Resource nationalism and risk

This year a lot of my work has been helping firms navigate and anticipate the demands of governments and/or communities in African countries for a greater stake in natural resource projects -- mainly mining.

It's made me wonder about how we tend to think about 'political risk'.

The term one often hears with clients facing these demands is 'resource nationalism'. Now, the term is not particularly helpful: such demands partly reflect cyclical patterns (much of the 2000s was a commodities price boom), and so its hardly surprising that from Australia to Zimbabwe there'll be some seeking to re-adjust relationships for more favourable terms; the phenomenon is not limited to emerging or developing economies; and where a country's strategic longer-term interests are involved the term 'nationalism' seems pejorative, whereas its perhaps only natural that sovereigns move to protect their resources...

Also, the term is unhelpful because it suggests radical postures like the outright nationalisation of sectors experienced in Africa and Latin America in the late 1960s and 1970s (and sometimes since). Whereas what we see in the recent actions of governments such as those in Zambia, Namibia or Guinea may alarm investors and threaten margins and contradict existing agreements, but are not necessarily tantamount to expropriation or nationalisation. As I suggest below, in some cases we can understand these moves as mitigating, not increasing, longer-term investor risk.

I recently came across an in-house report from October 2005. At the time South Africa's parliament was considering a law compelling firms to process a portion of rough diamonds locally, in order to create more jobs. The report's title was 'Diamond law raises nationalisation fears'. But it struck me as wrongly stated: regulation like that makes full-scale nationalisation or other radical future action less likely, not more so.

In some cases -- Guinea is a good example -- new mining codes and revenue arrangements simply reflect a somewhat understandable readjustment of terms by newly-elected or post-conflict governments (facing huge development challenges and revenue shortfalls) after a generation or more in which unaccountable administrations did not necessarily pursue the wider national public interest in negotiating terms for the extraction of finite mineral resources, or were weakly placed to do this.

Sometimes 'resource nationalism' reflects nothing more than popular demand to see a greater share of natural resource wealth benefit the host country or community. Of course, the dynamic is open to abuse: Zimbabwe's indigenisation laws are an example of very small numbers of political actors using 'national entitlement' discourse to enrich their person or party; some accuse the ANC Youth League in South Africa of promoting mines nationalisation in recent years -- by invoking historic demands to ensure mineral wealth benefits 'the people' -- merely as a means to get the state to bail out distressed black empowerment investors.

However, in Zimbabwe's case the hijacking of indigenisation for political ends should not obscure how the notion that foreign investors should yield a greater share or show tangible livelihoods gains is a popular one in countries with high youth unemployment and levels of poverty. So on one level the term 'nationalism' is, after all, apposite to what is going on in many African mining jurisdictions, in the sense that it involves emotional issues as much as rational ones.

South African business leader Bobby Godsell was right when he said that ANC Youth League leader Julius Malema -- who has driven nationalisation calls there -- was giving some very bad answers to some very good questions. [See my subsequent post elsewhere on this: here].

One of the questions is 'how do we reach a proper balance between what is commercially viable in private sector investment, and what is publicly credible for communities increasingly conscious of the value of what lies beneath their soil?' These are difficult questions -- for one thing, South Africa's case is scarcely analogous to Guinea, or anywhere else -- but I wonder if many investors have misconceived political risk when it comes to the principle of the state taking a bigger stake in extractive projects. In the short term, such moves are ostensibly alarming. In the longer-term, when the state (and workers or communities) have a stake in a firm's success it can help stabilise the whole investment, grounding and legitimising it; the state then becomes a partner in the project in a more meaningful way, and when faced with local demands the firm can point locals to the government for answers, rather than dealing with creeping high expectations alone.

So when executives react to the state making noises about, say, a 'free' 10% stake in new exploration projects as indicating 'political risk', I sometimes wonder whether it isn't more risk-laden to believe one can enter on easy terms only to wake up three to five years into a project with the state demanding it all be renegotiated.

I often think that mining executives who 'high-five' each other for securing a good deal from an African mining jurisdiction might be unaware that there is such thing, in my mind, as a deal that is too good. If its terms seem very favourable but insufficiently match the local public interest, it seems almost inevitable that there'll be pressure to revisit the whole deal structure. Predictability is of high value in mining. In the longer term, a 'good' deal may be one that makes it very hard for even a populist government to justify alterations.

That is, one cannot guarantee everything and prevent every eventuality; but one can safeguard longer-term moves by narrowing the grounds on which host publics and governments can claim to not be getting a fair deal. Fairness may sound like tree-hugging in the hard world of mining. But a clear-eyed view of risk will often tell one that it is implicit in bargaining. Even Zimbabwe's self-interested ministers find it hard to sustain demands that are unfair for firms; but firms feel very exposed without being able to point to fair terms.

Renegotiation of terms can provide opportunities for firms (and others) to promote revenue transparency or tie further payments to improving social or national infrastructure -- perhaps providing greater insulation from accusations of extracting without truly investing.

Practical, country-specific manifestations of broader 'resource nationalism' ideas and trends are a big part of my 'day job', but also at the heart of what it means for the private sector to operate in an increasingly public world...

Who regulates who?

This is a lazy post in that it merely draws together three recent posts made elsewhere. They have in common the question of who takes the lead on developing standards and future directions - government, industry or civil society?

The most recent concerns the future of the Kimberley Process in regulating human security and human rights issues in global diamond supply chains. Its short -- here. Concern about the KP can obscure how even if arrangements involving governments fail or fall short, it remains open for buyers, jewelers and others to set more demanding standards (and for consumers to insist on compliance). Not all the regulation that works or matters comes 'top down' from state bodies. Braithwaite and Drahos (2000) convincingly showed how historically much regulation began with guilds and industry associations, and was only subsequently incorporated as legislation -- for example, maritime safety standards were developed by marine insurers in London long before the state became involved. Of course its not that simple in regulating 'conflict' or 'blood' diamonds; for one thing, buyers and consumers are not all equally discerning when it comes to the origin of stones, and collective action problems remain.

The second post -- here -- reflected on South African industry seeking clarity from government on proposed CO2 emissions regulation. Its easy to be naive, but in the tone of some SA business leaders' recent speeches is a sense that industry is not necessarily opposed to regulation, but craves policy certainty to enable long-term transitions to a greener economy -- and the opportunities it may bring. Whether they will self-regulate beyond the minimum required by government is a different question, raising difficult issues of competitiveness for firms -- and the country.

The third post -- here -- deals with this theme only indirectly; but it did try make the point that while much analysis of prospects for growth and development in sub-Saharan Africa focus on the inadequacies of the state, much of what is positive on the continent happens despite -- not because -- of what governments do or don't do.

None of this is to suggest that we be naive about whether business can or will develop adequate social standards without education, encouragement, supervision or sanction; but I thought the three posts touched on a common idea -- government is not the only 'regulator' capable of influencing outcomes, and opportunities are missed by a mentality that waits for its lead.

First Post - December 2011

Welcome -- this first post is not a substantive one. My role at Oxford Analytica involves daily forward-looking analysis on events, issues and trends (in my case, in sub-Saharan Africa) at the intersection of politics and economics, for a range of private and public sector clients. It also involves tailored advice, including on the issues at the heart of this blog:

* What are the changing social and political expectations of business and the private sector?
* How can public policy promote responsible business conduct, mitigating social and environmental harms while harnessing the strengths of business for achieving public goals?
* How can a better understanding of the social, political and regulatory context for business activities  help create value and minimise harms -- for businesses, governments, communities?

Well, big issues: this is just a blog -- a space for occasional thoughts -- and just a first post.

This blog is called 'Private Sector - Public World'. This is a blog, not a thesis, but some early points are worth making. First, we understand better when we think of sectors, not 'the private sector' -- even within something like 'the oil and gas sector', firms differ widely on things like susceptibility to reputational harm. It is one theme I'm sure the blog will revisit.

Second, the blog will deal with issues marked by a blurred or shifting line: what is 'public' and what 'private'? What private commercial activity is properly a matter for the public interest? The legal personality, protections and privileges afforded to private entities are essential to commerce, and so to progress and prosperity. However, the private sector operates in a public world. In general, I take it that a view like Parker's ('Open Corporation' 2002) is -- or will become -- axiomatic. That is, private sector freedom of action is conditional - it is subject to what is in the wider public interest. Firms that prosper in the 21st Century -- or perhaps those that deserve to do so -- will be ones that appreciate this and adapt accordingly. Public policy will still be tested, since private actors have a role in shaping what that policy should be, or how well it works. To what extent public policy is shaped by private influence is part of these debates. So is the fact that many of the entities involved in 'private' enterprises like mining in sub-Saharan Africa are state-owned firms: 'state capitalism' trends are inseparable from any contemporary understanding of the public-private divide.

The blog has sub-Saharan Africa as a focus. As in other parts of the world, sometimes the problem is not that the private sector is not regulated enough, but too much; the problem often is not the inability of the state to regulate responsible business conduct, but over-regulation or predatory / arbitrary 'regulation' undermining the ability of businesses to operate. The blog will also discuss how for many businesspeople and firms, the practical question is not whether regulation is or is not warranted; it is dealing with how to account for issues in the 'public' sphere in a way that helps safeguard investments, minimise reputational harm, and so on.

A blog can become about everything, and therefore nothing. This one aims to offer some occasional thoughts on what I think are some interesting issues for our times: what are the norms and values that become the standards by which we judge whether business is 'responsible'? What role is there for the private sector in delivering public goals, and what is appropriate for public institutions in engaging private actors in such processes? Does promoting self-regulation by business help or hinder the development of clearer standards? How can we find common solutions while accepting that there are (and should be) limits to the public role that the private sector should play or be expected to play?

I also blog periodically on the Royal Africa Society's 'Business Africa' blog.