Executives of resource companies can learn from the missteps of others on what is increasingly a career-defining challenge.
A summary version of this article was published by the Financial Times on 11 January 2022: see here
By Daniel Litvin, Founder and Senior Partner of Critical Resource
If you are a senior executive of a mining or energy company, what are the rules of engagement with an angry prime minister of a host country who accuses your firm of paying too little tax while destroying the environment to boot? Now may be a good time to consider a few basic lessons from the rich industry experience in this area.
Resource nationalism – moves by host governments to toughen tax and other rules governing foreign-owned resource projects – is again on the rise. Both Chile and Peru have recently elected leftist presidents seeking to raise taxes on the mining industry and block environmentally-controversial projects. Rio Tinto has recently been forced to renegotiate its deal with the Mongolian government to complete a giant copper project in the Gobi Desert. Last May, the government of Kyrgyzstan seized control of a huge gold mine from the Canadian firm Centerra Gold. Many other countries, from the DRC to Russia, are looking to toughen fiscal and other regulations facing the industry.
A range of factors – growing public debt due the pandemic, higher commodity prices, and stronger public environmental consciousness – are motivating politicians to target resource firms both to extract more cash for state coffers and to win political points.
So how should senior executives respond? With no claim to comprehensiveness or applicability to every case, five basic management lessons stand out from resource nationalist episodes in the past.
First, mend the roof before the storm hits. Resource nationalist politicians are sometimes driven by ideological fervour, but they also draw from genuine grievances against projects or from misperceptions about them that gain wide circulation. Leaving these to fester is a common industry mistake.
In Tanzania, for example, many foreign miners paid relatively little tax in the 2000s under ‘tax holiday’ deals originally struck with the government. As a result, perceptions gained hold across the country that the miners were failing to contribute to national development, culminating in then-President Magafuli’s demand in 2017 for $190 billion in unpaid tax from Acacia, the largest foreign gold miner, plus other industry-crippling moves.
Likewise, environmental infractions by projects, real or perceived, clearly need to be tackled pre-emptively. The president-elect of Chile Gabriel Boric has so far focused particular fire on a proposed mining project near a major penguin and marine reserve. In the 2000s, Shell lost control of the giant Sakhalin oil and gas project in Russia to state-owned Gazprom, after allegations (vigorously denied by Shell) of environmental infractions.
Second, take pains to understand the government’s apparent ‘irrationality’. A common private reaction from executives is to dismiss resource nationalist politicians as economically illiterate (because they seem to be damaging national interests by deterring foreign investment), unhinged, or perhaps corrupt – and wait for them to ‘come to their senses’. The reality is often more nuanced: politicians may be focused on positioning themselves for an upcoming election, for example, or navigating complex domestic or geopolitical interests. Any of these has the potential to make bashing a foreign firm a rational course.
Only by immersing themselves in understanding the host government’s motivations, influences, and game plans, can executives hope to respond effectively. In one case in recent years, for example, a major western-owed resource project was effectively expropriated by a government partly, it was suspected, as a means for it to keep options open with state-backed Chinese interests – a ‘great game’ of which the western executives at the time had limited understanding.
Third, stand your ground but recognise that playing hardball can easily backfire. In the past executives have often unintentionally poured fuel on the fire of resource nationalism by being seen to try to strong arm host governments into submission. The wave of nationalisation of western-owned oil assets in the Middle East in the 1960s and 70s was accelerated by often heavy-handed resistance to nationalist pressures by the western oil giants, which fueled local anti-colonial, anti-western sentiment. In a more recent example, negotiations between an African government and a western resource firm were set back when its senior executives were seen to adopt an imperious manner, jetting in and out for discussions, seemingly insensitive to local perceptions.
Similarly, companies’ use of legal remedies against resource-nationalist host governments (pursuing international arbitration against them, for example) can be inflammatory. Commercial interest clearly needs to be defended, but deals to resolve major episodes of resource nationalism – such as that between the government of Indonesia and the American mining firm Freeport-McMoRan over the giant Grasberg copper mine in 2018 – are more often eventually secured through intensive dialogue between the parties, as opposed to through threatening letters from lawyers.
Fourth, think big in order to achieve a ‘grand bargain’, allowing wins for both sides. The multi-billion dollar Grasberg deal is a case in point. Under pressures from the Indonesian government, Freeport gave up majority control of the mine to a state-owned firm and committed to build a copper smelter in the country – giving a pre-election boost to President Joko Widodo – but in return, among other upsides, gained security and clarity over its key mining permit for a further 20 or so years. In another ‘grand bargain’, De Beers in 2011 persuaded the government of Botswana to renew its license to sell the country’s diamonds for another ten years, in return for shifting its globally-important diamond sales business from London to the country.
In general, while host governments will look for headline-grabbing commitments demonstrating how hard they have squeezed the foreign multinational concerned, this can still allow for profitable operations going forward. As the company looks to offer up incentives to the government which are attractive without being ruinously costly, it often helps to take a broad view of the country’s needs and how it can support them – for example, through technology transfer, local capacity building, and social programmes, or even (some governments like this) replacing the local management team.
Fifth, and finally, prepare to play the long game. Executives should denominate their timelines for tackling resource nationalism in years, if not decades. Once hostile, political and public sentiment can take years to turn around; and there should be no surprise if deals negotiated with one government are re-opened by the next one.
The Grasberg deal, again, was the culmination of years of discussion. Tanzania’s dispute with Acacia mining took some two years to resolve (and an offer of $300m on the part of Barrick Gold, Acacia’s full owner since 2019, to settle outstanding tax and other disputes). Many other disputes rumble on for longer. And of course some are conclusively lost by companies. The nationalisation of western oil assets in the Middle East in the 1960s and 1970s, for example, remain largely unreversed today as state oil firms such as Saudi Aramco continue to dominate the scene. In the resource nationalism game, governments will sometimes play the final moves.
Daniel Litvin is the founder of Critical Resource, advising energy and resource companies on sustainability and geopolitical risk, a Visiting Senior Fellow at LSE’s Grantham Institute, and author of ‘Empires of Profit: Commerce, Conquest, and Corporate Responsibility’.