Emerging mining trends in resource nationalization in Southern Africa

Africa is still a frontier market, and this has often presented a unique opportunity for governments in African countries to create legal frameworks that attract sustainable investment. But Africa has always written its own rules. This has never been more apparent than in the governance structures of Africa’s major pulling factor – natural resources.

Mining legislation in Southern Africa

In 2008 Zimbabwe introduced an indigenization policy that required all foreign-owned mining companies to “cede” – on a free carry (meaning that locals did not have to pay for the shares) – a 51% shareholding in their companies to employees, local communities and designated state-owned entities. While the law was well intentioned (in the sense that investors were in effect being required to empower locals through an equity participation) it was badly crafted, and gave rise to a multitude of negative effects, particularly encouraging rent seeking, which drove away investors. It is not surprising that the new Zimbabwean regime prioritized abolition of the indigenization laws as a way to attract much needed foreign direct investment.

Similarly, a decade later in 2018, the Tanzanian government introduced sweeping changes to its mining legislation. The mining reforms were aimed at increasing Tanzanian nationals’ and entities’ participation in the mining sector, requiring local companies to own 51% in mining companies and for multinational companies to partner with local companies and financial institutions. However, this was then subsequently followed by new mining regulations; the Mining (Local Content) (Amendments) Regulations, 2019, which reduced the ownership restriction for local mining firms to a minimum 20% equity.

Comparatively, the Democratic Republic of Congo’s Mining Code also underwent significant revisions in 2018, with the result that 10% share capital must be held by Congolese citizens. There has also been an increase in the state’s free carry, non-dilutable stake from 5% to 10%, which is increased by a further 5% upon renewal of the mining license.

While these cases can be cited as extreme examples of local protectionist mining regimes, South Africa has adopted a moderate and structured approach under the Mining and Minerals Industry, 2018 (Mining Charter III), which came into force on March 1, 2019. This is perhaps owing to its stronger democratic and legislative structures. The Mining Charter III largely affected mining entities’ Black Economic Empowerment (BEE) threshold requirements in respect of ownership. While existing mining rightsholders who have a minimum of 26% BEE shareholding are recognized as compliant, applicants for new mining rights are required to have a minimum of 30% BEE shareholding which must in turn include a minimum of 5% non-transferable carried interest to each of the following: qualifying employees; local communities; and a 20% effective ownership to BEE entrepreneurs.

Changing investment landscape

A pattern begins to emerge. Without being overly comparative – as there are always distinctions that can be drawn – African governments are seemingly pursuing greater state and local participation in the mining industry, mostly brought about by: fluctuations in global price/demand factors, geo-political and social factors particularly around a sovereign nation’s right to resource revenue, new emergent investors (such as China and Russia), internal civil society pressure groups, as well as country-specific economic pressures. For the most part, unfortunately this is intrinsically linked to the national or quasi-political agenda of the country at any given time.

The question then becomes: “can this be viewed through the broader lens of investors as an opportunity or it is simply classified as sovereign and political risk.” According to Verisk’s 2019 Q1 dataset, out of the top ten highest-risk ranked countries on its Maplecroft’s Resource Nationalism Index (RNI), Africa has four “extreme risk’’ entries: the Democratic Republic of Congo is ranked first, Tanzania third, Zimbabwe fifth, Swaziland seventh and Papa New Guinea eighth.¹ Notably, these are all Southern African countries with low-performing economies. This presents a marked opportunity for these governments to create properly crafted legislation that cannot be viewed as anti-investment.

It must be emphasized that most of these mining codes are outdated, having been drafted in the colonial era. And as governments become more commercially aware on the back of lucrative commodity prices, the state will demand a greater stake from foreign multinationals in the interests not only of a political agenda, but also on principles of equity. Hence, the recent trend of amending legislation. The wording of most mining codes is telling; the preamble often states that minerals belong to or are vested in the state on behalf of its people. Mining companies will simply have to adapt to and factor in this reality. Governments will – predictably and periodically – impose higher profit taxes and royalties.

Nevertheless, governments are keen to engage foreign multinationals on commercial terms, and in most countries, negotiated concessions and investment incentives outweigh the perceived negative of giving away equity. The basic and palpable fact remains that large-scale investment leading to the rapid development of most African nations requires significant and sizeable capital. Hence, it is a matter of perception; where investment is implemented in a more aggressive and accelerated manner, it is viewed as resource nationalization and quasi-expropriation. But where a more measured and judicious approach is adopted, it can be interpreted as simply resource participation, making it more palatable and, therefore, messaging becomes imperative.

African countries in the region are competing to attract foreign investment and the risk appetite of private capital is an important factor. Investors will continue to have concerns relating to policy inconsistency, issues of security of tenure and political instability aligned with the country risk profile of countries in the region. As such, there is a fine balancing act required with the radical shift and the introduction of nationalist policies in the extractives sector.

A shift in investment structures, particularly with a focus on in-country beneficiation and strong environmental, social and governance structures by mining companies will lead to the benefits of extractive capitalism being felt more directly at local level.

Predictable legislative landscapes often shape long-term, sustainable mining sector activity. Mining companies are therefore advised to horizon scan and keep abreast of these trends so they can anticipate the cost of compliance on project operations and reputation, as this will remain a dynamic and topical issue.

¹ https://www.maplecroft.com/insights/analysis/resource-nationalism-rises-30-countries/#embedform

DLA Piper Africa is a Swiss verein whose members are comprised of independent law firms in Africa working with DLA Piper.