Is Julius Malema right? The increasing role of government ownership in Botswana's Mining Sector?

Botswana’s Increasing State Ownership in the Mining Sector

I woke up sweating at what the Europeans know as the ‘devil’s hour’- 3AM. The previous evening I had just finished reading a taxation report. The report was important and as I calmed myself I thought …how pathetic, only an economist can wake up sweating at 3 am over the results of a mining taxation report. But the report has enormous implications for Botswana and all of Africa. It was completed by the reputable  International Centre for Taxation and Development (ICTD) in 2013 came to really significant conclusions. Basically it said that only in Botswana in Africa and Chile in South America, which both have significant government ownership of mining  companies (Debsawana in Botswana and Codelco in copper rich Chile),  have  governments  ever earned  a significant proportion of the revenues from mining. In those jurisdiction where governments rely solely on taxation systems to extract returns from mineral assets, they have gained precious little.

Mining, when it works, is a high rent (profit) business e.g. Debswana. But unless you are on the inside your will never know whether what you are being told by the mining company is exported is in fact accurate. Most countries in Africa, which have limited technical capacity to check, simply take the mining company’s export figures, valuations  and profits for granted.

This is not just a theoretical question for tax economists as it has been the very basis of Julius Malema’s argument for the nationalization of the South African mines when he was still leader of the ANC Youth League. It is a position that Malema continues to support in the South African parliament today as leader of the Economic Freedom Fighters The debate Malema unleashed four years ago terrified South African mining investors but while the debate over how countries benefit from their mineral assets changes its form, it will simply not go away easily anywhere in Africa or for that matter in any resource rich country in the world whether it is Indonesia or Kazakhstan or Venezuela.

The unavoidable fact is that most resource rich countries that followed the dominant advice given to them by the World Bank since the 1980’s that governments should not own mines and should only tax them have proven not to be bid winners. Equally, those that take no risk have not proven to be big losers. The report by the ICTD authored by Olav Lundstøl, makes it very clear that state ownership only really works to bring  economic benefits to a society when  the mines are ‘managed in a strictly commercial manner’.  This is no small caveat because as we know governments are very reluctant to just leave business alone to get on with the business of making a profit.

…. Yes, but what about Zambia?

If state ownership can do such wonders for resource rich countries then why was the Zambian nationalization of its copper mines by President Kenneth Kaunda at independence such a commercial disaster? By the end of the period of nationalization in 1998 the Zambian state mining company  Zambian Consolidated Copper Mines  (ZCCM)  was losing about US$1 million per day. The reason is that copper prices which peaked in the early 1970’s fell dramatically over the next 20 years but just as importantly Lundstol’s caveat was not applied. The mines were not run in a commercial manner. The government mismanaged the commercial side of the business and so it proved to be a monstrous failure that brought Zambian government to the point of bankruptcy in the 1990’s. Zambia was  eventually forced by the World Bank and the IMF to privatize its copper mines as a condition for a financial bailout.

This fire sale of Zambian assets occurred just before the current commodity ‘super-cycle’ which began in 2004 and saw copper and other metal prices sky-rocket under demand pressure from China and developing Asia. In retrospect it could not have a been a worse time to sell. The Zambian government was forced to give ‘away the crown jewels for almost nothing’ and then agree to a taxation regime on the newly privatized companies that meant that government earned very little taxes. This was all done with the technical help of the World Bank and the Commonwealth Secretariat and it was definitely not seen as one of the high points of their policy assistance to developing countries.  

 State ownership of mining and resource companies has gained a new lease of life over the last decade, especially in the BRIC countries where it was the largely state owned enterprises have lead the growth and development of the mineral sector. Vale, the giant Brazilian miner is owned by largely the government of Brazil but has been allowed to operate in a largely commercial manner.  These BRIC largely state owned or controlled companies, from Gasprom in Russian to Vale in Brazil to Sinopec in China have been the driving force behind minerals policies in these countries.

Vale or BMC?

Over the last while the government of Botswana has moved quietly to increase government ownership in the mining sector. Unlike some other policies that are written up in policy statements but are never implemented, this increasing state ownership was not written in a policy document but appears to be happening nonetheless. There has been a  take-over of the last remaining private shares in BCL owned by Norilsk after Anglo American and AMEX sold out. Normally well informed sources in the mining industry suggest that the government, perhaps through BCL, will very soon announce the takeover of the remaining interests in the Tati Nickel mine that is currently owned by the Russian nickel company Norilsk. The government has  established a fully government owned diamond trading company Okavango Diamonds, has established the Botswana Oil Company and is going to establish a  state owned mining company which is likely to be what BCL will eventually become.  

Those who care for Botswana should view these developments in the mining sector as both a real opportunity for the economic future of the country as well as a possible threat. It is an opportunity because for once the role of mining may go beyond just digging holes in the ground and extracting maximum short term profit.  But it will be only a threat to the future of Botswana if we do not apply Lundstøl’s caveat as we did with Debswana. It is possible for government to own a very large share of a mining asset and greatly profit from it but only so long as we allow business to get on with the business of making profits. That often involves truly ugly decisions that no politician likes- dismissing redundant workers and squeezing costs where necessary.

We have sufficient examples in Botswana. In the case of the Botswana Meat Commission (BMC), for example, following  Lundstøl’s  caveat  means shutting abattoirs that don’t make profits such as Francistown, laying off hundreds of workers who are redundant rather than keeping them for years. In the case of BCL, it means shutting mine shafts that are sub-economic or in the case of Tati closing mining operations where there are no more profits because ore grades are too low. It also means not even beginning iron ore operations when world prices hit rock bottom. All this means politically unpalatable job losses.

Is Malema Right…..No, but Seretse Khama  probably was?

Sir Seretse Khama came across an excellent formula for Debswana which is now the envy of all resource rich African countries. The government gets 50% of the profits but Sir Seretse Khama was wise enough to leave De Beers with the business of running the mine and running the diamond cartel and making money. If BCL or Okavango or the Botswana Oil Company turn out to be managed like BMC has been over the years then this will threaten the economic stability of the nation. There are two or three pretty basic ways to avoid this threat. First, is to put any management out to tender on a commercial basis and second is to sell a chunk of the shares to   Botswana citizens and float them on the Botswana stock exchange as quickly as possible. Because the stock market will tell the government and the public right away if the company is being mismanaged. But there is no substitute to government which understands that its strengths do no lie in managing businesses.  

Malema’s road of mine nationalization will lead South Africa and any African country that follows to where Zambia was in 1998. This is because the amount of economic power that governments  possess with ownership of mines make its exercise irresistible of political power ‘in the public interest’ and that is exactly where much of the troubles begins. Seretse Khama’s model of a 50/50 joint venture with Debswana where government does not manage business is one of the main reasons the nation is as relatively prosperous as it is today. The formula precluded unilateral action without De Beers agreement. It is a first class model that Botswana should not forget as we  go ahead with the policy of increased state ownership in the mining sector. The way Botswana proceeds will determine whether we develop strong and healthy state owned companies like the Brazilian miner Vale, or we just produce more loss making BMCs.

These are the views of the author and not necessarily those of any institution with which he may be affiliated.