Equitable Resource Ownership in Namibia

Namibia possesses immense potential for socio-economic advancement through its mining industry.

However, the current state of resource ownership and the subsequent exportation of profits and jobs are hindering the realisation of this potential.

To address this issue, it is essential to conduct a comprehensive examination of existing legislation on resource ownership, review taxation policies, consider general valuation principles, and learn from advancements in other sectors, such as fishing.

These efforts will contribute to establishing a fairer and more equitable approach to resource extraction and ownership in our country.

LEGISLATION ON OWNERSHIP

Namibia’s Constitution, particularly Article 100 on Sovereign Ownership of Natural Resources, clearly stipulates that land, water, and natural resources below and above the surface of the land belong to the state if they are not otherwise lawfully owned.

However, the challenge lies in the lack of clarity regarding the transfer of resources from the rightful owners, the citizens, to the entities responsible for exploration and extraction, often foreign investors.

This absence of a transfer cost undermines the principle that resources belong to all Namibians, regardless of who discovers them.

Consequently, and contrary to expectations, there is no explicit requirement for governmental ownership in the mining sector.

This attractive aspect of the Namibian mining industry allows private investors, both foreign and local, to own 100% of the resources and reap exclusive benefits, with minimal sharing with the public or government, apart from taxes and royalties.

This legislation has resulted in skewed ownership, as evidenced by the National Planning Commission Report, which states that foreign ownership accounts for 88,1% of all mines combined, while local ownership stands at a mere 11,9%, with Namdeb and Debmarine distorting this figure.

Excluding these two entities, local ownership in the mining sector could be below 5%.

TAX BREAKS, VALUATION PRINCIPLES

Investors often justify their exclusive ownership of resources by emphasising the significant capital expenditure and development costs involved.

However, the Namibian tax framework presents a contrasting perspective. In the mining sector, investors are granted a 100% deduction for exploration costs in the initial years, as well as for development costs over a span of three years.

These tax deductions essentially mean that the development of mines is funded by the citizens.

Investors can offset these costs through their profit and loss accounts, thereby reducing their tax obligations for a period extending beyond three years.

Consequently, the government and its population witness the exportation of minerals without receiving any direct compensation during this time frame.

Therefore, using the magnitude of developmental costs as a justification for complete ownership raises doubts.

To rectify the imbalance resulting from the perception that investors should retain 100% of the minerals, it is imperative to assess resource ownership through the application of the general principle of a fair business transaction or valuation.

When evaluating assets and shareholding in a business transaction involving multiple parties, their respective contributions are appraised, and shareholding is determined based on the value of these contributions, which may include capital, talent, land and IT systems.

By adhering to this general valuation principle, if an investor brings N$10 billion to discover diamonds in Namibia, the government, representing the citizens, should evaluate the mineral resources discovered as part of its contribution to the shareholding.

This valuation principle should serve as a starting point for negotiations in all agreements pertaining to resource extraction.

The current system disregards the value of the resources and only considers the value of the capital invested in exploring and developing the mine.
The introduction of royalties in the mining industry was an attempt to address this issue.

However, the consistency of royalties varies across different natural resources.

Furthermore, royalties fail to account for the value accruing to shareholders through value-added activities conducted outside the country.

EMPLOYMENT AND TAXATION

Similarly, investors also often argue that they deserve concessional benefits because they create jobs and pay taxes.

However, it is important to recognise that investors are driven by profit for their shareholders, and employment is a means to achieve this value. Many non-resource-based businesses also pay taxes and employ people.

Therefore, employment creation and tax payment should not be considered a price for resources. Additionally, extracting resources without the involvement of people is nearly impossible. Job creation and tax payment are inherent aspects of any business activity, and all entities, whether they possess mining rights or not, must pay their fair share of taxes.

Thus, a transfer price for resources is necessary regardless.

INCONSISTENCIES

When analysing the taxation framework within the mining industry, it becomes evident that diamonds, in particular, make a substantial contribution to the state treasury.

Notably, diamond mining operations such as Namdeb are subject to a royalty payment of 10% and profit taxes that can reach up to 55%.

Moreover, the government has successfully negotiated a 50% shareholding in Namdeb and Debmarine, in addition to the significant job opportunities created by these companies over several decades.

However, inconsistencies arise when comparing the diamond sector to other mining industries, where the government holds minimal or no ownership interest.

If the ownership structure implemented for Namdeb works, it should be extended to other minerals, potentially leading to more equitable outcomes.

GLOBAL MARKETS

To replicate the successful model of Namdeb, it is prudent to conduct a comprehensive evaluation of global commodity markets to identify valuable resources in high demand that Namibia also possesses.

By aligning ownership structures and tax regimes with market trends, the government can ensure a fair distribution of benefits.

For instance, rare earth minerals like lithium, which are crucial for rechargeable battery manufacturing, are currently experiencing a surge in global demand.

Namibia, being home to lithium deposits, should engage in negotiations to secure higher royalties, taxes, or government shareholding, aiming to capture a fair share of the value derived from these sought-after resources.

LOCAL ADD, BENEFICIATION

In addition to aligning ownership and tax regimes, the government can promote local value addition and beneficiation, fostering quality and sustainable employment opportunities within the country.

This approach has already yielded positive results in the diamond industry, where diamond polishing and trading industries have been established.

By expanding this strategy, other mineral resources can also be subjected to value addition within the country.

For instance, in the oil sector, demanding that extraction companies refine crude oil domestically would stimulate job growth and retain more value within Namibia.

If immediate profitability is not viable for investors in doing so, it may be prudent to consider leaving the resources untapped until future generations can find more cost-effective methods for extraction and local processing.

It is important to note that Namibia would not be the first country to adopt such policies; several countries, including the United States (US), have implemented similar strategies for their mineral resources.

In conclusion, it is crucial to prioritise the creation of wealth for all Namibians and future generations by implementing policies that ensure the retention of value locally.

Simply relying on employment creation as a justification for providing mineral resources for free does not align with this goal.

It is imperative that investors bear the costs associated with resource extraction and pay a fair price for these resources.

Taxation and employment should not be considered as substitutes for the true value of the resources being extracted.

It is important to continually monitor the commodity market to identify valuable resources in high demand and adjust ownership and tax regimes accordingly.

Moreover, the government should strive to maximise the value of its resources by promoting local value addition and beneficiation, thereby creating quality employment opportunities and retaining a greater share of the value generated by its resources.

This will lead to the creation of sustainable wealth and leave a legacy for the benefit of all Namibians.

• Immanuel Kadhila works for Eos Capital, and Natalia Shilongo is a passionate young economist.