Interview with Olivier Binyingo, Director, Herbert Smith Freehills LLP, SA. At the upcoming DRC Mining Week in Lubumbashi from 17-19 June 2020, Mr Binyingo will address the conference on “An asserted Rule-of-law for a conducive investment climate” which will be followed by a panel discussion. The company is also a bronze sponsor at the event.

Let’s start with some background on Herbert Smith Freehills – there is a proud history there.

HSF is one of the world’s leading professional services businesses, bringing together the best people across our global network of offices, including Johannesburg, to meet all of our clients’ legal services needs globally.

We have a solid understanding of the African market derived from a deep track record acting on matters in Africa for over 40 years across all practice groups and industry sectors.

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Authors: Peter Leon, Ernst Muller and Natasha Rachwal

Evolution of the AfCFTA 

A significant milestone has been reached in the economic integration of Africa, with the creation of the African Continental Free Trade Area (“AfCFTA”). Opened for adoption at the African Union (“AU”) Summit in Kigali in March 2018, the Agreement establishing the AfCFTA (“AfCFTA Agreement”) has been signed by 54 of the 55 AU member states (tiny Eritrea being the lone exception), and ratified by 28, including major economies such as Egypt, Ghana, Kenya and South Africa, but not Nigeria. AfCFTA entered into force in May 2019, a month after the requisite 22 states deposited their instruments of ratification with the Chairperson of the AU Commission (satisfying the minimum requirement for the Agreement’s entry into force). For trading purposes, however, the AfCFTA only becomes operational on 1 July 2020.

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Author: Peter Leon

The government should take note of historical lessons

Zambia, the world’s seventh-largest copper producer, is the latest leading African mining jurisdiction to succumb to the siren song of resource nationalism. In recent years this trend has seen international miners and their host governments in Tanzania and the Democratic Republic of Congo clash over swingeing tax changes and other regulatory imposts.

The government’s current court application, through its state-owned proxy ZCCM Investments Holdings, to liquidate Konkola Copper Mines, a business controlled by Vedanta Resources, has been greeted with alarm and marks the culmination of a three-year clampdown on private, and especially foreign, influence in the mining sector.

In 2017, the Zambia Revenue Authority (ZRA) initiated a mining industry tax audit, claiming it was losing $3bn annually through “illicit financial flows”, mostly in the mining sector. In 2018, the ZRA slapped Canada’s First Quantum with a $7.9bn tax bill, which remains unresolved. In September, the government announced a series of fiscal reforms: introducing a new 5 per cent import duty on concentrates; increasing royalties by 1.5 per cent and making them no longer tax-deductible; while replacing value added tax with a non-refundable sales tax.

The latter is significant, as mining companies were owed $600m in VAT refunds at the end of 2018. Then in January, the ZRA declared it would not pay, claiming that its (unpublished) audit showed mining companies owing more than this in unpaid taxes, penalties and interest.

So why is the government doing this? And why now?

Typically, resource nationalism manifests in response to certain cycles. Most fundamental is the investment cycle. Countries that are rich in natural resources, but lack the capital, operational and technological resources to extract them profitably, adopt liberal legal frameworks and fiscal incentives to entice foreign investors (who may otherwise invest elsewhere, if it promises a better return on their capital outlay).

Once investments are made (and capital sunk), the government may flex its legislative muscle to claim a greater share of the returns than the original laws or licence terms allowed.

Whether a government does this depends on one or both of the following immediate factors. Commodity cycles drive resource nationalism in countries that are highly dependent on raw mineral exports: during a period of price depression, the state receives less revenue from royalties and export duties, but a subsequent surge in prices presents an opportunity to feed the fiscal deficit by extracting higher rents from mining companies.

Electoral cycles also drive resource nationalism in countries that have regular elections with relatively close margins, as incumbent governments often seek to increase their support by exploiting the populist appeal of resource nationalism.

Zambia is no exception, but is in fact a stark exemplar of both price driven and populist resource nationalism.

The country’s finances are extremely sensitive to the price of copper, which accounted for 80 per cent of export earnings in 2016, when copper’s price per tonne reached a 10-year low of $4,800 a tonne, down from its 2010 peak of $8,800. That year, Zambia boasted annual GDP growth over 10 per cent and a fiscal deficit of 3.3 per cent.

But by the end of 2018, after four consecutive years of sub-4 per cent economic growth, the deficit had ballooned to 7.5 per cent of GDP, and Zambia had accumulated over $10bn in external debt (73 per cent of GDP), despite having had most of its debts extinguished under the IMF’s “heavily indebted poor countries” scheme in 2005.

On top of this acute fiscal strain, the government also faces intense electoral pressure. President Edgar Lungu won the 2016 election with just over 50 per cent of the popular vote, only 2 per cent more than his rival Hakainde Hichilema.

After losing a critical by-election in the Copper belt region in April, and facing another general election in 2021, the Lungu administration now claims that the country’s mines were “sold [to foreigners] for a song [in the early 2000s] because Hichilema and his cartel misled then President Mwanawasa”.

It is also true that resource nationalism tends to be contagious. First Quantum’s hefty ZRA tax adjustment resembles those visited on Glencore in the DRC and Acacia in Tanzania during 2017. Both countries, which share borders with Zambia, overhauled their mining codes over the past two years, claiming that the existing regimes unfairly benefited foreign investors at the state’s expense. This created a precedent, as much as popular expectation, for Zambia to follow suit.

While the government’s escalating confrontations with mining companies are driven by tangible short-term fiscal and political gain, the long-term consequences of such measures are likely to be dire.

Zambia should know better about the dangers of nationalisation. The country’s 1970s nationalisations brought economic ruin and IMF structural adjustment, prompting precisely the mining regime liberalisation the government now resents so intensely. If the country continues on its current path it will place the whole economy at risk.

This article was first published on Financial Times: https://on.ft.com/2ImtqER

For more information, please contact Peter Leon or your usual Herbert Smith Freehills contact.

Peter Leon
Peter Leon
Co-Chair of Africa Practice Group, Johannesburg
+27 10 500 2620


Author: Patrick Leyden

In a move that is likely to be welcomed by the mining industry, President Ramaphosa has appointed Gwede Mantashe as the Minister of Minerals and Energy (which now combines the Ministries of Mineral Resources and Energy).

During his short erstwhile tenure as Minister of Mineral Resources, Mantashe made significant progress in addressing several fundamental issues that have hampered investment into the South Africa mining industry over the last five years. His decisive action in addressing corruption and maladministration within his Department as well as taking steps to promote regulatory certainty were positively received by both domestic and international investors alike. As a result, South Africa gained twenty seven places under the Policy Perception Index and also made considerable gains under the overall Investment Attractiveness Index in the Fraser Institute’s most recent Mining Investment Survey.

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Authors: Andrew Cannon, Natalie Yarrow and Rebecca Warder 

The Republic of Djibouti is the latest country to become a signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). Djibouti’s Minister of Economy and Finance, Ilyas Moussa Dawaleh, signed the ICSID Convention on 12 April 2019. Djibouti must now ratify the ICSID Convention in order for it to become a Contracting State (or Member State) to the ICSID Convention, and for the ICISD Convention to come into force for Djibouti.

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Authors: Frédéric Bouvet, Rudolph du Plessis and Siddhartha Shukla

Following a period of recent change for the worse in M&A (and PE exits) activity, due to political uncertainty and governance issues, can local strategy – combined with Africanising operations – and positive business sentiment improve the current state of affairs?

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