Africa’s improving legislative environment

Today more than ever before, there is a growing emphasis across many African countries on accountability and transparency concerning their natural resources. Alongside this, however, is the unpredictable and growing trend of resource nationalism, where several governments are changing the rules of the game to ensure they get a larger share of their country’s mineral resource wealth while commodity prices remain high.

Speaking on the issue at the recent Mines and Money conference in London, was Peter Leon, a partner at the South African law firm Webber Wentzel, and co-head of its Mining, Energy and Natural Resources Practice group. Leon has helped several African governments shape their mineral legislation and mining codes, gives three examples of the improving legislative environment on the continent in the form of Botswana, Ghana and Liberia. 

While he notes there have been some discouraging events in recent years – such as Guinea instituting a mandatory 35% carried interest by the state in mineral rights, mine and mineral tenement seizures in the Democratic Republic of the Congo and Zimbabwe’s nationalization and indigenization plan – there are just as many, if not more, African countries improving their environment for foreign investments. 

“The key example to me is Botswana, which I think really is a model for a good mineral regulation system in Africa and indeed democracy,” Leon says. Botswana is consistently the top-ranked country in Africa in terms of lack of corruption, and is in the top quartile worldwide. It is similarly highly rated in the Fraser Institute’s global survey of mineral jurisdictions, scoring as high as the eleventh-best region in 2007-2008. The mining code is clear, concise and explicitly set out, with quick processing times. And it remains relatively easy to graduate from an exploration permit to a mining permit. 

Mining, and diamond mining in particular, is the mainstay of Botswana’s economy. In 2008, mining accounted for no less than 36% of its GDP. The country is careful to maintain good relations with the industry, and has a competitive tax and royalties regime. All mining companies other than diamond miners are taxed at a rate of 25%, and there is a 100% capital writeoff in the year the investment is made, with losses carried forward for an unlimited period. A variable income tax formula has also been introduced on highly profitable mines and rises to a theoretical maximum of 50%, and is only applicable if taxable profit equals gross income. Royalties payable are easily determined.

The second example of Africa’s improving legislative environment, according to Leon, is Ghana. Although the country’s parliament announced changes to the mining tax regime this November – including raising the corporate income tax rate on miners to 35% from 25%, and introducing a new 10% windfall profit tax – Ghana remains a stable environment for investment where democracy is flourishing. Leon notes the tax hike was supported by the International Monetary Fund, which had recommended the country consider increases taxes or introduce new ones to boost revenue.

In 2009, Ghana concluded democratic elections that saw the opposition candidate defeat his ruling party rival by fewer than 41,000 votes. 

As for the country’s mining code, which was revamped in 2006, Leon says it increases security of tenure and limits administrative discretion in the regulatory process. There is a minerals commission that features an independent regulator appointed by the president, whose tenure is protected by the constitution. By law, Ghana’s minister of mining must act on the recommendation of the minerals commission in negotiating, granting, renewing, suspending or revoking mining rights. 

Other features of the Ghanaian mineral legislative system include the option of signing a “stability agreement” with the government, whereby the holder is protected from adverse changes in the law for a period of up to 15 years. This must be ratified by parliament, however. Lastly, the country provides means for dispute resolution under international arbitration should foreign investors wish to do so. 

Leon says the third, and arguably most intriguing, example of an African country improving its legislative environment is Liberia. The country has come out of a terrible civil war but already has Africa’s first female president, who won a Nobel Peace Prize last November and was elected to a second term earlier last year. 

Liberia has latched on to a different model for advancing mineral development than other African countries. Indeed, only Mongolia and Kazakhstan follow something similar, as far as Leon knows. “Essentially, they have taken the model from the oil industry of concessioning oil blocks and applied that to mineral concessions. They basically have a competitive tender system, which . . . does not follow the open access, first-come first-served system you see elsewhere in Africa. The idea behind the Liberian system is that it is not the first applicant who gets the licence, it’s the best applicant.”

This helps improve transparency, Leon says, and discourages corruption because the decision to grant a concession is made by an inter-ministerial committee, and not just a minister of mines. 

The downside to the system is that is relatively slow, cumbersome and extensive, Leon argues. Even if a company meets all the criteria and gets through all the hurdles necessary to win the bid, there is no firm guarantee it will get the concession. Finally, exploring for precious and base metals is much different in practice than what is done in the oil industry, and requires staged investment which sometimes does not lend itself to the auction
environment. 

“The key message in all of this,” Leon says, “is whatever system you have in place, it must be fair to both investors and home states. The issue around resource nationalism is one of fairness, which does concern host governments and communities that surround mines. Clearly there have been some problems in recent times, but one must not walk away from them.” 

Leon notes other key initiatives that are improving the legislative environment in Africa are national and international anti-corruption measures, which he is keen to watch in the future. These include the recent reforms to the Dodd-Frank Act in the U.S., the newly created U.K. Bribery Act, the OECD Anti-Bribery Convention, the UN Convention Against Corruption, the IBA Model Mine Development Agreement project and the UN Guiding Principles on Business and Human Rights.