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Abstract:
Rise in commodity prices drives mining investments especially in resource rich economies. However, governments in resource rich countries have been formulating regulations that enable them to exercise a greater control over the assets operated by miners, which in other words is termed as resource nationalism. Resource nationalism has been the common strategy adopted by the governments mainly owing to improper share of the resource benefits between the host nation and mining companies. Such policies incur significant additional costs for mining companies.. This article discusses about the impacts of resource nationalism on mining companies and the protective strategies adopted by mining companies to minimize the effects of resource nationalism, which in turn would benefit the host nations economy while ensuring sufficient returns to the Mining companies.
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Introduction
Recent boom in mining sector has encouraged more miners to invest in new projects. In 2012, mining investment was expected to peak with global mining capital expenditure at around USD 142 billion. However, certain business risks such as resource nationalism are expected to be a strong deterrent discouraging investment into new projects. Owing to such business risks, the global mining capital expenditure is expected to decline by 10% per annum to USD 115 billion by 2014.
Why resource nationalism? Resource nationalism is attributable to the fact that mine profits are not appropriately shared between mining companies and the host nation. Resource nationalism, an act through which governments exercise a greater control over the assets from the mining companies has been known to pose significant threat to miners. A leading research firm rated resource nationalism as the biggest business risk for mining companies for the year 2012-2013. While many believe that resource nationalism is restricted to developing economies, this has been the trend in developed economies as well. About 25 countries across the world have already strengthened their policies that support increase in share of mining profits. Sudden policy changes by these governments have led the mining companies to reduce investment and in worst cases have led to shelving off the projects. Resource nationalism is attributable to the fact that mine profits are not appropriately shared between mining companies and host nation.
Mining industry is confronted by business risks that are expected to deter the global mining capital expenditure by 10% per annum to USD 115 billion by 2014.
Such dynamic nationalization laws have discouraged mining companies in investing into new projects. Resource nationalism has affected FDI inflows in developing economies especially in Africa which recorded a decrease of 4.5% in FDI inflows in 2012 when compared to that of 2011. With nationalization laws becoming more stringent, FDI inflows in developing economies are expected to show a decreasing trend in the years to come. Recently, Zimbabwean government imposed mandatory indigenization which demands the foreign mining companies to give up 51% of their share to the locals. Revenue of USD 4 billion has been raised so far by the government after many foreign owned resource companies obliged to the indigenization law by ceding up 51% stake. In March 2011, Namibia announced Strategic Mineral Policy which demands strategic minerals like copper, coal, gold, uranium and platinum to be directly owned by a state mining company.
Strategies to mitigate the risks of Resource Nationalism Infrastructure aid through Public Private Partnerships (PPP)
Establishing partnerships with governments to aid in infrastructure development might be a potential solution for the big miners to attract significant support from local communities thereby avoiding nationalization of their operating mines in developing economies. Resource rich countries like Zimbabwe, Congo and Zambia suffer from unemployment and poor infrastructure. While these are considered as hurdles for a mining company to incept its operation, the same can be viewed as a gateway to mitigate risk of nationalization of resources and contribute to the economic development of the country. Rio Tinto has implemented PPP for its Simandou mine in Guinea, West Africa. According to this partnership, Rio Tinto would aid the government in investment of road and rail infrastructure in the region where the mine is located. Government of Guinea currently holds 51% stake in infrastructure and 35% stake in Simandou mine.
Mining companies have been investing in infrastructure by establishing partnerships with governments through Public Private Partnerships (PPP) Recently, Rio Tinto established PPP with government of Guinea and has planned to invest in road and rail infrastructure surrounding the mine region Paladin, a prominent Uranium miner implemented SSMP through which it has plans to improve infrastructure conditions in the area surrounding Kayelekera mine in Malawi. Legal protective measures such as contract stabilization and BIT are being adopted by mining companies in order to minimize the financial risks due to resource nationalism.
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Contract stabilization clauses is essential during contract negotiations between government and mining companies as it offers protection of contracts for a specified period of time against the local communitys right to alter the law. However, such law has been viewed upon as distrust by local governing bodies and NGOs who fear such protective measures would disrupt countrys ability to enact initiatives that may stimulate economic development, and decrease poverty. Copyright Beroe Inc, 2013. All Rights Reserved 4
Recently in Ghana, a multinational oil company rejected a tender bid issued by a leading local supplier .GHEITI (Ghana Extractive Industries Transparency Index) claims that bid was rejected in spite of the supply being technically competent and relatively cheaper compared to tenders received from its incumbents.
Governments in emerging economies are politically instable enacting stringent nationalization policies. Also, such policies are instable thereby deterring mine investments. There is a need for developing economies to build a collaborative approach in framing policies that support local content development. 6
Conclusion
External investment is vital for development of mining industry especially in developing economies where there is lack of sufficient domestic capital and technology in spite of the availability of abundant resource rich deposits. However, developing economies have been unsuccessful in motivating foreign mining companies to utilize these natural resources by adopting nationalization strategies that demand a greater state control of resources from foreign investors. This has discouraged and deterred foreign mining investment. Hence, governments need to develop a balanced approach by rationalizing existing laws and regulatory framework to optimize revenue generation from foreign mining investment while enabling an investment friendly climate for mining companies to operate.
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