Resource nationalism needs a poison pill
Johannesburg, Gauteng, South Africa
Sanity has partially prevailed with nationalization being declared a non-starter from any and all government mouth pieces. This refreshingly bold anti-populist banter is warmly welcome and one of the few bright spots of unilateral resolve from SA leadership.
In a pre-game effort this morning en-route to the ICCT, I stopped by one of Cape Town’s beneficiation success stories, Origins HQ Coffee shop- my bean brew was greatly enhanced whilst reading Tito Mbeweni’s comments made yesterday- the former reserve bank governor verbalized what we’ve all been thinking for some time; government has too many mouthpieces and that only the President and minerals minister Susan Shabangu should voice minerals policy opinions.
Shabangu likewise in her address yesterday drove this message home. It is comforting to note that government finally “get it”- uncontrolled talking heads cause immense sustainable damage.
This approach to double-down on what I like to call juju-ranting , named after cabbage farmer extraordinaire Julius Malema- is the kind of deliberate leadership which thinking South Africans need to demand more of.
The ability of these mouthpieces not withstanding- this is fabulous advice- in fact the nations new Madiba, Dr. Mamphela Ramephele lamented the noise emanating from government and encouraged them to focus on the issues already on their overwhelmingly high-piled plate.
There are two fundamentally entwined concepts to unpack in understanding this debate- resource nationalism and non-renewable resources.
As the conversation migrates from nationalization to resource nationalism it’s relevant to unpack what exactly these terms mean in order to contextualize the topic and formulate opinions.
There is nothing intrinsically good or bad about any form of resource nationalism.
In theory government could outright nationalize an asset and pay a premium on market value eliciting shareholder delight, they could retain the entire workforce and continue to deliver profitable growth and infuse cash into state coffers.
In the same vein government could insist that only local inputs be used for operations requiring wholesale vertical integration and quashing any hopes of profitability.
Nationalization takes various forms
· Outright nationalization
o Compulsory acquisition of a private company by a government, with or without compensation (e.g. Venezuela)
· Nationalization by stealth
o Nationalization of underlying mineral rights (e.g. South Africa)
o Mandatory government participation in mining projects (e.g. Botswana )
o Creation of a government mining company (e.g. Chile)
o A government may require minimum local shareholding in all mining companies (e.g. Zimbabwe)
· Increased Taxation
o Corporate income tax (e.g. India)
o Super-profit or windfall profit taxes (e.g. Ghana)
o Increased royalties (e.g. Zambia)
o Resource rent tax (e.g. Australia)
· Increased local inputs (e.g. South Africa)
· Increased local outputs (e.g. South Africa)
With an understanding of the various forms of resource nationalism it is relevant to ask the question, why is this debate specific to resources?
On the face of it, the answer is that since resources cannot be replaced and will not be available for future use they have a special status.
Without entering into the realms of philosophy, what difference does this make - pray tell?
One could argue that since cigarettes deplete lung condition they are depleting a non-renewable resource and in fact should face additional taxation- oh, wait- they do get additional sin taxes applied.
What emerges from this line of argument is that government are essentially indifferent to resource depletion provided they can extract sufficient rents from the process- if they were concerned for public health, cigarettes would be banned like narcotics, and they are in fact banned only when smuggled - for the crime of not sharing the spoils.
The real reason why resources always have and possibly always will have the sword of nationalism dangling over them is quite simply- exit barriers.
Resources generally have long time horizons, require heavy upfront investment and take many years to reach profitability, the perfect recipe for regulatory abuse. Obviously governments are cautious not to slaughter the golden goose but politician’s priorities are oftentimes rearranged to place short term greed over long term need.
Resource nationalism gets tricky when viewed strategically, the conundrum facing regulators is that if they push their levers to hard they will discourage future investors; if they don’t push them enough then they leave cash on the table.
This is the reason for the proliferation of instruments for resource nationalism ranging from sneaky state mining companies obtaining lucrative assets to export tariffs forcing extracting companies to beneficiate locally.
The problem simply stated is that governments are looking to make a quick buck to the detriment of all other stakeholders.
This as it happens is a familiar problem to public companies.
Companies for decades have faced the threat of corporate raiders. Corporate raiders are essentially activist investors seeking to acquire significant shares in a company allowing them to vote for their desired changes including privatizing, spinning off and changing leadership.
There is irony in that the potential solution for nationalism is contained in an instrument designed to ward off privatization- but essentially the goals are identical – shareholders want to dissuade marauders from taking over their company.
Since their purposes are aligned it is useful to note the techniques used to thwart corporate raiders and attempt to reengineer these methods for deployment in the resource nationalism arena.
Anti-takeover techniques fall into two broad categories; poison pills and greenmail.
Greenmail as the name suggests is kind of like blackmail; it is the practice of purchasing enough shares in a firm to threaten a takeover, thereby forcing the target firm to buy those shares back at a premium in order to suspend the takeover.
This isn’t particularly relevant to resource nationalism since government are unlikely to be assuaged by a partial pay-off when they have the power to take everything- at best this would provide an interim solution.
Poison pills broadly speaking are mechanisms which are triggered by an attempted hostile takeover - which lead to a rapid significant decrease in shareholder value with the intention of making the acquisition target as unattractive as possible – in describing the attempted hostile takeover of Yahoo! one Microsoft executive commented, "They are going to burn the furniture if we go hostile. They are going to destroy the place."
For practical reasons this is not the most endearing strategy to company boards since they are custodians of shareholder interests and malicious destruction of assets only to prevent nationalization doesn’t fit their fiduciary duties.
That being said there is industry precedent for this - in the Democratic Republic of Congo where a mine had irreconcilable differences with the state it led to the mine practically raping the resources through unsustainable mining practices in an effort to maximize extraction in a short time period before being booted out the country and surrendering their assets.
A more applicable form of poison pill is the lesser known wrecking amendment – essentially this is an amendment made by a legislator who wants to sabotage a bill by including changes which make it nonsensical –thereby discouraging even its backers to vote in favour of it.
In our context of resource nationalism this would constitute a strong disincentive to government to take over assets- this punishment mechanism despite its attractiveness does not seem all that practical since it’s unclear what would spook a recalcitrant government.
In theory a fitting punishment would be an embargo on ill-gotten resources which would preclude government actualizing any revenues against their nationalized assets. In the event that the sole buyer was a member of the EU or the US this is tenable but in the modern reality where resources generally flow towards emerging titans such as China and India enforcement would be futile and costly.
A more palatable solution however also lies in the corporate realm, not in the area of hostile takeovers but rather in sphere of employment termination.
Golden handcuffs as it happens are quite relevant to gold mining (or any other mining for that matter).
Golden handcuffs refer to an agreement between a company and an employee where the employee will receive significant benefits if employment is terminated.
At first this seems delusionary – governments who are nationalizing resources are most likely not going to honour agreements requiring them to pay hefty penalties for tossing out mining companies.
The solution however lies not in expecting states to cough up the cash but rather in requiring governments to obtain third party nationalism insurance for mining companies.
Absurd as this seems at first the concept addresses all the pertinent issues.
Comprehensive nationalism insurance would only cover blatant nationalism in any demonstrable form. It would be coupled with the country’s sovereign debt risk profile making pricing relatively straightforward. It would trigger an avalanche of foreign direct investment most of it from yield starved developed nations to debt starved developing nations- and it would enable miners to get on with digging rocks out the ground without dealing with the real hard stuff, the task of political monkeying.