Africa's New Barriers for Foreign Mining Firms

Africa's New Barriers for Foreign Mining Firms

A Tanzanian tanzanite miner holds 09 June 2006 a gem worth locally 200 US dollars outside the Mererani mine, which runs 300 meters into the ground. In the United States, which accounts for 80 percent of the world?s consumption, 400 million dollars (317 million euros) worth of tanzanite jewelry is sold each year. Maasai herders first found the stone in 1967, prompting famed US jeweller Tiffany and Co. to call it "the most important gemological discovery in 2,000 years", spawning a boom in Tanzania.

SourceMatt Brown/Getty

Why you should care

The new rules may end up hurting the very people they’re meant to benefit.

Germany's public broadcaster Deutsche Welle joins forces with OZY to pique the curiosity of globally minded readers.

Tanzania’s president John Magufuli does not need any more opponents than he already has. Since taking office, he has contended with critical journalists, lazy officials and the European Union. But the temperamental president, nicknamed “bulldozer” by some of his country’s citizens for his strict leadership style, is now targeting foreign mining companies.

“We must profit from our God-given mineral resources,” Magufuli said at a rally last month. His Parliament made good on his words: At the president’s initiative, a new mining law was passed. In future, foreign companies will have to pay higher taxes. Their operations in the country must be 16 percent locally owned. Existing agreements with the government will be allowed to be renegotiated.

Tanzania is among a growing band of mineral-rich African nations tightening regulations on foreign companies, arguing that the mined resources are currently helping line the pockets of overseas executives instead of serving the interests of their citizens. Zimbabwe’s government wants to seize nearly 28,000 hectares (69,000 acres) of land belonging to a subsidiary of the South African mining company Impala Platinum. The case is currently before the court. In South Africa, the government has ruled that 30 percent of shares in all mining companies must be in South African hands. Until June, that figure was 26 percent.

Fighting this battle in a populist, public way through the media and through very random impositions, like an export ban introduced overnight, does not install confidence.

Ross Harvey, South African Institute of International Affairs

The moves are expected to be widely popular, politically. To an extent, say some experts, they even have an economic rationale — higher taxes will help these countries ride out times when commodity prices are down globally. But other experts are arguing that the manner in which these governments are trying to force foreign firms to renegotiate contracts could end up undermining the interests of these very countries.

“Fighting this battle in a populist, public way through the media and through very random impositions, like an export ban introduced overnight, does not install confidence,” says Ross Harvey from the South African Institute of International Affairs.

Raising tax rates for foreign companies in the mining sector isn’t necessarily a problem in itself, say experts. In some African countries, foreign companies have to pay lower taxes on mineral resources than is customary today because they are still benefiting from old contracts, says Robert Kappel of the GIGA Institute of African Affairs. As long as world market prices remained high, African governments earned good money despite the low taxes, thanks to export charges. But those times have gone. “The prices of raw materials have been declining for years, which is why the tax on profits from the production of raw materials has fallen in the respective national budget,” says Kappel. Because their source of income has been interrupted, many African governments are now kicking into gear.

Politically, though, the governments have wrapped their moves in public concerns over economic sovereignty, complicating what experts suggest could have been standard negotiations.

New mining licenses for other companies will be given only when “things are in order,” Magufuli said, announcing Tanzania’s new steps. This is expected to be well-received by citizens. Tanzania is the fourth-largest gold producer in Africa, but almost no one in the country benefits from that: One-third of the population lives in poverty.

In Tanzania, local financial authorities have accused British mining company Acacia of deliberately downgrading its gold exports in the past to save on taxes. The group asserts that it was not aware of such practices and says it is cooperating fully with authorities. To no avail: Foreign employees are currently not being granted new visas.

Harvey describes the tack governments are taking as follows: “The country is not benefiting sufficiently from mining; mining is … simply extracting resources and repatriating profits elsewhere, [leaving] the country with nothing but a hole in the ground and no socioeconomic benefits.”

But higher tax revenues will not necessarily benefit the poor, says Kappel. “What governments do with their tax revenue is up to them,” he points out. “If you look at the budgets of most countries, there is not much money to help improve the situation for the poor populations.”

And the countries need mining companies. In South Africa, for example, more than 70,000 jobs within the mining industry have been lost in the past five years. This comes as the country is already suffering from a high unemployment rate.

Instead of hasty symbolic politics, governments should quietly negotiate with corporations, Harvey says, pointing to what he sees as positive examples in Burkina Faso, Namibia and Kenya.

“They [African governments] understand they need foreign investment, but also that their countries need to profit in the long term,” adds Harvey.

For that, says Kappel, governments should insist that people in the regions where the mines are located profited in a practical way.

“There are many ways to get companies to do something for infrastructure, health care and the education system in their production areas,” says Kappel. “There are already countries that have written that into their contracts.”

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