The Importance of Managing Relationships With Governments in Africa

South Africa: The Importance of Managing Relationships with Governments in Africa

The recent suspension by Minister Ngaoko Ramatlhodi, South Africa’s minister for mines, of the Glencore’s license to operate the Optimum coal mine and the subsequent conditional suspension of his earlier order focuses attention on one of the key challenges facing businesses operating in Africa over the next decade and that is the management of its relationship with governments and its various departments.

That is not to say that Glencore did not have a relationship with the South African government. By all accounts, it probably did. The conditional withdrawal came about after discussions with the government, after all. However, when a ministry threatens the economic interests of a company, it is an indication that the relationship is not all that it should be. As in any relationship parties should be aware that a party’s interests change over time and anticipation of government action is essential.

Glencore’s Optimum coal mine had been supplying the state electricity generator Eskom with coal at a price deemed by Glencore as below cost. The pressure on Eskom to turn around the nation’s electricity generation fortunes is immense. Load shedding has stymied economic growth and could result in an increase in the cost of borrowing if the situation worsens. Meanwhile, cost pressures on the company arising from the purchase of diesel for its aging generators is a serious concern. The acting CEO is one of the most respected black managers in a country, in which state owned enterprises are deemed to be mere tools of political patronage. The National Union of Mine Workers is a key ally of the government and needs to justify to its members why they should not join the rival more militant union, the Association of Mineworkers and Construction Union. Mine workers are concerned about the up to fifteen thousand redundancies recently announced by the large mining concerns in the country. Unemployment is already running at 25 per cent and the government has called upon mining houses to reconsider planned retrenchments.

On the other hand Glencore inherited a coal supply agreement agreed during the nineties with a low coal price escalation provision, thereby forcing the company to provide coal at a low price. This was evidently viable when coal prices were high and the company could rely on its export market. However, the slow down of the Chinese economy has caused a decline in coal prices.

The price of thermal coal was about R140/t in January 2011, compared with $62/t at the end of January 2015 and $42/t as of 3rd August 2015. This has forced the company to focus on its domestic contracts and consider retrenchments as a way of maintaining value for shareholders. It was the manner of those retrenchments that the Minister cited as the cause of the license suspension.

Irrespective of the terms of the coal supply agreement or the lawfulness of the Glencore’s redundancies, it is interesting when one of the largest mining concerns in the world is threatened by a government ministry and alarming when that threat is made public.

The old fashioned way of dealing with governments in Africa was for a company to engage an “old Africa hand”, normally a former colonial bureaucrat who had key relationships with the President and/or his family. Little was expected of regulatory knowledge or even technical know how. Contacts with the “big man” was deemed sufficient to push the interests of a company. Relationships with ministries was often left to spy agencies.

Today, in an environment in Africa where governments are become increasingly technocratic, managing relationships with policy and government decision makers is of the utmost importance. In some territories, senior officials are often more qualified than their European private sector colleagues and educated at some of the most prestigious schools in the United States and Europe.

Nevertheless, few ministries within Africa have an informal relationship with the industry for which it is responsible. Information is communicated in a formal manner and appointments with decision makers are often difficult or impossible to obtain.

Capacity continues to be a concern in the public sector at the lower level but this is slowly changing as governments cooperate and become more exposed to regulatory changes in other jurisdictions. obtain. Consequently, companies that may have started off establishing a relationship with government tend to ignore the need to manage the relationship and plough on regardless, put off by civil service and ministerial changes, bureaucracy, inefficiency and policy uncertainties.

One consequence of the financial crises in 2008 has been the growing harmonisation of regulatory standards and zealousness in collection and cooperation amongst tax authorities, thereby making it more and more difficult for companies to forum shop to avoid taxes. Ensuring that relevant tax authorities easily understand a company’s tax structure has however been a challenge, causing many companies to risk losing licenses rather than voluntarily provide information.

Investing resources in a “best friend” relationship with relevant government departments is important irrespective of the jurisdiction. Government should be kept informed of private sector thinking and strategies, particularly those that may impact existing government policy or sensitivities. Equally, the private sector must appreciate government and country specific sensitivities. They should be receipt of regular reports of potential policy changes in their area. This is more essential for foreign owned companies, which are more vulnerable to nationalist sentiments in policy.

Those companies that identify the technocrats and view a relationship with them as an equal but informed partnership will be successful in Africa.