Lowering taxes for new miners may not be enough to counter the lack of infrastructure, writes Roman Grynberg.
Botswana is certainly attracting attention with its announcement of a cut in mining taxes.
The minister of minerals, energy and water resources and reportedly soon to be the vice-president of Botswana, Dr Ponatshego Kedikilwe, commented earlier this month that the government intended to lower the taxes on the new generation of mainly Australian and Canadian junior mining companies that are searching for coal as well as base metals in Ngamiland, the area between the Okavango and the Namibian border.
This is in sharp contrast to Botswana's neighbours, which in the past two years have almost been competing with each other to make life more difficult for mining companies in general and foreign-owned mining companies in particular.
In Zimbabwe the government has made it clear that it intends to localise ownership of foreign-owned mining companies. In South Africa, it seems the ANC and the political classes cannot discuss mining without scaring the pants off the mining companies with their talk of either selective or wholesale nationalisation. Few in the mining community in Botswana doubt that former ANC Youth League president Julius Malema's comments about mine nationalisation in South Africa deserve a medal for what he has done to push investment across the Limpopo basin to Botswana.
In Zambia, President Michael Sata, nicknamed "King Cobra", doubled royalties on copper companies after coming to power. In all fairness to Sata, the tax regime in Zambia had given the government a minor share of the huge increase in copper revenues and was in need of change.
Island of peace and tranquillity
In Namibia, a country not known for impulsive mining policy decisions, the government presented proposals for radical increases in mining taxes from 37.5% to 44% last year, which were subsequently withdrawn.
So, is Botswana an island of peace and tranquillity in an African sea of turmoil, or do the neighbours know something the policymakers in Gaborone do not?
Commodity and mineral prices are in the middle of what economists are calling a supercycle. For decades, until 2000, commodity-exporting countries suffered terribly from declining terms of trade as commodity producers saw their real earnings fall. This was also true of mineral exporters, as it was of agricultural commodity exporters, for almost half a century.
However, everything changed at the turn of the century with the surging demand from India and China for mineral products and some agricultural products. Commodity prices have risen and show no real long-term decline, prompting many countries to reconsider their mining tax regimes. Most of the mining tax regimes that Southern African Development Community countries are trying to change were designed in the 1990s when commodity prices were low and African countries were desperate for more mining investment.
There is, however, another cycle in economics that explains the Botswana government's behaviour, and that is the theory of the hog cycle: when prices of pork or beef rise and you see all your neighbours moving into the market, it is probably a really good time to start raising goats because, by the time the cattle or pigs mature and are ready for slaughter, the market will be oversupplied and the price will have collapsed.
Botswana's position is essentially a policy hog cycle in the midst of a commodity supercycle – it is doing the opposite to what all its neighbours are doing.
All Botswana's neighbours are trying to raise taxes or force expropriation to capture ever more of the economic rents that come from high mineral prices. In the process they are frightening the mining companies out of their wits, which is decreasing the incentive to invest in their countries.
Botswana is sending the opposite signal to the market, but it has one major disadvantage as a mining location: with the notable exception of its two fabulously rich diamond mines at Jwaneng and Orapa, almost everything that has been discovered in Botswana is generally low or medium grade, whether it is copper, coal, uranium or nickel.
Eye-popping reserves and grade levels have not yet come to the surface, although they may be found in parts of Ngamiland. As a result, the deposits are likely to be profitable but unlikely to generate superprofits. Almost all the coal deposits are in the eastern Kalahari basin, but there is no suitable railway line to the coast and, despite what some of the coal mines say, there is no sustainable supply of water.
Its small but increasing deposits of copper, nickel, lead, zinc and silver are starting to form the basis for a major base metal industry in Ngamiland. But if infrastructure is inadequate in the east of the country where the coal deposits are found, it is almost nonexistent in the parts of Ngamiland where Botswana's copper belt is found.
Open for business
To lower mining taxes sends a strong message to the mining industry – our neighbours can do as they wish, but Botswana is open for business and the new miners are welcome. No miner will ever oppose a tax decrease, but the real question is whether lowering taxes can be anything more than symbolic. Without massive investment in railways, electricity and water – and these are investments that no mining company can make – the mining investments will not materialise.
But Botswana can probably afford to be generous with its Canadian and Australian junior miners, because most of its revenue will not come from them in the foreseeable future.
The secret of Botswana's revenue in the minerals sector is that it almost all comes from dividends and taxes on the big diamond mines and there is no public intention of lowering taxes on De Beers.
In an earlier time when other African countries were being told by the World Bank and international advisers that they should not own mines because they were risky and should be left to the private sector, Botswana, under presidents Seretse Khama and Quett Masire, did the exact opposite. It had a right to 15% of the diamonds mines. It took that and proceeded to acquire 50% of interests in Debswana, which owns the Jwaneng and Orapa mines.
Khama and Masire also acquired a 15% direct stake in De Beers. The dividends derived from this are the real source of the government's mining revenue. The reason they went against the stream was because the rates of return at Jwaneng were so high – reportedly with costs of $0.10 to extract a dollar's worth of diamonds – that it would have been foolish to have done otherwise.
Lowering taxes on the new junior miners is a clear signal to the global mining industry that Botswana intends to keep its place as a premier venue for mining investment in Africa, but there is still no substitute for the expensive and difficult work of developing the necessary infrastructure to turn acceptable base metal deposits into highly profitable ventures.
These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis, where he is employed