Archive | March, 2013

Resource Nationalism or Political Risk Management Failure?

7 Mar

David O. Kuranga, Ph.D.

The author is the Managing Director and Principal of Kuranga and Associates, a full-service investment, political and economic risk consultancy, and asset management firm that specializes in Africa. He is also the author of The Power of Interdependence with Palgrave Macmillan Press.

There is a great deal of concern among commodity investors in Sub Saharan Africa over the supposed wave of resource nationalism that is purportedly spreading across the continent. Decision-makers in many African states are seeking greater returns on their natural resources and are implementing various measures to achieve them. In some states, international investors have faced steeper taxes and fees on resource extraction activities. Other states have created national companies designed to establish joint-ventures with international firms to increase profit-sharing. Increasingly a number of states have actively employed a number of these strategies simultaneously. The trend has led many analysts to declare that there is a wave of resource nationalism that is sweeping across Africa. This has also led to growing concern for the potential risks that investors in African resources are facing.

With all the hype surrounding the policy shifts of decision-makers in a number of African states regarding resource extraction, one of the key conclusions is that it has become a bit more challenging to do business in a number of African territories. On numerous occasions I have listened to various investors griping about how one state or another has shifted in policy adversely impacting the returns of investors. Their next conclusion is that the investment climate in Africa has become more hostile to international investment particularly when it comes to resource extraction. Thus many in investment circles point fingers at African decision-makers, and their increasing appetite to shake-down international commodity investors. The usual talking points are, “look what they are doing to us”. “Why are these leaders taking legal steps to increase the share their governments get for their resources?”

What is most shocking is how nobody really bothers to look closely at the actions, in many instances, inaction of the various corporations themselves. International mining and energy companies spend a lot or resources on high-powered lobbyists and government relations consultants in their home-base countries and all the major developed countries in which they do business. They understand that if they did not do this they would likely face a series of hostile policies and potentially get overlooked in public assistance initiatives and programs. However, almost across the board these same companies do not have a single lobbyist or government relations representative in any of the developing countries in which they do business. Yet, they expect that they will not face hostile policies and get overlooked in public assistance programs. The reason they choose to act so differently when it comes to developing countries is in-part based on their condescending and outdated mindset that treat developing nations as just sources for raw materials and potential markets for their goods.  In today’s Africa, this mindset will cost any investor seeking to tap into the continents resources. Countries in the African region have governments just like any other region of the world. Government officials are falling under greater scrutiny from the public and are forced to be more responsive to public demands. As a result the environment of corruption that international investors where highly complicit in creating, is no longer a reliable way to deal with political decision-makers in Africa.

Countries in Africa have become more politically sophisticated and savvy when it comes to international investors. Further, greater competition for their resources among various emerging economies alongside developed countries now enables them to negotiate deals that are more in-line with global standards. If a company thinks they can invest substantial capital in an African country and not have a single lobbyist or government relations representative to work with that government aside from their pathetically trained compliance staff in headquarters then they should not be at all surprised by what is happening to them. I gave a talk on this very issue about a year ago, see: In this case Chad had a deal with an international consortium for its oil that fell well below international standards. A couple years into the deal, the Chadian government instituted a series of taxes and fees to bring their revenues from oil more in-line with international norms. During the first few years of production, when Chad’s oil royalties were a small fraction of what would be expected, oil production was at its highest. Shortly after they implemented the new tax regime, the consortium began to pump less oil. After the taxes were passed the companies even attempted to “negotiate” a tax-exemption with an official in Chad who did not even have the authority to grant them a tax exemption. They have since began to pull back on their investments in the country, only to be replaced by others.

From a risk management standpoint, the problem is not that there has been some drastic anti-investment sentiment among decision-makers in Africa, but simply that official governing institutions in African societies have become more sophisticated and responsive to their peoples demands. Accordingly if a company is doing business there they cannot employ the outdated strategies used when recognized governing institutions in Africa were just being formed. Doing business in Africa today is not so much different from doing business in other parts of the world. Granted, the climate is different, there is certainly less infrastructure than what would be found in the developed world. Still do not mistake these differences for meaning that investors can ignore and/or payoff regulatory and governing institutions in these societies for pennies. I believe that if there was a wave of political risk management upgrades among commodity investors in Africa the issue of resource nationalism would be insignificant. Certainly companies would have to adjust their stance and approach and perhaps consider making reinvestments as oppose to just extraction and profit repatriation models, but there is no reason why their absolute returns in Africa have to decline. In fact, given the rapid growth found in these countries, their returns should very well also increase if they employed strategies in-line with global standards for dealing with political risks and developed a holistic approach for investment to include profit-making infrastructure and processing beyond just extraction and repatriation. In the example of Chad, Chinese firms have built a refinery and have made deals in Chad without facing any of the issues of the Western-led consortium. Companies that do this will be able to navigate the continent with ease, as the business climate in the African region has never been better.

Kuranga and Associates Global Consultancy is a political and economic risk management firm with a principle practice area of Africa. To learn more about Kuranga and Associates go to © Copyright 2012 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

David O. Kuranga; Ph.D. Managing Director
Kuranga & Associates Global Consultancy
Phone: 212.363.0936