There may be unforeseen and unintended political and social ramifications for countries implementing indigenisation legislation, aside from affecting foreign investment, if it is not carefully considered and the effects thereof are not carefully managed, law firm Webber Wentzel Africa mining and energy partner Bruce Dickinson tells Mining Weekly.

Besides weakening investor appetite for a project, indigen- isation law unintentionally impacts on the intended benefits of resource nationalism. Therefore, these benefits do not seem to reach and improve the lives of the citizens of the host country and perpetuate the perception that the opportunities created by indigenisation legislation benefit only those who are politically connected.

Dickinson describes indigenisation law as one of the manifestations of resource nationalism, a trend identified by advisory firm Ernst & Young in its ‘Business Risks Facing Mining and Metals 2011–2012’ report as topping the concerns of mining and metals companies.

From a host-country perspective, the trend of resource nationalism could be viewed as resource-rich countries seeking to derive greater benefit from their natural resources and exer- cise greater control over them.
At macro level, resource nationalism and the associated, but not necessarily accompanying, phenomenon of indigenisation could be divided into two key themes – economic resource nationalism and social resource nationalism.

Economic and Social Resource Nationalism
Economic resource nationalism, a worldwide phenomenon, is usually manifested through the revisions made to the host country’s tax codes. These can include windfall taxes and resources rent taxes, extended capital gains tax reach, revisions to export and import duties and custom regimes, increased royalties, as well as requirements for a free carry interest in mining projects.

Along with a variety of global mining jurisdictions, host coun- tries in Africa, such as Angola, Guinea, Liberia, the Demo- cratic Republic of Congo, Mozambique, Tanzania, Burkina Faso, Zambia and Zimbabwe, have used economic resource nationalism to secure what they regard as a fairer portion of the economic gains for the host government, says Dickinson.

Social resource nationalism, however, focuses on deriving more direct benefits for indigenous citizens of the host country to allow them the opportunity to participate in and benefit from the development and exploitation of the host country’s natural resources. An example is South Africa’s black economic-empowerment policy, as well as Zimbabwe’s 51% indigenisation and economic empowerment requirement, notes Dickinson.

Result
Dickinson notes that if the economics of the project do not make sense, investors will stay away.

“Too often, we see host governments using tax and royalty regimes in isolation, without giving the due consideration to the overall fiscal burden imposed by other legislation, such as skills development levies, community development levies and local employment requirements. This makes a once eco- nomically viable project unfeasible,” he says.

In addition, local participants in mining projects often lack the financial resources to buy into projects and fund any ongoing cash calls, which places a further financial burden on the investing company. As a result, the responsibility generally falls on the investing company to vendor-fund the buy-in and the cash calls, particularly while a project is in development.

Economically, it remains a delicate balancing act between host countries deriving a fair benefit from their mineral resources and attracting investors seeking a fair return on investment, as well as ensuring that all economic impacts are taken into consideration, says Dickinson.

Further, social resource nationalism may also impact on control.

Dickinson explains that, traditionally, a mining company would have had absolute control in determining with whom it partners, but such control has been reduced. Similarly, the investor is also restricted in its choice of whom to employ and from whom to source goods and services, besides other aspects.

threat indigenisation or social resource nationalism has on mining in Africa is a blurring of responsibilities between the host State and mining companies, which involves the traditional responsibilities of the host State being shifted to mining companies.

The tragedy at platinum miner Lonmin Platinum’s Marikana mine, in Rustenburg, where 46 people were killed in August last year, the during the wildcat strikes, which spread to other mines on the platinum belt, is an example of the effects and the social and political unrest that may, to a large degree, result from the benefits of resource nationalism not being felt by those most in need, says Dickinson.

Mitigation
“To mitigate the threat of indiginisation in Africa, there must be a thorough understanding of the local laws, including, among others, fiscal, employment and indigenisation laws and how they are implemented.

“Due consideration needs to be given to how and through which jurisdiction the entry into the host country should be structured, not only to ensure commercial and tax efficiency, but also to take advantage of favourable bilateral investment treaty protection,” says Dickinson.

Further, a careful selection of local participants, whose interests are and should be aligned with those of the investor for the life of the mine, should be made. Stakeholders might have a big impact on the project if their interests are not taken into account and dissatisfaction ensues, he says.

Indigenisation risk can also be mitigated by appropriately structuring the local participants’ involvement in the project. Dickinson says, generally, it is best to include a “trickle dividend” in the project to ensure some cash flow to local partners while their buy-in is being settled, as all of their dividends go to paying back the loan taken to buy the shares. “Dissatisfaction quickly mounts when no financial rewards are forthcoming,” he notes.

Establishing a social licence to operate, using open communication in which the investor interacts with all relevant stakeholders at national, provincial and local level, is important. The appropriate sourcing of local employment, skills development and training, the procuring of goods and services, strict adherence to all local laws, respecting local custom and engaging with local communities and government agencies should be prioritised.

Tackling corruption by imple- menting international and regional anticorruption laws and local corrupt-practices legislation is becoming more prevalent, says Dickinson, who adds that South Africa, Nigeria and Ghana are subjecting more mining investors to ethical business practice frameworks.

He is adamant that, to operate productively in African countries, mining companies should understand the environment they are working in and rigorously follow the rules.

Alliance
Webber Wentzel announced on December 4 that it would enter into a collaborative alliance with global law firm Linklaters, which currently has more than 200 live matters relating to Africa and experience in more than 45 African countries.
The alliance, which launches on February 1, offers clients a unique advantage in Africa through the firms’ combined experience, know-how and international and on-the-ground resources, notes Webber Wentzel.

The firm’s clients will benefit from access to Linklaters’ lawyers (and those of its alliance firms) located in Africa’s key trading partners in Asia Pacific (specifically China, India, Korea, Japan and Australia), Europe, the Americas and the Middle East, as well as specialist Africa-focused resources at Linklaters’ London, Paris and Lisbon offices.
Webber Wentzel senior partner David Lancaster says: “Our alliance with Linklaters is a vote of confidence in South Africa and Africa. It’s also a strong endorsement for Webber Wentzel. With the demand for cross-border legal services continuing to grow, Webber Wentzel and Linklaters will be working together for the benefit of clients across Africa. This arrangement is consistent with our strategy of helping clients wherever they do business in Africa.”

He notes that Africa’s fast- growing economy is attracting record investment and sub- sequently international law firms.