In 2010/11 at least 25 countries increased or announced intentions to increase their government take of profits generated by the local mining industry through taxes or royalties, says advisory firm Ernst & Young’s yearly ‘Business risks facing mining & metals 2011/12’ report, with seven of these countries being in South America.
The report further identified resource nationalism as the “biggest risk” facing the mining industry in 2011 and 2012, up from being the fourth-largest risk in 2010.
Webber Wentzel Africa mining and energy projects head Peter Leon confirmed the “cycli- cal and contagious” rise of resource nationalism around the world when addressing the Brazilian Mining Association at the Second International Congress on Mining Law, in Brazil, last month.
In his address, Leon identified what constitutes resource nationalism, its causes, the countries affected, and the risks and ways of mitigating it.
He confirmed that numerous South American countries were on the list of countries experiencing the phenomenon.
Brazil, Venezuela, Ecuador, Peru, Chile and Colombia featured, while Argentina was particularly topical, as it had recently nationalised Yacimientos Petrolíferos Fiscales (YPF), the country’s major oil producer.
Resource nationalism is not necessarily nationalisation, which is the most extreme form of resource nationalism, explains Leon.
“Resource nationalism describes any measures, regulatory or contractual, taken by a State to enhance its control over a nation’s natural resources.”
Leon adds that resource nationalism is not necessarily only about obtaining a greater share of resources. It tends to arise when commodity prices are high as well as when investors seek to expand their operations.
This trend enables governments to assert sovereign authority and strengthen their bargaining power over investors, explains Leon.
Resource nationalism takes many forms, such as outright nationalisation, nationalisation by stealth, indigenisation, increased taxation, increased royalties, as well as increased local inputs and outputs, he notes.
Nationalism in South America
In South America, there has generally been a rise in resource nationalism across the continent as it tends to be a contagious phenomenon, says Leon.
“It is more pronounced in some places than in others, as some governments are more politi- cally prone to economic populism than others. The risk of nationalism would most likely be limited to a core of States that are resource rich and have politically radical administrations, such as in the Andean region – Bolivia, Ecuador and Venezuela.”
Leon says Venezuela is the most nationalistic of the South American states, with President Hugo Chavez leading his so-called ‘Bolivarian revolution’ for a number of years now. This had attracted the attention of the Bolivian, Ecuadorian and Argentinian Presidents.
“Bolivian President Evo Morales enlisted the country’s army to carry out his nationalisation of a Spanish-owned power company Red Eléctrica Española, on May 1, while Ecuadorian President Rafael Correa has, in the past, used the threat of nationalisation to pressure foreign oil companies to renegotiate contracts in his government’s favour.”
However, other more established democra- cies, such as Chile and Peru, have stronger institutions in place to ensure that changes in government do not result in radical changes in policy, explains Leon.
Further, Mexico and Chile are strongly against Argentina’s nationalisation of YPF, while Brazil has largly been quiet about the recent developments in Argentina, he says.
Argentine President Cristina Fernández de Kirchner nationalised YPF in May, taking a 51% holding from Spain-based oil and gas company Repsol.
“This is an example of outright nationalisation,” says Leon.
Fernández de Kirchner called it a “recovery of sovereignty and control” and blamed Repsol for Argentina’s lack of energy self-sufficiency, says Leon.
YPF was originally a State-owned company that was privatised 20 years ago under the refor- mist Menem administration and the renationali- sation of the company is a strong indicator of the economic pressure being experienced by the current government of Argentina.
“Argentina is facing spiralling inflation, a serious shortage of hard currency, exclusion from international bond markets and a loss of its energy self-sufficiency, despite having the world’s third-largest reserves of shale oil and gas,” notes Leon.
He adds that, typically, the more pressure a sovereign government is under to secure its political position, the more extreme the form of resource nationalism it is likely to enforce.
It can, therefore, be seen that the government is motivated more by politics than by economics.
A rise in resource nationalism can cause foreign investment to decline, in terms of not only capital but also skills and technology.
It may also increase an economy’s dependence on commodity exports and hamper economic diversification and sustainable growth.
As a result of the nationalisation of YPF, Spain has now imposed limits on the imports of biodiesel from Argentina, obtaining it from within the European Union instead.
Further, Spain has stated that Argentina’s conduct will have consequences, impacting on the two countries’ diplomatic and industrial relations, which likely marks a freeze in the relations previously enjoyed by the two countries, says Leon.
The US also announced that it would suspend Argentina’s trade benefits for its failure to pay international arbitration awards to nationalised US companies.
Leon observes that rating agencies Moody’s and Fitch Ratings have since downgraded YPF’s credit rating, while US-based Standard & Poor’s has downgraded Argentina’s credit rating from ‘stable’ to ‘negative’.
Further, the recent imposition of import restrictions by Argentina, including mandatory local content requirements for mining companies is likely to harm productivity and will weaken the attractiveness of Argentina’s mining sector to foreign investors, says Leon.
“It is also likely to invite complaints from the World Trade Organisation and have other trade law repercussions, while it may also be indicative of further nationalism to come.”
Leon suggests that the Model Mine Develop- ment Agreement developed by the mining law committee of the International Bar Association, which he developed, could serve as a helpful template for negotiations between developing countries and foreign mining companies.
The agreement is designed to assist parties in striking an equitable balance of interests to ensure that mining is productive and profitable, as well as fair to foreign investors, host States and affected local communities.
Further, foreign investors can position themselves as integral to the development process by building infrastructure or assisting the host State in meeting its developmental goals, besides others, Leon concludes.