Resource Nationalism: How Miners Must Work With Host Governments – Part Two

Continued from Part One.

You can’t argue with Brian Menell’s credentials.

His family founded one of South Africa’s largest mining and industrial conglomerates, the Anglovaal Group, and after some 20 years of personal experience across a wide range of energy and natural resources projects in nearly every African country, he speaks from a position of considerable authority and credibility in the mining industry. So his opinions regarding how the industry should respond to the threat of resource nationalism outlined in Part One of this series deserve serious consideration.

One phrase forms the basis of Menell’s advice to the resource extraction industry when dealing with host regimes — “act with respect.” From that leads a number of ideas, but the prerequisite is to act with respect for cultural, political and personal sensitivities among the political and commercial representatives of the host counterparties.

Resource nationalism primarily springs from a belief that foreign miners are an exploitative tool of imperialist interests. The history of mining is seen by many developing countries as a history of exploiting the wealth of the nation for the benefit of foreign interests. Countering that perception requires considerable sensitivity and skill, and will require mining companies to engage in constructive engagement as equals with counterparties in host governments. It may well require host country education as to the realities of mining economics, but equally it will require greater political skill among mining company executives in dealing with their hosts.

Some mining companies believed all that was required was an extensive Social Responsibility Program, the building of local schools, roads and communities. The Chinese in particular have taken this approach both in Africa and South America, but in Menell’s opinion, they are at best beneficial in bringing the local population along with you, but at the national level are not highly valued.

Of far greater value is any endeavor that creates sustainable structures that reduce uncertainty, reduce instability and avoid the moving of goal posts such as changing legislation or the application of punitive tax and royalty regimes. This can only be achieved through real partnership with state bodies that have the financial and technical capacity to fully understand and participate as equals. Menell gives four basic principals that he believes are necessary as cornerstones of such a structure:

  • Such structures should be transparent so that the electorate, the media and the international community can clearly see that value is being accrued to the nation
  • The equity participation by the nation in new projects should generally be limited to a ceiling of 25%, of which a maximum of 10% should be a free carried interest
  • Exercise of back rights by state bodies should come hand-in-hand with preferential tax and duty rates, and be set for the life of the project
  • Perhaps hardest of all for developing states is that the dealings of national mining companies with developers should be free of politicization and the distortions of bureaucratic entrepreneurialism,” as Menell puts it

You only have to look at some of the costly and painful positions miners have gotten themselves into with host regimes to realize Menell has a point.

Not all regimes will work with miners as outlined in his approach, but shareholders at least should be pushing boards to explain to what extent they are seeking to implement what sound like common-sense ideas.

–Stuart Burns

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