In countries ranging from Zambia and Ghana to South Africa and Tanzania, poorly thought-out mining policies that lack certainty and consistency are hampering the search for new mining investment, and cast a shadow over the continent’s longer-term economic growth.
This was a common refrain heard at the annual Mining Indaba, the world’s largest mining investment conference, which was held in Cape Town, South Africa, from 6-9 February 2017.
Reflecting the subdued investor mood in mineral-rich South Africa, Africa’s largest mining destination, the influential Johannesburg financial newspaper, Business Day, wrote in an editorial:
“This week’s Mining Indaba comes amid signs that the commodity cycle may be turning… But South Africa will not be positioned to take advantage of the green shoots of spring, or the heat of summer, unless the environment for mining is conducive to private-sector investment. And the [South African Mineral Resources] minister’s bland speech was frighteningly short of any sign that he had understood investors’ concerns about the regulatory environment for mining – or that he had intentions of doing anything about these concerns.”
The editorial adds: “There are other much easier and more attractive destinations for mining investment, by junior or senior miners, and international investors are increasingly passing South Africa by.”
With perhaps the conspicuous exception of Botswana – a model mining-investor destination by international standards – these serious investor concerns are not limited to South Africa. They affect virtually all African mining destinations, notably Zambia, Ghana, Guinea, Tanzania and the Democratic Republic of Congo (DRC).
There are other much easier and more attractive destinations for mining investment
To a large extent, these concerns stem from sudden and unexpected changes made by many mineral-dependent African countries to their mining regimes after the 2008-09 global financial crisis. Hit by the twin hammers of lower revenue and rising debt, these countries attempted to extract more money from their mining sectors at a time when they could least afford it.
“Many African countries made rash and unpredictable changes to their mining regimes, creating regulatory uncertainty and harming investor confidence,” writes Peter Leon, a partner at the global legal practice Herbert Smith Freehills, in an analysis published in Business Day to coincide with the start of the Mining Indaba.
Ghana, for example, announced in 2012 that it would impose a 10% windfall tax on gold mining and review its fiscal stability agreements with foreign mining companies, but failed to follow through on these measures. Then in 2014, Ghana amended its mining law to replace the fixed 5% royalty with “wide executive discretion” to prescribe new rates.
The resulting regulatory uncertainty “weighed on sentiment”, and considerably affected Ghana’s ranking in the authoritative Fraser Institute’s annual review of the investor attractiveness of the world’s mining destinations. “Ghana fell from its enviable 2011 ranking of 17th in the world to 38th in 2012, and then fluctuated from 30th in 2013 to 44th in 2014 and 31st in 2015,” says Leon.
Another notable example is the DRC, Africa’s largest copper producer, the world’s largest cobalt producer and a major source of diamonds, gold, tantalum and tin. While the country’s 2002 mining code “strikes a relatively reasonable balance between the interests of the state and the private sector”, the industry was suddenly thrown into turmoil in 2012, when the government announced drastic reforms. These included increasing the state’s free carry from 5% to 30%, doubling royalties on copper, cobalt and gold to 6%, and imposing local beneficiation quotas.
“In the face of strong industry resistance, these reforms were never implemented, and at the 2016 Mining Indaba, the DRC’s mines minister announced they had been formally abandoned,” says Leon. The prolonged investor uncertainty “hobbled investor confidence”, and saw the DRC plunge in the Fraser Institute rankings, from 54th place in 2011 to 75th in 2012 and 2013. It recovered to 67th in 2014 and 60th in 2015.
“Similar dynamics played out in Guinea, Tanzania, Zambia and, of course, South Africa, where amendments to the Mineral and Petroleum Resources Development Act proposed in 2013 have entered the fourth year of legislative limbo…” writes Leon.
Leon’s reference to Zambia relates to the numerous changes made to the country’s mining legislative framework and mining-tax regime in the past decade. These changes culminated in the ill-fated 20% Mineral Royalty Tax proposals of 2014/15, which nearly brought the Zambian mining industry to a standstill and threatened its very existence. According to Mike Phiri, tax partner at KPMG, speaking in a recent interview with Mining for Zambia, certain exploration companies pulled out of Zambia, and many mining projects were abandoned or deferred, representing a potential investment value of “billions of dollars”.
Leon argues that for African countries to get the best out of their mining industries, they should heed the guidelines of the Africa Mining Vision. This vision was adopted by the African Union heads of state in 2009 as a roadmap to “transparent, equitable and optimal exploitation of mineral resources to underpin broad-based sustainable growth and socio-economic development”.
The African Mining Vision Guidebook recommends collaborating with the private sector and other stakeholders to develop “clear, transparent, predictable and efficient legal and regulatory frameworks”, which would require “adequate protection of property rights, an effective judicial system, and independent enforcement and oversight bodies”.
Following these guidelines would yield better results than the “hasty and haphazard adoption of bolt-on reforms with which many African governments have experimented in the past five years”.
Leon concludes: “If African governments begin to embrace the essential conditions for investment in the mining industry, and if mining companies accept the principle of mining-led sustainable development, there is no reason to think that mining cannot significantly transform the economies of Africa’s key mineral producers.”
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