Is it ever a good time to nationalise?

Sam Storr

Argentinean President Cristina Kirchner announces the re-nationalisation of oil company YPF in 2012. Credit: presidencia.gov.ar via Wikimedia Commons.

It is almost commonly-accepted wisdom that undeveloped nations can be cursed by an overabundance of natural wealth. Scarcely a month passes without a new report or investigation decrying the corruptive effect of foreign extractive industry on weak political institutions, and the inequalities suffered as a result of the deals they make. Yet despite this, it is when a nation decides to take control of national resources for itself that the most controversy occurs.

Any attempts to nationalise resources, impose taxes on or reform extractive industries is branded as ‘resource nationalism,’ usually taken in the pejorative as being associated with demagogy and greed.

The first wave of modern resource nationalism began in 1938 with Mexico’s heroic seizure of its national oil reserves, spreading through others such as Brazil and finally seeing the Middle East’s successful emergence as a petro-power in the 1970s. The concept of national resource sovereignty emerged in this period. UN General Assembly Resolution 1803 of 1962 recognised the inalienable right of states to expropriate natural resources for their own economic and national interests, as long they give adequate compensation.

The world is being reshaped by the natural riches of those countries. However, the 1960s also saw the difficult partial emergence of post-colonial African successor states, among others, that have since failed to benefit from the exploitation of their resources, whether due to the behaviour of extractive industry, foreign powers or their own governments.

During the 1990s, investors complacently predicted that the conflict with resource nationalism was over. But in recent years the international mining sector and its interested parties are complaining of a new ‘wave’ in both the developing and developed world. Arbitration cases between governments and private industry rose by a factor of ten in the oil and gas sectors and by four in the mining sector between 2001 and 2010. Among these, a few cases stand out.

In 2012, Argentina shocked the world by seizing the Spanish stake in its YPF oil group, shortly after it found one of the world’s largest oil deposits; the company is negotiating for compensation thought to be half the US $10 billion it initially demanded. Argentina’s stated reason that the Spain’s Repsol company had not invested enough in development. But perhaps even more offensive to foreign investors are the actions of the Democratic Republic of Congo (DRC), which seized several mines in 2010 over ‘contractual violations,’ or Zimbabwe, which is extending its fast-track ethnic land redistribution project to the mining sector.

As the trend of contractual disputes does seem to follow that of commodity prices, there is a strong tendency in the industry to see disputes as caused by an opportunistic greed that unfairly robs them of their risky investments The other view is that mining contracts, negotiated in times of low prices, heavily favour the investor with tax breaks and become irrelevant with time.

Though claiming a greater share of a suddenly profitable resource would seem prudent, the moralising rhetoric of international finance voices otherwise. The economist Dambisa Moyo, for example, believes that this ‘virulent’ trend will lead to governments being unable to access sources of finance and investment through lack of trust, driving away private sector talent, and ironically losing on out on revenue due to their avarice. In an admirably even-handed take, the Financial Times’ David Gardener writes that ‘Resource nationalism can be about nation-making and institution-building, or looting and dilapidating resources.’ The difference, he believes, lies in how the transition is managed.

However, for now, the doom-laden premonitions have proved inaccurate. Despite Argentina’s many economic problems, foreign interest in its extractive industry is undimmed. Foreign direct investment levels into Africa rose 5% in 2012 despite a total fall of 18% worldwide, and investment into the least developed countries (LDCs) of the world hit a record high in 2012. Normative encouragement was even offered by the French Development Minister Pascal Canfin, who recently broke his government’s silence on Niger’s ‘legitimate’ attempt to remove the tax exemptions on uranium extraction enjoyed by French-owned Areva.

Additionally, these developments are partly driven by investment from the BRIC countries, with their own nationalised resource wealth. While commodities remain hugely profitable and investment in the crisis-hit developed world is risky, the risks for resource nationalists seem low. 

In more extreme cases the counter-argument to nationalism becomes absurd. One example is Moyo’s belief that the inability to raise revenue through debt financing is a pressing concern for the DRC, politically unstable, violent and environmentally damaged as it is. More salient is the story of state mismanagement and corruption, which has seen Brazil and Mexico turn back to the private sector to rejuvenate falling profits, and cast doubt on ability of the economic models in the BRICs to overcome internal problems.

If among the controversy there is a sense that the two sides may yet meet, some analysts see a greater change at hand. The 2013 Ernst & Young Africa attractiveness survey finds that of the growing level of new investment projects on the continent, the proportion involving oil and mineral extraction fell from 18.5% in 2003 to 7.2% in 2002. Outside the African success story however, there is little that seems likely to change for the better. Emerging actors such as China, though giving countries such as Niger more negotiating power with their former colonial monopolists, will not help places such as the DRC by joining the race for the strategic mineral cobalt.

It is not nations that must avoid being hypnotised by the thought of riches, but foreign investors. In fact, one of the worst aspects of the DRC episode for the industry was the behaviour of one of its own, ENRC, which unscrupulously bought the assets before the dispute was resolved. Risk analysis consultancies such as Maplecroft emphasise political instability and conflict as a factor determining the risk of resource nationalism, suggesting that safe investments will work to strengthen human development and political institutions, and avoid environmental damages.

In historical perspective, extractive industry is beginning to emerge from a real age of extremes. The boom in commodity prices and mismanagement on all sides has seen the rulebook torn up, meaning that states can take the risk of claiming greater sovereignty for their resources amid a broader context of new opportunities, providing that they manage resources well. As the boom subsides, hopefully private industry will gain more wisdom on how and with whom to conduct business.

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