punitive measures were a short-term response to fiscal stress and the perceived commodity super-cycle. They were described as “costly, disruptive to efficient planning and capital allocation” and “often represented the industry’s failure to educate their host governments and to encourage, engage and develop alternative models of state participation”.
He was similarly critical of foreign ownership protectionism. The Canadian Government’s decision to block BHP Billiton’s takeover of Potash Corp was the embodiment of this particular brand of nationalisation. These decisions are politically motivated, giving miners no way to prepare themselves and little room for recourse.
Enforcing companies to beneficiate ore locally is a more subtle form of resource repatriation and has been successful with Indonesia’s tin industry and Botswana’s diamond sector, however, Menell said such a move was doomed if forced on industries at random without properly considering the economic feasibility.
The most significant, dangerous and also the policy with the most room for miners to seize opportunities, was an increase in government equity stakes, which was the first step toward the establishment of state-owned mining companies, according to Menell.
He said while state-run mining companies had mixed records, to be kind, when established properly with industry consultation, they were far superior to the largely short-term solutions above. They may also represent the only long-term way forward for miners.
Managing state affairs
Ultimately, state-run miners should provide a vehicle through which the government can participate directly in the mining industry without disrupting the efficient operation of the private sector. This has rarely proved successful, with many state-run bodies developing into corrupt and negative influences on the industry, which deter investment.
Menell raised De Beers’ formation of Debwana with the Botswana Government to manage the diamond industry as an example of how state-owned companies could work. He said for a state-run company to be a positive ambassador for the government and the mining industry, it needed to be transparent and keep its ambitions for equity participation in check.
“National mining companies should be transparent in order for the electorate, the media, and the international community to clearly see the value that is accruing to the nation,” he said. “[And] the equity participation by national mining companies in new projects should be limited to a ceiling of 25% of which a maximum of 10% should be free-carried.”
He also said large equity stakes for the state should come with tax holidays and lower royalties for miners.
Governments must be open to working with industry to provide a framework within which a state-run miner can work. That also requires the mining industry to be open to these discussions, rather than automatically resisting all moves toward resource nationalisation.
The time for acceptance
Miners would be best served accepting that a change is upon us and moving with it, but their ability to assist in the establishment of what Menell termed a “new generation of state-owned companies” may be inhibited by an inherent lack of respect within the industry. This issue is more prevalent in third world and developing nations.
“Dealing with officials and local colleagues in our host nations with a genuine appreciation of the value of their culture and position is an essential prerequisite for constructive engagement on the type of emotive and difficult issues that litter the resource nationalism field,” Menell said.
“If we drop in on flying visits and act like we have all the answers, and act like we don’t need to bother understanding local, historical, cultural and political dynamics, we will fail. And we will end up as targets for endless value extraction until we eventually run away.
“We need more political skills in the industry. We need to evolve a new culture of management that gives equal weighting and seniority to technical and political capacity. We need more leaders with the acumen and confidence to act like Harry Oppenheimer [in establishing Debwana].
He said the only way a “long-term, sustainable solution” to this issue could be created was if a “level playing field” was established – a “partnership between equals” where high level bureaucrats were dealing with high level executives in an environment of understanding and respect.
The points laid out by Menell were true. Few would deny that. But there were those in the audience who felt what they had heard was a set of ideals that neither governments nor industry was capable of living up to. Not surprisingly, when asked to name current examples of companies and governments working with the skills sets and objectives outlined, he struggled. But then that is the change he is calling for.
In the end, the government-industry relationship that was described is something to work toward. Few, if any, will manage to strike the perfect balance, but many should be able to come up with a workable agreement. The first step in every case will be accepting that change is inevitable.
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