I have found the recent debacle around the proposed new tax on mining rather bemusing.
Following some lobbying from the industry, the Finance Ministry finally announced that it will not go ahead with its plan to raise the mining tax for companies in the non-diamond sector from 37.5% to 44%.
What has been proposed now is a formula-based surcharge to get extra revenues when the economy is doing comparatively well. A windfall tax in other words. What perplexes me is why the state so often appears to only consult the industry when proposals reach cabinet level.
Surely if the parties involved had engaged in dialogue well in advance all the uncertainty could have been avoided. I, personally, am not too bothered about the welfare of the global giants currently mining in Namibia. In fact I am convinced that the Honourable Minister was looking in the right direction since her goal was to meaningfully increase tax revenue.
The industry’s reaction to the proposed tax increases was hardly surprising, remember the principal aim of these companies is to maximise returns for its shareholders. What surprised me, however, was the amount of negotiating clout the industry appeared to possess. What we have to understand is that natural resource extractors conduct operations only for as long as they remain economically viable.
By and large, they do not possess any national development agendas and only confirm to certain state directives in order to be eligible for and maintain their mining concessions. It is critical for the mineral extractors to understand that the resources they exploit actually belong to the citizens of the land and that the resource is not renewable.
Mining profitability remains high with the four year total shareholder return for emerging market players having more than doubled the returns of companies from traditional mining countries.
PriceWaterHouseCooper Mine 2011 report shows how mining CEOs continue to believe in the emerging market story and particularly the ongoing growth in China. Thirty years of achieving its targets and Five Year Plans has increased confidence in the likelihood of the 12th Five Year Plan being successful. The 7% growth target for China is now widely considered to be a floor not a ceiling.
With global demand for commodities expected to remain buoyant albeit volatile over medium to long term, we can conclude that mining profitability is hardly under threat. Consistent with these rising mining profits one would expect a corresponding increase in the benefits which accrue to the actual owners of the resource (being the citizens of the endowed land).
Furthermore an improvement in the negotiating position of the owners of the resource can only be expected. This is particularly so given that local mining sector employment has more than halved since independence as operations become more technology and capital intensive. The decline in its contribution to employment can be considered a loss to the owners of the resource.
As governments continue to implement active changes to laws surrounding taxation, royalties and disclosures, mining companies must consider political environments when making investment decisions.
The reality is that there has been more talk of increasing mining taxes and royalties in numerous emerging market economies. In the last 18 months governments in Australia, Brazil, Canada, Chile, DRC, Guinea, South Africa and Zimbabwe, to name just a few, have all taken action in different ways to tap into the increasing mining profits while others have openly discussed thoughts of doing the same.
It is evident that the balance of power is swinging in favour of Emerging Market governments as commodity prices soar and new players (Chinese, Brazilian and Indian companies) join traditional Western companies bidding for contracts. At the same time, policy makers are looking to finance investment in roads, rail links and utilities. The fact that more companies are becoming much more involved in the Emerging Market mining space means that traditional Western mining companies are more vulnerable around the negotiating table. In light of this I believe that most Emerging Market governments (ours included) can afford to be a little bit more selective and a little bit more demanding with respect to potential investors. In a nutshell, we must seize the moment to extract the best possible deals from mineral extractors.
Ngoni Bopoto is the oracle