Taxation and corporate responsibility in Africa

For those following African issues, of all the current topics of global debate about the social impact of business or public-private sector relations one stands out more than others: corporate taxation.

 

Here the tax-tightening agenda of developed but revenue-strapped G8 governments now somewhat aligns with that of developing African governments.

 

The recent 'Africa Progress Panel' report highlighted the extent of unrealised revenues lost to African governments through practices such as transfer pricing; the Zambian government, most notably but hardly alone, has continued in recent months to move on its promise to tighten compliance with existing tax and duty requirements on foreign firms in its mining sector.


 

The relationship between tax issues and corporate responsibility ones is fairly simple, at least in the resource extractive industries in developing African countries.

 

A principal (and principled) argument available to a mining firm under pressure to 'do more' for its host community or country is that along with paying its employees, it pays taxes to the government, whose responsibility it is to provide services and infrastructure to the population. On this classic account, it is the government, not the firm, that should be primarily accountable to the public about the use made of tax revenues. For instance, in March 2012 I heard Ivan Glasenberg, CEO of Glencore, make this argument forcefully if rather unsubtly during a panel on 'resource nationalism' in Africa.

 

Likewise, when faced with government attempts to raise a firm's taxes, royalties and duties, an argument available to a firm which has made extensive local social investments is that the firm should be spared further increases since it is carrying some of the state's social spending burden.

 

The public relations or political risk vulnerability for firms is that if it transpires that their effective taxation levels or volumes are in fact far lighter than is widely assumed, the first-mentioned argument loses its force.

This is particularly so for firms in sectors that despite their revenue by nature do not create a lot of local jobs, something that would otherwise help illustrate their social value even if their tax footprint is low.

 

Of course the dilemma for firms which spend heavily on their social investment side, believing that it is pointless to wait for the government to translate taxes and royalties into palpable gains for the host community, is that the firm's uptake of this responsibility removes the incentives on the government for doing so. Moreover, the firm may pay tax to the central government but be answerable for local conditions to a provincial or municipal government, whose relations with central government may be beyond the firm's control. 

 

Technically speaking, tax issues are matters of legal obligation -- one is either liable or not -- whereas issues of 'corporate responsibility' tend by definition to relate to things done despite there being no legal requirement to do them.

 

The recent first issue of our firm's 'Business and Society Monitor' observed that taxation is one issue that has largely not been framed in the language of 'corporate responsibility' -- no doubt for the legal / voluntary reason just mentioned, yet despite the close relationship between tax and corporate social investment discussed above.

Given the often blurred or highly technical nature of compliance (which underpins the distinction between 'avoidance' and 'evasion' of tax), the Monitor implicitly noted that it would be unsurprising if mainstream corporate ethics, corporate responsibility and related debates increasingly focus on taxation issues. A parallel development is that increasingly social investment issues are covered in investment contracts, so that they become legal issues; this can be in a firm's interest, since it delimits the extent of its otherwise open-ended non-legal responsibility.

 

Like the issue of revenue transparency that the UK will push at this year's G8, taxation issues relate to much broader questions for African policymakers about competitiveness in attracting foreign investment, in the absence of cooperation from peer (competing) governments on uniform approaches to revenue management.

 

One strategic consideration for major extractive industries in Africa is their interest in reducing the share of national revenue for which their industry accounts. That implies that those in the oil sector, for instance, should be interested in boosting the non-oil economy (and non-oil or oil-related employment) in their host country, increasing the number of tax-paying firms and decreasing their exposure as single dominant sources of government revenue. Initiatives such as Tullow Oil's 'Invest in Africa' scheme reflect an understanding that for an oil firm, a booming non-oil sector is directly in its commercial and government relations interests.

 

Jo

 

For a recent post distinguishing (corporate) responsibility from (government) duty, see here.

 

These issues are raised in multiple previous blogs, see for example here on social investment by the mining sector in Africa.

Mining and development: 'A' to 'Z' of the 2013 Mining Indaba

The nature and extent of mining firms' role in meeting host country / community development aspirations is a daunting and complex topic.

This post comes from South Africa, where yesterday I attended the final day of the mammoth African Mining Indaba (investment conference).

The final day focusses on sustainability issues in large-scale mining -- but the 'A' to 'Z' title of this post over-promises, since I have no intention on summarising the conference.

I propose only to mention two thoughts I had while listening to experienced CEOs, the ICMM and others on sustainability / mining-for-development / mining-as-development issues. One ('A') is an Australia-related thought (or attempted analogy); the other ('Z') is Zimbabwe related. Mining has been a big part of the industrial history of both these vastly different countries that have in common only that I happen to have lived in each!

Scaling-up social investment

How do firms under pressure to improve livelihoods balance payments to appease individual workers (and so the collective labour-force), with large-scale social investment that benefits such a group but in a less direct fashion?

The Australia example is this. In 2009, in an effort to stimulate consumer spending and stave off recession, the government offered individuals small packages of cash that together amounted to billions of dollars. I was able to buy the predecessor to this laptop. Yet the pay-outs were criticised on the basis that one-off cash to individuals could not be justified relative to the large, once-in-a-generation infrastructure project that the same cash total could fund (with ancillary job-creation and other benefits).

Major South African platinum (and other) mining firms last year offered wage increases in response to stoppages partly caused by complaints about cost-of-living and access-to-basic-services issues in the mine site area. Such strategies may come at the cost of longer-term ones, where the same funds are used to build shared infrastructure (such as water and sanitation). The latter strategy raises a host of difficult, familiar issues about distinguishing corporate from government duties. Nevertheless, yesterday's discussion at times seemed apolitical: it will be intensely political, for example, to persuade local authorities in the Rustenberg area of South Africa to build (or allow companies to build) more permanent housing for a workforce that local residents sees as foreign (being heavily comprised of migrants from the eastern Cape, Lesotho and elsewhere).

Scaling up research on social investment

The Zimbabwe analogy is this -- and it relates to the need, in my view, for more research on the empirical links between social investment and reduced political risk.

It is routinely -- as at Indaba -- stated that increased corporate investment in social services builds the social license to operate, and it is inferred that this lessens the overall risk of sudden or catastrophic governmental interference with a mining asset. As well as reducing the prospects of local friction and resulting disruption (although spending and local procurement or hiring can create or worsen local grievances and competition, too), it is certainly arguable that investment that consolidates the social license also reduces the likelihood that a mining or oil/gas site will provoke local political energies that lead to national adverse political attention, thus putting the overall formal license to operate at risk of political scapegoating.

Yet this link is not a necessary one -- hence the need for more empirical studies. It is not necessarily the case (look at platinum firms' experiences in Zimbabwe recently) that a better social performance profile immunises a firm from high-level political pressures. Many of the processes at work are driven by issues and forces far bigger than an individual site or firm; the company's reputation and goodwill might be irrelevant in terms of how government treats it.

The actual Zimbabwe analogy I meant is from white commercial farming in the 2000s. Others have studied this far more closely, but it seems to me that there was no necessary link between farmers who had refrained from developing their workers' livelihoods (electrifying compounds, water, clinics, etc) and the likelihood of their properties being subject to formal compulsory requisition (or informal and illegal seizure by political elites or groups). Being a better citizen farmer might have helped reduce the scope for scapegoating any individual, but most farmers were at the mercy of a much wider and more complex, irresistible set of forces. In that process, their responsible actions in social investment terms often had little impact on whether they retained their property or not.

The point is that social investment strategies are both right, and make business sense. Yet more research is needed on the link between them and reduced political risk. Indaba speakers merely asserted this link.

So what?

Each year that I've been, the Indaba highlights how intensely political, ultimately, it is to enter another country and extract its resources. Navigating the risks and opportunities involved is part of my day job; thinking about the duties and dilemmas of the private sector (vis a vis government) is this blog's subject. No-one has a monopoly on solutions to these pressing, difficult issues.

Input welcome!

Jo

See previous posts on resource nationalism and other topics for discussion of related issues, both in South Africa's (rather unique, yet also not) context and more broadly.

Public order and private firms: Marikana shootings

For a blog exploring the intersection of private sector activity and public interests, last week's police-mineworker shootings in South Africa reflect key issues and dilemmas in their starkest -- and saddest -- form.

The widely reported police shooting of over 30 illegally striking workers near Marikana platinum mine northwest of Johannesburg -- unprecedented in the post-apartheid era, but sadly and eerily reminiscent of it -- is still resonating through South African society and politics.

Much has already been written and said; with funerals, trials, public inquiries and attempted mine-reopenings ahead, much is yet to be done and said, including at the level of national politics.

Yet since this is a blog called 'Private Sector - Public World', I feel obliged to offer some further insight. After all:

* The shootings -- and the week leading up to them -- illustrate the complex blurring, by no means limited to South Africa or indeed mining, between what is a labour relations issue (involving government-regulated processes, but in essence a matter between the employer and workers) and a public order one; between an issue managed simply by mining private security and a serious policing issue; between pay-related demands on one particular site and politics-related debates at a national level.

* This area of the country has seen mines develop at a far faster pace than the provision of related social infrastructure; much of what is provided for workers, families and hangers-on comes from the firms themselves. Well before the shootings, the Rustenberg area threw into sharp relief the duties and dilemmas of firms and governments in providing public goods -- in relation to a sector (platinum) highly vulnerable to significant global economic downturn.

[In the most recent post, I'd speculated whether a possible wider downturn across mining sectors would result in increasing frequency and intensity of protest action, as margins narrow (for firms) and expectations are dashed (for existing or want-to-be staff) -- see here].

The above factors suggest Marikana is a test case of what it means for a private firm to operate in the very centre of the spotlight of public concerns.

Yet it is not clear to me what one can sensibly add, in terms of the subject-matter of this blogsite, to the various media and commentator reflections to date on the Marikana shootings.

One risk to avoid is armchair / analyst arrogance. At the office during the last few weeks we've forced ourselves again to note how 'resolving' the Syria crisis is not simply a question of policymakers seeking analytical clarity and then acting accordingly: the issues are hard, hard, hard; events run of themselves, with multiple considerations and variables; we know far less about the future than we like to pretend.

So it is with my thoughts about Marikana for this blog ...

... For clients' purposes, we are obliged to offer what insight we can about what this means, for instance, for near- and longer-term ANC politics, or debates on mining sector transformation in South Africa (on which see past posts on nationalisation and resource nationalism, e.g here).

... For the purposes of this blog, is it enough to say that Marikana shows that, all analysis put aside, the issues arising for private firms operating in an inevitably (sometimes starkly) public world are sometimes just hard, hard, hard?

Admitting as much is not just an act of easy abdication of the role of analyst. It is a reminder of the difference between armchairs and hotseats.

Boardrooms need armchair analysts -- potentially valuable sources of dispassionate objectivity -- but the most visible and vital intersections of business and society will often occur at close range, move quickly, and -- yes -- be truly difficult.

Jo

Resource nationalism: hardly the 'end of history'

Today was quite a day -- I'm going to namedrop: politicians (Blair, Obasanjo, Tsvangirai, Mandelson) and businesspeople (Ivan Glasenberg, Xavier Rolet, Tidjane Thiam) - and that curious mix of both, Cyril Ramaphosa.

Today I sat at The Savoy, London (as one does on a Monday morning ...) agreeing with most of what former prime minister Tony Blair was saying opening The Times CEO Summit Africa. I say 'most' because he suggested that Africa had 'moved on' from global ideological debates about Left or Right; his view seemed to be that it was now clear to all what are the correct policy prescriptions in African countries, and it is now merely a matter of these being implemented. Africa, he said, is in a 'post-ideological' age...

Mr Blair of course is -- with great respect to him -- surely wrong. Like many at today's event he spoke of public-private partnerships as the solution to unlocking Africa's growth and development potential. But there is nothing ideology-free about the concept -- just ask unions in South Africa (or whatever still-crystalising force takes up the current slack on the Left of politics there); and if Africa's growth story is 'post-ideological', no-one has told South Africa's cabinet (let alone its wider society), which is still struggling for some coherent consensus on what are the appropriate / ideal relative roles for government and the private sector in meeting economic and development challenges, imperatives and aspirations.

The issue is wider than South Africa -- or Africa, as indeed was illustrated in a panel debate, soon after Mr Blair's talk, discussing the issue of 'resource nationalism'. Wherever significant natural resources are at stake, the terms on which these are extracted (etc) inevitably gives rise to large, difficult questions about the relative roles of the host state and foreign firms (some state-owned) -- how national wealth is developed inherently involves deeply ideological preferences and orientations.

For long-term investors it may be healthier if debates about the role of foreign investment or private capital take place in host societies (even if this causes discomfort or even some disinvestment) than that we pretend that business and development (which overlap when it comes to natural resource sectors) take place in some 'post-ideological' space -- only for the tide of history to take everyone by surprise.

Host governments will continue to struggle to articulate the role that private investors play in national development; corporates will continue to wrestle with when and how to become overtly or explicitly involved not only in developmental activities but also societal debates about their own role in countries where the overall ideological agenda remains contested. It remains contested precisely because we have not seen the end of history and universalisation of some final ideal form of human government.

(We did the briefing book for today's CEO summit -- here -- and I wrote a blog today for 'Business Africa' on the summit, including discussion of mining firms' relations with local informal mining communities in Africa -- here).

Jo

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...