Mon. Jan 24th, 2022

Resource nationalism is on the rise again. From Africa to Latin America to Central Asia, more governments want to tighten taxes and other rules governing foreign-owned resource projects.

Both Chile and Peru recently elected left-wing presidents trying to raise taxes on the mining industry and block environmentally controversial projects. Rio Tinto forced to renegotiate his agreement with the Mongol government to complete a giant copper project in the Gobi Desert. Last year, Kyrgyzstan took control of a large gold mine from Canada’s Centerra Gold. Many other countries, from the Democratic Republic of the Congo to Russia, are trying to tighten fiscal and other regulations facing the industry.

A variety of factors – growing public debt due to the pandemic, higher commodity prices and stronger public environmental awareness – motivate politicians to target resource companies to withdraw more cash for state coffers and to win political points.

So how should managers respond? Five basic lessons can be learned from episodes in the past.

First make the roof ready before the storm strikes. Politicians are sometimes driven by ideological zeal, but they also draw from sincere grievances against projects or from misperceptions about them gaining wide circulation. It is a common operating error to enable this.

In Tanzania, for example, many foreign miners in the 2000s paid relatively little tax under “tax holiday” agreements originally entered into with the state. As a result, perceptions began to emerge that the miners were failing to contribute to national development, culminating in then-President John Magufuli’s 2017 claim for $ 190 billion in unpaid taxes. Acacia, the largest foreign gold miner, plus other crippling moves in the industry.

Similarly, environmental offenses, actual or perceived, must be tackled preventively. Elected President of Chile Gabriel Boric has so far focused on a proposed mining project near a large penguin and marine reserve.

Second, make an effort to understand the government’s apparent “irrationality”. A common private reaction of executives is to dismiss resource-nationalist politicians as economically illiterate, harming national interests by deterring foreign investment, uninhibited, or perhaps corrupt, while waiting for them to “come to their senses”.

The reality is often more nuanced: politicians may be focused on an upcoming election, or navigating complex domestic or geopolitical interests. Any of these have the potential to make a rational choice of a foreign company.

Only by immersing themselves in understanding the host government’s motivations, influences and game plans can managers hope to respond effectively.

Third, companies need to stand their ground, but also recognize that playing hardball can easily backfire. In the past, executives have often inadvertently thrown fuel on the fire of resource nationalism by seeing them try to arm armed governments heavily into submissiveness.

Similarly, companies’ use of remedies against host governments can be inflammatory. Commercial interests need to be defended, but agreements to resolve episodes of resource nationalism – such as those between the Indonesian government and US miner Freeport-McMoRan over the giant Grasberg copper mine in 2018 – are more often ultimately secured through intense dialogue than threatening letters from lawyers.

Fourth, think big to achieve a “big bargain” that enables victories for both sides. The multibillion-dollar Grasberg transaction is an example. Under pressure from the Indonesian government, Freeport relinquished majority control of the mine to a state-owned company and committed itself to building a copper smelter in the country – which boosted presidential election boost to President Joko Widodo. In return, among other things, it gained security and clarity about its key mining permit for another 20 years or so.

When a company wants to provide incentives to a host government, it often helps to take a broad view of the country’s needs and provide support such as technology transfers, local capacity building and social programs, or even replacing the local management team.

Finally, prepare to play the long game. Managers need to name their timelines for tackling resource nationalism in years, if not decades. Hostile, political and public sentiment can take years to turn around; and it should come as no surprise that agreements negotiated with one government are reopened by the next one.

Daniel Litvin is the founder of Energy and Resources Sector Advisor Critical Resource, LSE Grantham Institute visiting senior fellow, and author of ‘Empires of Profit: Commerce, Conquest, and Corporate Responsibility’.

The Commodities Note is an online commentary on the operation of the Financial Times.

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