Boomtime for Mafia governments

Governments and politicians across the world are increasingly turning into cold and venal robber barons.

Author: Barry Sergeant
Posted: Tuesday , 18 May 2010

JOHANNESBURG - -

Since election as president in 2006, Juan Evo Morales Ayma has used May Day to announce nationalisations in Bolivia. This year it was four power companies; in prior years private sector oil & gas, mining and telecoms firms have been gobbled up. This year, Morales failed to turn out for the May Day celebration; there is growing dissent as social conditions continue to deteriorate as the private sector is further squeezed out.

Far away, in Australia, the government recently vented a strong desire to hobble resources companies with a new supertax. Jac Nasser, chairman of BHP Billiton, the world's biggest diversified resources stock, says the proposal would see the total effective tax rate on BHP Billiton's Australian profits increase from 43% to 57%, "making the Australian resources industry the highest taxed in the world. This compares to a tax rate of 23% in Canada and a range of 27%-38% in Brazil".

Back in South America, Hugo Rafael Chávez Frías, president of Venezuela, this past weekend announced the expropriation of a group of iron, aluminium and transportation companies. Elected in February 1999, and survivor of a coup d'état in 1992, Chávez "re-nationalised" Petróleos de Venezuela after a crippling December 2002 to February 2003 strike.

Venezuela nationalized its oil industry on 1 January 1976. New oilfields in the Orinoco heavy oil belt were confiscated in May 2007 from global majors Exxon Mobil, ConocoPhillips, Chevron, and Total. Other recent nationalisations include most of the cement sector, steel mills, all rice processing and packaging plants, and earlier this year, six supermarkets, snatching them from a French company.

Some other developing economies have adopted the Australian approach, opportunistically lunging at profits, rather than assets; Chile, Zambia, South Africa and Tanzania are among those wanting mining companies to pay more. Governments have an awful habit of forgetting that they have always been multi-level stakeholders in companies. As Nasser points out, BHP Billiton in 2009 alone, and in Australia alone, paid AUD 6.3bn in taxes, never mind the thousands that it employs directly and indirectly, who also all pay further taxes.

Beyond these details - and there is far more - there is increasing evidence that the social contract between public and private sectors is disintegrating. There is, by definition, a conflict between the interests of the two sectors; governments, for example, want to maximise tax income so everyone can be provided everything for free, ensuring the government's popularity forever. In no time, the private sector would be dead.

In the private sector, there is an atavistic desire, no matter how well disguised, for minimal interference of any kind; sooner or later, this would also take certain companies into impossible utopia, most likely overwhelming all competition, abusing customers, paying zero taxes, and wrecking the environment. Unfettered public and private sectors are irreconcilable with the human condition; they exist, in the best examples, in a state of healthy conflict.

Allowed to run loose, governments transform, sooner or later, into robber barons; it is here that something big continues to unfold across the world. The Economist magazine this week discussed "a new, post-cold-war model of authoritarian rule which combines a democratic mandate, populist socialism and anti-Americanism, as well as resource nationalism and carefully calibrated repression".

This model, the magazine argues, "has proved surprisingly successful across the world. Versions are to be found in countries as disparate and distinct as Iran, Russia, Zimbabwe and Sudan. In one way or another, these regimes claim to have created a viable alternative to liberal democracy". To that list may be added the likes of the Democratic Republic of the Congo (DRC), where a failing democracy is characterised by kleptocracy at the top, and continuing atrocities at the bottom.

In the private sector, companies have over the past decade invested billions of dollars in the DRC's Katanga Province's copper mines, converted to junkyards under nationalisation dating from 1964. This week, copper miners protested that a 20 April 2010 USD 60/tonne tax on unrefined concentrated metal exports was illegal under the DRC's mining code.

And so on. For the private sector, the horrors of facing possible compromise by having little choice but to deal with robber governments is becoming increasingly harrowing and irksome. In Guinea, for example, elections to replace a military junta in place since the latter part of 2008 are anticipated next month. The UN has stated that "Guinea's interim president Sékouba Konaté has reassured the United Nations and its African partners that presidential elections will be held as scheduled on 27 June".

In 2004, transnational miner Rio Tinto discovered the world class iron ore system at Simandou in Guinea, and secured four blocks in the area, where it has so far spent USD 600m on development. Yet an announcement on 30 April 2009 has it that Brazilian supergroup Vale had agreed to pay USD 2.5bn for a 51% stake in BSG Resources Guinea, which apparently holds rights to blocks 1 and 2 at Simandou, previously in the Rio Tinto stable. These kinds of deals may become the new normal, as the world continues to lose its compass.