Guinea's new mining code: will it deter investors?

A good article highlighting the progress made in Guinea's new mining code regime. Other countries, including its West African neighbours like Sierra Leone and further afield, like Mongolia, can learn from Guinea. Now the country has the legislation in place, let's hope it has the political will and technical capacity to enforce the same.

I have my own views on the threat in this article from the mining companies that they will go to other more "relaxed" countries to invest. It would be really interesting to hear other people's views on this as well, just for a bit of fun debate! Do you think companies will go elsewhere for bauxite or are these knee-jerk threats that are raised as soon as an equitable code comes into being?

Finally, well done to all those involved in getting the code through parliament: its a brilliant start and can hopefully set a precedent third generation mining code for other countries to learn from.

http://thinkafricapress.com/guinea/new-mining-code

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Permalink Reply by Kobina Aidoo on September 29, 2011 at 2:48

Kinnari -

It's bold if nothing else. It's interesting you mention how that could influence Mongolia. Perhaps it has already! I imagine there is buyers remorse for countries which have recently renegotiated only to see that they might have gotten away with a bigger stake. My expectations is that governments will keep pushing for bigger stake. I am curious to see any studies out there which predict the point at which companies will not invest.

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Permalink Reply by Kinnari Bhatt on Tuesday

Hi Kobina,

I meant to reply to this a while ago, sorry, but I did actually find an organisation called the Frasier Institute which seems to produce reports investigating how mineral regulations, taxation regimes and other public policy factors affect investment. Mining companies are surveyed and asked to provide an opinion on how and to what extent various factors such as taxation, environmental regulations, disputed land claims, enforceability of regulations etc would affect investment decision making. Here is the report:

http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/rese...

Interestingly I do not get the impression from this survey that companies are really "put off" by onerous tax or regulatory regimes (with the exceptions of the DRC and Zimbabwe, for obvious reasons). As long as the investment remains economic and they perceive that commodity prices will continue to rise companies will, on the whole, invest. The importance of mineral potential outweighs policy factors. Sadly the survey is not current so it does not pole companies after the new Guinea code but the results of the survey for the tax regime in Guinea based on the 1994 code do not seem to show a major deterrent for investment. 35% of companies poled stated that the tax regime was not a deterrent to investment, 30% said it was a mild deterrent and 13% said they would not invest due to the tax regime. Arguably that 13% is high as the DRC poles at 14% for the same category but the point remains that companines will still invest. It would be interesting to see which companies are saying no but I think that type of information would be confidential.

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Permalink Reply by Kinnari Bhatt on September 29, 2011 at 22:19

Yes, I am sure there would be buyer's remorse. However it is worth remembering that some mining codes permit the government to re-negotiate the terms of the code periodically, so it can have leverage to amend thus mitigating buyer's remorse. In any event and even without such a term, I think it may be often forgotten in ministries that private companies who have already invested will not want to pull out of a transaction. Mining is an incredibly capital intensive business and no company that has sunken costs running into the millions without starting commercial operations will want to pull out of a country - in fact this could be the most opportune moment for a government to demand a re-neogtiation, particularly if there is an election around the corner - very effective! As for attracting new investments, yes a study as to the tipping points for investment would be really interesting if anyone has one out there. One of my bug bears is windfall taxes. Governments (like Zambia and Mongolia I believe) have re-negotiated, often under duress, these provisions to their great disadvantage. For example the Zambian government removed its windfall tax due to pressure from investors in the commodity crash in 08/09, only to find that the rock bottom rates did not last forever (surprise surprise) and the prices went up and they were thus unable to claim what would have been really valuable super-taxes. loosing out on valuable money for the country. I believe it has now been re-instated due to a lot of publicity on the same. Arguments of uncertainty of taxation are often raised by companies against windfall provisions. In my mind it seems an excuse as I do not understand how international companies cannot work out a tax rate when a metal such as copper hits an agreed price based on a transparent, international benchmark such as the LME for that metal, which would then activate the contractual windfall rate- probably quite a simple calculation - but I may be being simplistic here and so am open to correction please! Governments should not lose sight of the basic fact that these are finite resources and should I believe, have the confidence to negotiate with investors and realise the strong bargaining position they have. Obviously technical capacity is a massive constraint in these countries and political will has to be strong as good legislation and external assistance can only go so far - governments have to want it and take ownership but there could potentially be a confidence gap here. I would be keen to see any studies as you have suggested, whilst being mindful of who has written them, as this would shift the balance of power so to speak.

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Permalink Reply by Ahmed Finoh on October 2, 2011 at 12:05

Kinnari?

You pondered if mining companies would head for other more regulatorily "relaxed" countries to invest.

Not necessarily. It depends on a host of other factors, especially on the expected returns on the investment as estimated based on the amount of economically minable resource, insitu.

Besides, here's is the other side of democratic governance; these African countries we are talking about are new, frail and struggling democracies. Those BIG guys might just hover around for next year elections and conspire a regime change to a political party ready to bid.

Or as in many instancies the question is who will enforce those stringent regulations enacted by the host government? There's one thing to copy corrupt-proof regulation from the consultants, and another to have the resopurces to exeucute those regulations during the operations phase of the mines.

In addition, those mining companies have some ways of "twisting" arms behind the scenes such that the final versions of those regalations are so watered down that they no longer have any bites.

Realistically, enforcement of too much stringent regulations is expensive on both sides, the government and business. Why do you think there's now pressure on the Obama government to relax some EPA regulations as one way to make it profitable for corporations to begin investing again that will lead to more hiring to turn the economy around.

So, both sides will find some mutually beneficial way to work it out.

Traditionally, are the costs of regulatory enforcements often considred in mining investment agreements?

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Permalink Reply by Kinnari Bhatt on October 5, 2011 at 10:12

Ahmed, dispute resolution and enforcement would typically be the subject of international arbitration and yes, all costs, fees etc should ideally be dealt with in the mining contract - if it is drafted well. There are many options as to choice of arbitral rules e.g. ICC etc. As to how they are apportioned between parties depends on what is negotiated and potentially the rules that are used. I have seen some mining agreements where each party bears its own costs and some where the prevailing party is reimbursed. There can also be differences for the type of dispute, so that type of technicality is I think up for negotiation but prima facie, costs should be dealt with upfront. And off course a government party has to waive any sovereign immunity it may claim so that it can be taken in front of an international tribunal, if need be.

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Permalink Reply by Elison Karuhanga on October 24, 2011 at 12:01

I think this is interesting. My view is that it all depends on the volume, value and the prices of a resource. provided the tax regime does not make an investment uneconomic then companies will invest. The challenge is stability also of the regime (the legal regime) is it always changing.. if so it becomes hard to project. fiscal terms and regulations can be as hard as a country wants. however, the business must never be uneconomic. any investor will even prefer harsh terms that are stable to lax ones that can change all of a sudden. problem with lax contracts is that in a few years (as surely as night follows day) states will change the terms of the deal. a strong law that however recogonises the economics of a project is likely to be safer even for an investor. the tricky thing will the Guinea law is demanding a minimum investment of 1Bn USD..a statement like that can be in a policy document..but placing it in a law I think is unwise

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Permalink Reply by Jim Bennett on October 30, 2011 at 22:54

Consider the possible benefits to the Guinean government and what it will do with these benefits. If there are indeed higher fiscal revenues accruing from the new mining tax code, will these revenues be used to finance fake elections, police and military brutality, or projects to the benefit of the common people? Based on past experience, the latter is the least likely outcome. We can only hope that the current government will break with the deplorable track record of previous governments.