Building Perceptual Bridges to Encourage Direct Foreign Investment in Mining

November 20, 2012   Business News
(PRLEAP.COM) Webber Wentzel is one of the most respected law firms in South Africa. Its Mining & Energy Practice is the largest dedicated legal mining practice on the African continent. The team provides comprehensive legal advice covering all aspects of mining and resources law. With a team of over 40 legal experts, the practice advises on mergers and acquisitions, corporate and commercial law, project development, environmental law, cross border dispute resolution and regulatory law in the mining industry.

Many investment publications are stressing the need to bridge perception gaps to attract potential investors to Africa's shores. Before donning hardhats to build those bridges, however, perhaps it is more pertinent to put on thinking caps and turn within South Africa's own borders.

While the country has traditionally been seen as the economic powerhouse of Africa and the gateway into Africa, one may argue that its regulatory environment is not as welcoming as others on the continent. Despite having the world's highest mineral reserves (with an estimated value of US$2,5 trillion), actual mineral production in South Africa has been declining, with mining production 2.4% lower for the three months ending January 2012 compared with the three months ending January 2011.

The Fraser Institute conducts an annual survey of mining companies to assess the effects of mineral endowments and public policy factors.

The Fraser Institute conducts an annual survey of mining companies to assess the effects of mineral endowments and public policy factors.

These public policy factors include:
  • including regulation,
  • taxation,
  • legal system,
  • trade barriers,
  • political (in)stability,
  • infrastructure and other socio-economic factors - on investment and exploration efforts.

  • In short, the survey allows potential investors to show participating governments how attractive their policies are - or aren't.

    South Africa's report card and ranking is concerning as indicated below.

    Report card of African countries out of a total of 93:

  • South Africa's report card portrays a dismal ranking of 54th
  • In contrast: Botswana ranks 17th;
  • Burkina Faso is 38th;
  • Ghana 43rd;
  • Namibia ranks 45th
  • and Zambia is 50th of the 93 countries.

  • With a resource history, advanced economy and better-suited infrastructure than most of these countries, the South Africa's mining industry thus provides a good example of one where the regulatory environment is making the risk of investing less attractive to foreigners.

    With a blossoming commodities boom fuelled by emerging markets, declining developed world reserves and rising production costs, the local slowdown trend is perturbing. During the first wave of mergers and acquisitions (M&A) in this sector - geared at satisfying developed nations' resource needs - South Africa emerged as a major (and successful) player.

    Although it is too soon to argue that the local mining industry has missed the second wave of interest (from Chinese, Indian and, to lesser extent, Brazilian investors), declining overall interest indicates that the sector has not positioned itself as strongly as it could have.

    Concerns caused by, for example, sensationalist debates surrounding resource nationalism ensure that the level of investment the South African mining sector is experiencing is a lot lower than it arguably could - and should - be.

    In the Fraser Institute's survey, for instance, 30% of participants considered the administration, interpretation and enforcement of existing regulations in South Africa a strong deterrent to investment, while Ghana strongly deterred only 3% of investors, Botswana 0%, Burkina Faso 4%, Namibia 10% and Zambia 2%.

    The need for greater engagement between government and the mining industry

    To this extent there is a need for greater engagement between the South African government and the mining industry to iron out policy and legislative issues. Swifter application processes and more expeditious decisions by the Department of Mineral Resources (DMR) will help avert much of the backlog that currently contributes to investor apprehension and frustration. Increased regulatory certainty and smoother processes will arguably go a long way to encouraging the tide to turn and stimulate more investor confidence in South Africa's mining industry.

    As opposed to being internally focused, government may also benefit from learning from what other African governments are doing. The Botswana government, for example, has been particularly proactive in engaging with foreign investors in a more friendly way than most other governments on the continent. Officials and even government ministers have made themselves available for site visits with potential investors and have even been involved in discussions between role players. This has assuaged investor fears to the substantial benefit of the Botswana mining industry, as demonstrated by the results of the Fraser survey discussed above.

    Investor perceptions of the South African mining sector

    Investor perceptions of the South African mining sector may also be improved by investor education. Potentially tricky subjects such as the redistribution of wealth through black economic empowerment (BEE) policies are often misunderstood and, as result, viewed with suspicion. Educating foreign investors on the beneficial impact of BEE policies could go a long way to overcoming their fears. It also remains important to show investors how broad-based empowerment policies can benefit large communities, which in turn reflects positively on corporate investor responsibility.

    The memory of previous, catastrophic power outages is also still fresh in many an investor and potential investor's mind. Power supply forecasts are also not giving investors much confidence. While the South African government is starting to address the problem by launching various initiatives, it should engage foreign investors more constructively to address the necessary infrastructure needs and encourage levels of investment.

    Zindal Steel's project to build a power plant in Botswana is a good example of achieving such co-operation; as is the Mozambican policy of allowing foreign players to build and own their own railways. On local soil, reports of increased co-operation between the South African and Indian governments on infrastructure development programmes seem to illustrate that we are at least starting to head in the right direction. There however remains immense scope for collaboration with foreign investors to develop the infrastructure and other requirements of our country.

    To allow South Africa's mining industry to benefit from the commodities demand, Government therefore urgently needs to address the attractiveness of the local mining industry by ensuring that the industry's capability is substantially enhanced. If these bridges are not mended urgently, the mining industry in South Africa is likely to not be positioned to fully exploit the second wave.

    About Webber Wentzel

    Webber Wentzel is one of the leading corporate law firms in Africa. The firm far outstrips the local competition being consistently ranked at the top by a diversity of international ratings agencies and have achieved a number of legal accolades in 2012.

    From offices in Johannesburg and Cape Town, the firm provides high-quality legal services to meet the multiple and varying needs of a powerful client base that includes many of South Africa's Top 100 companies in mining, insurance, technology, media and telecommunications and intellectual property and property.

    As you would expect from a premier firm such as Webber Wentzel, we are a full service corporate law firm offering expertise in legal areas including Dispute Resolution, Banking and Finance, Mergers & Acquisitions, Tax and Project Finance.

    Webber Wentzel has a staff complement of 750 people and a Level Four B-BBEE rating. Its 21 practice groups cover virtually the entire spectrum of legal endeavour.

    Work on the African continent represents a growing area of Webber Wentzel's business and the firm is the South African member of ALN, an established group of Africa's 12 foremost law firms.

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