Shall we abuse Human Rights (and abolish the Carbon and Mining taxes) to better compete with Africa for Mining Investment?
The CEO of a South African mining company has claimed that Australia is one of the riskiest places in the world to do business despite the fact that his company have business operations in war torn Sub-Saharan Africa and had active gold operations 8 years ago in The Democratic Republic of Congo in the midst of some the worst human rights abuses seen on that continent. The Carbon Tax and the Mineral Resources Rent Tax were cited by AngloGold Ashanti CEO Mark Cutifani as reasons why it is comparatively riskier to do business in Australia.
CEO Mark Cutifani, the Australian leader of this South African company, was in Perth for CHOGM talking about the Mineral Resources Rent Tax and the Carbon tax. According to media reports he was telling journalists that "Australia is a very expensive place to do business. Australian is going to have to work a lot harder to be competitive."
"To be frank, when I talk to the board, we have Australia as one of the top Sovereign Risk countries in the world and places where government policy has demonstrated failure in terms of taxation policy and its inconsistency in policy," he said.
Cutifani really stuck the boot into the Federal Government complaining that he worried the MRRT would be opened up to include other commodities (presumably including those dealt with by AngloGold Ashanti) and raising the spectre of the Prime Ministers "no Carbon Tax under a Government I lead" promise at the last election as an example of Sovereign Risk that will dissuade future investment in the Mining sector.
The Carbon tax is based on the principle that if your business model requires carbon to be belched out into the atmosphere that should cost you something. Our best guess is that it costs something to the rest of humanity so it should cost you something if your company makes a profit doing so. Our mineral wealth is the heritage of every single Australian. Only once can it be dug from the ground and sold off to a foreign company. It is not renewable. So we should be damned certain that we are getting just compensation when international mining companies want to come here and dig in from the ground.
International mining companies such as AngloGold Ashanti. For the last 3 years we are so used to hearing Mining Executives bash our Prime Ministers that we almost know the script off by heart. They wail and they twist in anguish. They threaten that the sky will fall in and that they will not be able to continue doing business in Australia. Jobs will be lost. Investment dollars lost. Then they go back to mining our resources and making super profits. AngloGold Ashanti is not different. They currently own the Sunrise Dam mine in WA and they are developing the Tropicana mine 300km north east of Kalgoorlie. Despite the wailing and gnashing of teeth, these projects still seem to be full steam ahead.
If this is all Cutifani had said on the matter it would already be extraordinary neglect on the part of the media to not call him out for speaking such rubbish. Somebody, somewhere reporting the comments in the mainstream media should have pointed out that Australia has an AAA Sovereign Credit Rating, the internationally recognised appraisal of Sovereign Risk.
However then he said something really quite objectionable. Referring to attractive locations for mining investment AngloGold Ashanti CEO Mark Cutifani said "So far Africa has been much more predictable and stable". Objectionable for 2 reasons. First because it is demonstrably untrue. Objectionable also because it implies that a modern industrialised democracy like Australia should even strive to compete with Africa for mining investment. A competitive advantage based on the abuse of human rights and appalling standards of environmental protection is not something that any country should seek to own. Much less a country like Australia that can do so much better
Lets digress momentarily to learn a little bit more about AngloGold Ashanti. They are the worlds 3rd biggest producer of Gold. The 3rd world also happens to be where they have the majority of their mines. They have half a dozen operations on the African continent and operations in both North and South America. They also have, as mentioned, a mine in Western Australia and a second mine, also in WA, which is expected to start producing by 2013. AngloGold changed their name to AngloGold Ashanti Limited in 2004 when they bought Ashanti Goldfields Company Limited, a company from gold rich Ghana in West Africa.
In 1998 Ashanti Gold (later AngloGold Ashanti) were granted a mining concession in the Democratic Republic of the Congo. Laurent-Désiré Kabila was the President of DRC at the time. A position he attained by the violent and bloody overthrow of his predecessor Mobutu Sese Seko less than a year earlier. Laurent-Désiré Kabila was himself overthrown some 3 years later when he was assassinated by his bodyguards. At this point Credit Rating agencies don't even bother to give a rating. The Sovereign Risk involved in investing in such countries is basically off the charts.
Image via Wikipedia
At this point perhaps it might be informative to examine what exactly is Sovereign Risk. There is a narrow definition used in business and finance and a broader definition which enjoys a lot of use from Mining executives and Tony Abbott. The more specific definition of Sovereign Risk is the risk that a Government may be unable to pay debts to international debtors due to bankruptcy or other problems like a revolution or other kind of societal collapse. Australia has one of the most stable political and business environments in the world. We are one of the only countries in the world with a AAA Credit Rating from Standard and Poors.
There is another definition that has become popular in Australia which, to say the least, is a much looser definition. Sovereign Risk might also be said to be the risk that Government will behave in an unpredictable way, jeopardising investments. To even mention the term Sovereign Risk and the word Australia in the same sentence, as Tony Abbott and mining executives like to do, you need to be using this extremely loose definition of Sovereign Risk.
To give Tony Abbott and Mining Executives their due, perhaps it can be said that, using the second definition of Sovereign Risk, the Carbon Tax and Mining Tax have introduced some Sovereign Risk into the investment environment for Mining Companies. Julia Gillard said she wouldn't introduce a Carbon Tax and now has decided to do so anyway. Tony Abbott has said he will abolish the Carbon Tax and Mining Tax if he takes power. We had a Resource Super Profit Tax and now a Minerals Resource Rent Tax. We have a hung parliament that at any moment could collapse and give us a change of Government. All of this introduces uncertainty into the investment environment. We can call this uncertainty Sovereign Risk because it is risk that has been introduced by the Sovereign Rulers of this country: the Australian People. This is a kind of Sovereign Risk for which we cannot apologise. It is caused by our Democratic processes functioning more or less exactly as they are supposed to and we cant apologise for that. Yes there will be some back and forth and some uncertainty in our democratic processes.
However not merely is Mark Cutifani saying that Kevin Rudd and subsequently Julia Gillard have added Sovereign Risk to the investment environment, he is going much further than that. Remember that Cutifani is claiming that, as far as AngloGold Ashanti have experienced, the unpredictability of Government policy and broader political situation is a bigger problem in Australia than in Africa.
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Keep that in mind while we go back to the story of AngloGold Ashanti in the DRC. In 2003, after 5 years of fighting in what had been termed The Great War of Africa, things started to settle down in The Democratic Republic of Congo. Somewhat. 8 nations and 25 armed groups had been involved in a conflict that claimed as many as 5 million lives but finally a peace treaty was ratified by all parties. A transitional Government was formed that had great difficulty bringing the whole country under their control. Regional militias, unwilling to take orders from the transitional Government and unwilling to give up their arms still controlled large swathes of land, including the Goldfields to the north east where AngloGold Ashanti have their mining concession.
As explained in a Human Rights Watch report titled "The Curse of Gold", one such regional militia was the "Nationalist and Integrationist Front", otherwise known as the FNI. According to the Human Rights Watch report AngloGold Ashanti, eager to develop their tenement entered into discussions with the FNI. Human Rights Watch have evidence of endemic rape and murder committed by the FNI and evidence also that AngloGold Ashanti supported the FNI financially in return for protecting their mining tenement in North Eastern Congo. FNI became something of a private militia for AngloGold Ashanti.
The HRW report is sobering stuff. At the very least it paints a picture of a mining company so desperate to dig gold from the ground that a civil war is not seen as such a risky, unpredictable environment that business is impossible. Rather than pulling back and waiting for a stable Government to form, AngloGold Ashanti seemed to decide to just pick a side and dive in. Which seems not entirely dissimilar to the attitude they have taken to Australian politics. Pick a side and dive in.
So there seems to be 2 main themes to what Mark Cutifani said at the sidelines of CHOGM a few weeks ago and they are both highly problematic. He claimed that mining in Australia is very expensive and that mining in Africa is very cheap and that therefore we should make mining cheaper in Australia so that Australian might better compete with Africa for mining investment. The second thing Mark Cutifani said, according to media reports, was that Australia was one of the worlds worst countries for Sovereign Risk.
These 2 concepts should not be conflated. Mark Cutifani has done his best to confuse investment uncertainty or Sovereign Risk with the cost of doing business. Cost of business is what you have to pay for the right to extract our minerals. This includes the cost of rehabilitating a mine site after the life of the mine, the cost of environmental protection measures during the life of the mine, wages and other benefits paid to employees, taxes and royalties paid to the Government and the cost of Corporate Social Responsibility programmes.
Sovereign Risk is a different matter. Sovereign Risk is a measure of uncertainty introduced into the market by the Sovereign, the Government. It is hard to know what to say about Mark Cutifanis accusation that Australia is "one of the top sovereign risk countries in the world" and that "So far Africa has been much more predictable and stable." Lets not call it a lie. Lets say it is a case of boy crying wolf. It is a claim that, upon even cursory examination of the recent history of Sub Saharan Africa, is spurious in the extreme.
Not a single country on the African continent has a credit rating as good as Australia. Not even close. Of course that is the case. Sub Saharan Africa where AngloGold Ashanti do most of their mining has been racked by civil war for most of recent history. The risks to doing business in that part of the world are huge. In fact the ONLY way, apparently, to do business in that part of the world is to pay for a private army of murderers and rapists as AngloGold Ashanti appear to have done in the Democratic Republic of Congo.
Not much more needs to be said to dispense of this rubbish that Australia is one of the top Sovereign Risk countries in the world. No. The Democratic Republic of Congo, mere months after the cessation of hostilities in a bloody civil war is one of the top Sovereign Risk countries in the world. The Government had almost no control outside the national capital. The gun totting General who controlled the mining area made his own rules at a whim. His soldiers kept the local population quiet with rape and murder. What could be a more unpredictable, more uncertain environment in which to invest? That is actual Sovereign Risk. What has happened in Australia for the last few years is the normal hurly burly of a democracy. This we do not apologise for.
So lets turn our attention to Mark Cutifani's assertion that Australia should make mining in Australia more profitable for mining companies in order to better compete with Africa for mining investment. As a nation we have to ask ourselves how hard we are willing to chase investment dollars from companies like AngloGold Ashanti. Would we be willing to become more like Africa? To shape our notions of environmental protection and human rights along African lines? If AngloGold Ashanti digs an ounce of gold from the ground in Australia there is no doubt that they make less money for their shareholders than they would if that ounce of gold was dug from the ground in Mongbwalu, Congo but how could it be any different? Australia is a democracy. Part and parcel of that is the idea that every single Australian owns a slice of our mineral wealth. Every single Australian must see some benefit from having AngloGold Ashanti in this country or else their presence here can't be justified. We have to have a robust system of mining royalties and taxes that see all Australians benefit.
It is simply not like that in Africa. AngloGold Ashanti mine gold in African countries where tinpot dictators and gun toting Generals rule with the ever present threat of violence. So long as a handful of the important people at the highest level of Government get paid, AngloGold Ashanti have a free hand to do as they want. Ensuring that ordinary Africans get their share is not necessary. Of course not. These are not democracies. There exists no concept that everyone should share in the mineral wealth. In fact, far from the general population sharing the wealth, they typically suffer from having companies like AngloGold Ashanti around. Who knows how many more people were murdered or raped because of the presence of AngloGold Ashanti in the Congo? After all, there is strong evidence to suggest that AngloGold Ashanti were putting money in the pockets of the men committing these crimes. Who knows how many lives are ruined because of the environmental damage done by companies like AngloGold Ashanti? There is significant anecdotal evidence to suggest that AngloGold Ashanti have done environmental damage in Ghana, Congo and elsewhere that would earn universal opprobrium in Australia.
The mining boom has been very important for the Australian economy. The mining boom helped Australia through the world financial crisis reasonably unscathed. We want to encourage the mining industry to continue growing in this country for many decades still to come but how far are we prepared to go to ensure that happens? Are we willing take an African approach to the problem? We want to encourage the mining industry to continue being a strong part of the Australian economy but it is important to think about where some of these mining companies come from, and the business they do in other countries, when evaluating the things they say about doing business in Australia. Australia is not one of the worlds top sovereign risk countries. The Democratic Republic of Congo on the other hand may well be. It is however more expensive to do business in Australia compared to Ghana or the Congo. It must be so, for we will never let international mining companies get away with enriching themselves as cheaply in Australia as they do in places like Africa. Regardless of what the CEO of AngloGold Ashanti might say.