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sharing in governance of extractive industries

AFRICAN MINERALS DEVELOPMENT CENTER (AMDC) POSITON ON CONTRACT NEGOTIATIONS

 

 By Mrs. Coumba Doucouré Ngalani, Lead Legal Consultant, AMDC and Mr. Charles Akong, Linkages and Diversification Expert, AMDC

THE AFRICAN MINING VISION AND THE ROLE OF CONTRACTS

The AMV underscores contract negotiation as ‘critical intervention point’ to improve resource governance.  Strengthening the capacity of African states to negotiate with private companies is paramount not only to reduce asymmetry of information but also to ensure broad-based linkages from the sector to the rest of the economy. The African Mining Vision (AMV) recommends some principles to shape contract negotiations in ways that ensure they are forward-looking and enhance broad-based linkages with other sector.

While contracts are critically important, on their own, they sit at the bottom of legal hierarchy governing the mineral sector including constitution, policy, legislation and regulations. However, contracts often may be negotiated in ways that deviate substantially from existing legal frameworks including tax laws of the host country. Negotiating contract must therefore be pursued in ways that do not preempt countries from implementing forward-looking reforms of the sector.

AMDC current research has shown that it is not exclusively for weak institutions and ineffective regulations that countries continue to remain unable to take advantage of booms. It is the lack of long-term vision and effective policies that create weak institutions and laws, and contracts unfit for transforming the mining sector.

There is growing recognition in countries of the importance of putting in place solid legal and policy framework for governing the sector. Governance regimes in the continent vary from contracts on one hand to licensing on the other. The choice of the type of instruments depends on the quality of institutions. Countries with less advanced institutions have adopted specific-contracts as standalone governance instrument for the sector, like in Democratic Republic of Congo. While advanced mining countries like South Africa have adopted broad-based licensing regime, which are opened to all as the only governance instrument for the sector, in the middle, there are countries that have integrated model contracts principles into their legislative framework, like Tanzania.

Contrary to expectation, African countries seem not to run the race to the bottom through negotiating weak contracts. We are seeing encouraging examples of forward-looking strategies, with some countries, like Zambia, shifting completely away from contracts to statutory model of governance. The country adopted its Mines and Minerals Development Act of 2015 presenting licensing as the primary governance regime for the sector. The Act in its section 160(1) annuls all minerals development agreements entered before the coming into force of the Act.

The Africa Mining Vision and its domestication through the Country Mining Vision processes aims to support countries to develop policy, legislative and regulatory frameworks that complements one another as the enduring basis of governance for the sector. Capacity building efforts for contract negotiation should therefore be placed within a long-term vision of maximizing domestic resource mobilization opportunities as well as building holistic institutions for the sector, which might not systematically require specific contracts for each project. In fact the governance architecture should provide a level field for all projects, underpinned by a long-term vision, policies and laws for broad-based development of the mineral sector in countries.

GENERAL CHALLENGES TO CONTRACT NEGOTIATIONS

With the depreciation of commodities prices, host countries and investors involved in development projects in the extractives industries are now going into deeper and more strategic analysis on how to maintain certainty and flexibility in long-term commercial contracts despite extreme changes of circumstances by limiting the impacts of external factors. The key decision criteria usually considered by investors are essential to understand this dynamic: from mineral potential to existing infrastructure, investors also looked for a stable legal and fiscal framework, contractual stability, a guaranteed fiscal regime, assured profit repatriation and easy access to foreign exchange.

 

More specifically, various factors and risks are impacting on investors’ decision making process:  i) commodities prices and volatility: as a primary factor that the investor will consider to determine whether a project is economically feasible; ii) proven reserves and geological risks: the difficulty to access deposits or the existence of resources that are lower than estimated; iii) political risk (uncertainty): due to political decisions made by a host country creating instability which impacts the certainty of the investments and induces changes in the legal and regulatory environment; iv) supply and demand risk (market risk): that highly impact on prices volatility. A good example is the current slowdown in China that affects commodities demand and prices. v) cost risks: with high operational risks making extractive a very capital-intensive industry; vi) legal risks: linked to the ability of the host country’s legal system to provide enough protection and guarantees to  investors (e.g. ability to enforce a contract and the quality of the judiciary system).

 

In addition to this non-exhaustive list, other macroeconomic factors and the status of the global market are also essential as they greatly affect the access to capital for investors.

 

With the current market, the outcomes of projects, particularly high-scale ones will mainly depend on how well stakeholders (particularly the host countries) negotiate their position by trying to shift, share or mitigate the risks when and where needed depending on the disposition of the parties toward those risks. It is crucial for them to use effective negotiations skills and techniques.  Host state that takes on the wrong risks and/or too many risks undermines the success of a project.

 

The allocation of risks will obviously depends on the industry and the potential scenarios are project-specific. The use of innovative legal and financial instruments to mitigate, allocate and manage certain types of risks, is crucial: stabilization clauses are used to immune investor’s activities from changes in the legislative environment as a result of an unilateral decision of the host country; indemnity clauses: a fundamental method for allocating risk between the parties; insurance; operating agreements involving operators managing the day to day operations of the project; guarantees from third party, etc...

 

Despite the appropriate allocation of risks that is essential to consider at the inception of a project, contracts might be reviewed and renegotiated at some point. However this exercise can be complicated especially in case of only one party requests the renegotiation.

 

The reasons for renegotiating a contracts are many and varies: i) key external factors such as commodities prices with high prices generally leading to reforms of fiscal regime by host countries whilst investors refused to accept those changes particularly if they are making windfall profits; and depressing prices putting pressure on investors who will allege unforeseen events to review the contracts and mitigate the risk exposure; ii) review of legal and regulatory framework by host countries to be in line with key regional, continental and international standards such as the African Mining Vision.  A country generally reviews its national laws mainly with respect to the fiscal regime for increasing its share of benefits; iii) changes of the political regimes often linked to corruption allegations.

 

The renegotiation process is generally complex and the difficulties faced by parties usually revolve around the following issues: i) finding the right balance between contract stability/durability and flexibility to maintain the economic equilibrium of the contract despite unforeseen changes of circumstances; ii) handling corruption and political instability as the main reason for a host country to request renegotiation; iii) considering a renegotiation when the contract is silent on review mechanisms or contains a stabilization clauses covering key matters; iv) whether or not the alleged circumstances by one party can justify a renegotiation; v) how to frame and regulate negotiation process;  vi) how to control the mechanism and define the event that gives right to renegotiation in order to avoid unlimited demands of review and political interference.

 

AMDC STRATEGIC VIEWS ON CONTRACT (RE)NEGOTIATIONS

 

  1. Important questions and factors to consider by host countries before entering into a contract:

-        How and where contracts fit into the legal and regulatory framework: The AMDC’s priority is to maintain policy dialogue with African countries for developing tailored country mining vision in line with the African Mining Vision.

-        How contract should be negotiated in line with the country i) sectorial development strategy and ii) economic development in particular avoiding too much focus on short-term goals;

-        To what extent a contract can interfere with host country ability to pursue sustainable development goals;

-        How and to what extent a renegotiated contract can set up a (wrong) precedent and reshape the legal and regulatory framework of a country.

 

  1. We also have to draw the attention to the negative impacts of countries actions with the sole aim of attracting investments by entering into various contracts with overly restrictive and overly broad stabilization clauses whilst ignoring key interests and rights of their population.

 

  1. The tendency to review policies, legal and regulatory framework along with contract renegotiation: what should come first? AMDC emphasis on the need for African countries to focus first on reforming the policy and legislative framework in line with the AMV for a strong competitive market and a broad-based development. Two questions has to be considered by African countries: how to sequence the reform and when. Considering the current market and commodities prices, African countries should put in place flexible mechanism (particularly when it comes to the fiscal regimes e.g. variable royalties rates and agreed reviews) allowing contracts to automatically adjust with changing circumstances.

 

  1. The difficulty in practice to get both parties around a table and agreed on renegotiating a contract especially when it is initiated by one party: the existence of strong arguments and justification for a renegotiation. African countries had to build up their negotiation skills (and their capacity to manage a renegotiation process) to convince investors that the contracts must be reviewed and reconsidered. Most of the countries had learnt from previous experiences particularly during price spikes when investors made windfall profits.

 

  1. Supporting countries in managing expectations: potential investors and potential investments do not necessarily mean immediate revenues and benefits for host countries. More than ever countries have to properly and continually communicate with its population and other key stakeholders like local communities, parliamentarians and civil society organizations.

 

  1. Strengthening capacity at the upstream to design and implement complex projects of cross-border dimension: harnessing linkages opportunities around anchor infrastructure development projects requires specialised skills in key areas which are critically lacking in countries including negotiating effective public private partnership, designing viable financing models as well as mobilizing long-term finance for projects. There is need to build capacity in coordinating whole of government efforts around negotiations as well as cross-border intergovernmental coordination around complex mining infrastructure projects including mobilizing domestic capital for project financing.

 

  1. Downstream human resources capacities and quality of the workforce: the AMV emphasis on the need to build up capacities and maintain a pool of experienced and skilled workers at the appropriate level to meet the industries’ needs. Ageing workforce and retaining talents are major issues that AMDC is taking into account when developing programs under its Human and Institutional Capacity workstream.

 

The Africa Mining Vision key outputs of mineral contracts

The Africa Mining Vision recommends that negotiators should secure agreement on the following before signing any mineral contract:

  • An equitable share of the resource rents.
  • A flexible fiscal regime that is sensitive to price movements and stimulates national development.
  • Third-party access to the resource infrastructure (particularly transport, energy and water) at non-discriminatory tariffs.
  • The development of the local resource supplier/inputs sector where feasible (particularly capital goods, services and consumables) through flexible local-content milestones.
  • The establishment of resource processing industries through the use of flexible value-addition milestones 
and incentives and the upfront stipulation of competitive pricing of resource outputs/products in the domestic 
market for the life of the project.
  • The development of local human resources and technological capacity through stipulated investments in 
training and research and development, preferably in partnership with the state.
  • Provisions that safeguard transparency and good governance as well as enforce internationally accepted safety and health standards, environmental and material stewardship, corporate social responsibility, and 
preferential recruitment of local staff.

 

Source: The International Study Group Report on Africa’s Mineral Regimes “Minerals and Africa’s Development, published by the African Union and the United Nations Economic Commission for Africa, 2011.

 

Figure 1: Schematic Overview of AMV Institutional Development Phases for Resource Based Linkages

 

Source: AUC (2009). The Africa Mining Vision, February 2009.

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