Natural Resource Nationalism and Joint Venture Negotiation

Mining policy and law: Natural Resource Nationalism and Joint Venture Negotiation John Southalan, 20 February 2014 Presentation for UG-UWA Mining Law Executive Course Workshop

Contents 1 Natural Resource Nationalism ............................. 1 1.1 State ‘aims’ in mining regulation & policy.... 1 1.2 Community Sense of Ownership ................. 2 1.3 Community Development ........................... 2 1.4 Sustainable Development Issues ................. 3 1.5 Managing Expectations of Mining Stakeholders............................................... 3 1.6 Managing Health, Safety and Environmental Risks in all stages of a Mining Project .......... 4 1.7 Overview of interests, royalty rates valuation, rights and structures in other jurisdictions .. 4 2 Joint Venture Negotiation ................................... 4 2.1 Role of State in mining? .............................. 4 2.2 Joint Venture Agreements .......................... 4 2.3 Corporate Governance/Role of Directors in Mining ........................................................ 5

1

2.4 Investment Protection/Stabilization Clauses, Mining Contracts ........................................ 5 3 Nationalism and negotiation: local content obligations .......................................................... 6 3.1 Introduction ............................................... 6 3.2 Local content obligations ............................ 7 3.3 Occupational structure in mining ................ 8 4 General mining materials / references ................ 8 4.1 Forms of regulation (generally) ................... 8 4.2 Mineral types.............................................. 8 4.3 Value added ............................................... 9 4.4 Economic ‘advocacy’ ................................... 9 5 Bibliography ...................................................... 10

Natural Resource Nationalism “[R]esource nationalism” is a hazy concept, and this limits its usefulness as an explanatory factor for growing disputes between states and companies ...[S]imply labelling all forms of tightening regulation or higher taxes as ‘resource nationalism’ obstructs a better understanding of why and how governments are intervening more forcefully in the sector. (Stevens & others 2013, 22)

1.1

State ‘aims’ in mining regulation & policy The 2011 report of United Nations Economic Commission for Africa, Minerals and Africa’s Development, suggests a nation’s policy and regulation of mining should include following aims: • •

‘Enhancing retained value by promoting linkages; Obtaining an adequate share of mineral revenue;

•

Improving public participation and accountability;

•

Pursuing an integrated view of rights of various stakeholders;

•

Valuing environmental resources;

• • •

Using mineral revenue efficiently; Promoting local development; Encouraging regional cooperation and harmonization; and

•

Strengthening institutions: building capacity and developing networks’: UNECA 2011, 20.

Recent study by Chatham House, assessing 'extractive disputes', identifies these “Lessons from history and current ‘wisdom’ (which leads to the above quote - disputes are not all about 'nationalism'): • •

Increased national control of resources Tensions with local communities

•

Increased environmental expectations

Mining policy and law

•

Legacy issues: Stevens & others 2013, 22

Tensions arise from various areas, but difficult to know whether escalate into full blown dispute with potential for extensive impact on parties (Stevens & others 2013, 11)

Much is about the interaction between mining and other land-use (and community interest). Most jurisdictions’ law falls somewhere within this range (Southalan 2012, 68): • •

granting/confirming ownership of public and private land to the mine-rights holder; providing free transfer of public-owned surface rights to the mine-rights holder;

•

enforcing, on private landholders, access and use rights for the miner - mining in effect being given preferential use of land (usually requiring prior notice and payment of compensation for impacts);

•

requiring the surface-holder's agreement before mining, but providing for arbitration and compensation where agreement cannot be reached;

• •

only enforcing access against a landowner's wishes where that is in 'the national interest'; or giving the surface holder a complete veto over mining.

Either end of range problematic, as complete rights enable autonomous decisions without consideration of other interests.

1.2

Community Sense of Ownership Kemp & Owen 2013 (community relations and mining) Gibson & O’Faircheallaigh 2010 (negotiating community agreements) Herz & others 2007 (Business Case for Community Consent) Jenkins & Obara 2006 (risk of community dependency) Macklem 2005 (Bougainville)

1.3

Community Development ARM 2002 (artisanal mining) CSRM 2011 (Community Development Agreements) Esteves 2008b (Mining and social development) Esteves 2008a (Evaluating community investments in the mining sector)

2

Mining policy and law

3

'Wokoro 2010 (Petroleum and Community Development) Caulfield & others 2004 (Resource Governance)

1.4

Sustainable Development Issues More useful way of addressing mining and land use is integrated land use planning. This seeks to include economic, environmental and social perspectives and include broad range of interests. For integrated land-use planning, Government agency should obtain information or parties’ involvement before making a decision on granting a mining right: • •

accurate information on current and expected land use and users; current legal ownership and entitlements;

• • •

land’s geological content (as known); opportunity for affected parties to participate; where long term decision, consistency and due-process in decision making (to better assure acceptance)

From Southalan 2011, 220: Mineral taxation traditionally focuses solely on money: what money the miner is receiving and what part of that the state takes. More contemporary perspectives suggest that other factors are equally important in understanding how to manage mineral resources and their long-term use. Minerals, and their revenue, are only one part of the country’s resources. Capital, traditionally understood as simply ‘financial assets’, is perhaps better understood as simply a ‘stock of anything (physical or virtual) from which anyone can extract a revenue or yield’ (Porrit 2006, 111). There are five types of capital (natural, human, social, manufactured, and financial (Porrit 2006, 115) and the crucial issue is how these are combined. Some writers use different terminology to explain this but: there is general agreement on the core assumptions...[including] that it is not acceptable to run down some stocks in order to build up others...[E]conomic growth should not be at the expense of depleting key non-renewable natural resources or destroying the social capital of the community... However, some substitutability within capital categories is considered acceptable, provided the net impact is...at least neutral. (Brereton & Pattenden 2007, 3). Sustainable development emphasises the importance of ensuring that per-capita resources do not decline; so any reduction in mineral resources should be accompanied by a reinvestment in alternative capital to produce more than the mineral resources that have been removed (Lange & Wright 2004). Many countries with large mineral resources and revenues have been unsuccessful in transferring this to other forms of capital. This reinforces the importance of understanding the different types of capital and not conceiving decisions as being simply a trade-off of one form of capital over other forms but instead finding the way to best optimise the outcome across all forms. The hazard in concentrating on growth in only some capital forms is not that we will reach an abrupt limit, but that increasing amounts of resources are devoted to dealing with problems from approaching/exceeding constraints. Eventually, so much is devoted to this that any further overall growth is unlikely because any increase in financial/manufactured capital will be used in remedying deficiencies in other forms of capital (Porrit 2006, 43) Other references on sustainable development and mining: • Brueckner & others 2013 (mining booms and sustainability) • Emel & others 2006 (sustainable development and resources) • Woodley & Collins 2013; Zaragoza Montejano 2013 (water, human rights and mining) • Goodland 2012 (Responsible Mining and Profitable Resource Development) • UNDP 2012 (management of extractives for development) • Arnscheidt & others 2008 (lawmaking and development)

1.5

Managing Expectations of Mining Stakeholders ATSISJC 2010 (community agreements)

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Hill 2010 (grievance mechanisms) Pattenden & others 2011 (cross-sectoral governance) Szablowski 2010; (free, prior, informed consent and extractives)

1.6

Managing Health, Safety and Environmental Risks in all stages of a Mining Project Kennedy 2010 (Community-Based Techniques in Environmental Regulation) OECD 2005 ('Risk Management Tool' for Investors in Weak Governance Zones)

1.7

Overview of interests, royalty rates valuation, rights and structures in other jurisdictions Guj 2012; PWC 2010; PWC 2009; ICMM 2009b; Otto 1995; Tilton 2004; Commonwealth 2009; Baunsgaard 2001 (mineral royalties & taxes) GBR Plmnt 2012; OSI 2009; Kumar 2009; Tremblay & Valenzuela 1997 (taxes and development) Lotz 2012 (royalties and mineral booms) Kangamungazi 2009 (Tax avoidance and inequitable mine contracts)

2

Joint Venture Negotiation

2.1

Role of State in mining? Most analysis, commentary and advocacy assumes or demands that mining should only occur by private industry and that government's role is strictly as neutral regulator (allocating rights and policing industry): Southalan 2012, 7. However there is significant state ownership in contemporary mining (eg. UNECA 2011, 33):

Other materials on state and mining: Daniel 1995; Padmore 1992; ANC 2012; Adimazoya 2013; Andrews 2010; Kauzya 2007

2.2

Joint Venture Agreements Asante & Date-Bah 1983 (Joint Ventures and restructuring Mineral Agreements 'A Casestudy from Ghana' ) Birch 2002 (choosing JV structures for farm-in) Tremblay & Valenzuela 1997 (taxes and JV structures) Fahey & McIntrye 2008 (JV dispute structures)

Mining policy and law

2.3

5

Corporate Governance/Role of Directors in Mining Increasing moves for greater accountability for business impacts on human rights. The UN's Protect, Respect, Remedy framework (UN 2008) has been given detail in the Guiding Principles on Business and Human Rights: Implementing the United Nations 'Protect, Respect and Remedy' Framework (or GPs): UN 2011. The three obligations that GPs direct for each business is: • • •

adopt a human rights policy: GP 16; conduct due diligence: GP 17; and have remediation processes to address any impacts: GP 22.

The GPs are accepted and enforced by various other structures, eg: •

OECD Guidelines for Multinational Enterprises (applies to the government and companies operating from or in an ‘adhering country’ - currently 44 ‘adhering governments’ or about 85% of foreign direct investment) OECD 2011;

• •

IFC 2012, para 12 (so if mining project is World Bank funding involved, GPs relevant). EPIII 2013, preamble (most lenders follow the Equator Principles, and these refer to GPs).

•

ICMM 2013 (applies to all members of International Council on Mining and Metals)

Starting to see significant movement in relation to states and mining regulation, eg the latest assessment of the Committee overseeing the Child Rights treaty and Australia's compliance (CRC AUS 2012):

See, more on GPs: A4ID 2013 More general materials on governance and extractives industry: Ushie 2013; Andrews 2007; ICMM 2009a; Campbell 2006.

2.4

Investment Protection/Stabilization Clauses, Mining Contracts Maniruzzaman 2007 (damages for breach of stabilisation clauses)

Mining policy and law

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From Southalan 2012, 152:

Substantial international and transnational law exists regulating international investment, particularly to protect it from excessive interference from the host government. Most foreign investment occurs under investment treaties, either bilateral or multilateral (UNCTAD 2011, 103). Bilateral investment treaties protect foreign investment through a basic regime where: (a) the host state commits to compensate expropriation of investment interests; (b) the investor has a direct right of action against the host state; and (c) there is international arbitration for disputes, usually through the International Centre for Settlement of Investment Disputes which is part of the World Bank Group.(Lehavi & Licht 2011, 120121)

3

Nationalism and negotiation: local content obligations

3.1

Introduction Local content = the use, at any stages of mining, of goods/services from the country/economy where the mine is located (some analysis also includes downstream processing). Usually about employment and suppliers, and the development of other processes to occur locally. Focussing here only on matters directly in mining operations, not broader benefits to local community/government (eg. assistance for education, generic training, social infrastructure). These often tied together with 'local content' obligations, but have a different context. Mining's main benefit to a government/economy is revenue (eg. taxes, royalties) not local content: UNCTAD 2007. But local content likely the major contribution at local level. Local content, and mining’s linkages with local economy, can contribute to broader development (eg. copper development, Wright & Czelusta 2007 compare Chile and US copper production): • US rise to economic power saw resource abundance tied with manufacturing growth. • US produced more than its relative share of reserves (and geological potential) compared with Chile. • Chile's 'problem' was not its resource endowment but how that was developed. • investment (eg. human capital, economies of scale and infrastructure) and technology (eg. new exploration and processing techniques) can 'expand a country's resource base, effectively creating new natural resources from an economic standpoint'. Chile and USA copper production, 1845-1976 (Wright & Czelusta 2007, 189)

Mining policy and law

3.2

7

Local content obligations The obligation/encouragement for mining to use or develop local content can come from: •

mineral law (eg. Minerals and Mining Act (NGA) 2007, s116);

•

conditions on mineral rights (eg. Model Lease 1990 (IND), pt VII, cl 22);

• •

mining agreement (eg. Bougainville Copper Agreement 1967 (PNG), cl 9(a)); government policy (see Otto & others 2006, 207).

Many local content obligations contain amorphous encouragements of intended results. Specified aims are tied with phrases like 'as far as practicable', 'where it won't unduly prejudice', 'where reasonably possible', 'if commercially feasible'. One example: ‘Throughout the continuance of [operations]...the Company shall...so far as reasonably and economically practicable use labour, materials, plant, equipment and supplies available within the [jurisdiction] where it is not prejudicial to the interests of the Company so to do’ (eg. Bougainville Copper Agreement 1967, cl 9(a) in PNG; Sierra Rutile Agreement 2001, cl 10(b)(i) in SLE; Hamersley Agreement 1963, cl 10(2)(i) and others in AUS) Vague local content obligations are pointless from legal perspective. The miner will procure locally when that is economic and beneficial to its interests. But where local procurement is not 'reasonably and economically practicable' or is 'prejudicial to the [company's] interests', the company will not procure locally and is not legally required to. These clauses usually result from incomplete negotiations or poor drafting. The issue that has been avoided is this: to what extent do the parties agree the company must preference local content? The key is to identify agreed and measurable targets for local content obligations, and incentives/sanctions for these to be met. Possible options: •

agreed percentage of local positions, with money to training if unfilled

•

agreed preference for local suppliers (eg. if locals can match the quality of a non-local supplier and are no dearer then x% of its quote, the local supplier will be used)

• •

don’t make it a ‘one-off’ obligation, but to be revisited periodically or as economics change: WA Gov 2004 agreed percentage of mineral provided to local processing

•

for infrastructure - provide independent arbitration on others' use if parties cannot agree on extent and terms of access

•

agreed ramifications where obligations not met

•

adjusting royalty/tax rates or allowed production amount depending on whether local content targets met

•

have differing tax on export, depending on the extent of local processing (with lesser taxes if more local processing)

Examples •

If company doesn’t progress toward local downstream processing in 10 years, limits on export amounts: eg. Hamersley Agreement 1963, cl 12(3).

•

Where local downstream processing is possible, negotiate and specify a percentage of product that will be given to local firms for further processing: eg. a 2008 De Beers - Namibian Government agreement provides for 10% of diamond volume (but higher proportion by value) to be sold to local cutting/polishing firms (Murray 2008).

•

'[Company to] give preference to Filipino citizens who [live near operations] in the hiring of personnel for its mining operations. If necessary skills and expertise are currently not available, the [company] must immediately prepare and undertake a training and recruitment program at its expense‘ (Model Agreement (PHL) ud, cl 11.1(j4))

Parties should consider and agree, where possible, on result if local content obligations not met. •

May need to take into consideration any laws in the jurisdiction in relation to anti-competitive conduct in preferencing supply of goods/services.

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Could use financial sanctions/encouragements, eg:

3.3

•

government may agree to reduce taxes on various imports, but specify that if a similar product/service is available locally, the reduced tax will not apply: eg. Bougainville Copper Agreement 1967, cl 9(c).

•

some form of security/liquidated damages clause(s) to provide some predetermined amount in the event of default (but note courts unlikely to enforce unreasonable penalty designed simply to pressure compliance).

Occupational structure in mining From Lowry 2006, see Southalan 2012, [4.30]

4

General mining materials / references

4.1

Forms of regulation (generally) From Southalan 2012, [1.47]-[1.50]

4.2

•

traditional (‘command and control’ regulation) eg. legal text states you must do X, you must not do Y

•

performance-based (prescribes required outcomes but not the means used to achieve) eg. waste output less than X ppm

•

process-based (requires management plans and policies) eg. must adopt/audit performance plans

•

co-regulation (where government and industry both have involvement) eg. legislative endorsement of an industry code of practice

•

information/education (encourage/enable incentives that business will respond to) eg. labelling and enforcement of that

•

economic instruments eg. economic subsidies, tradable permits, tax incentives

Mineral types From UNCTAD 2007, 84

Mining policy and law

4.3

Value added The potential revenue produced by a mining operation varies considerably. Significant for what resources/money available to address the impacts of the mining.

UNCTAD 2007, 85

4.4

Economic ‘advocacy’ From Southalan 2012, [1.28]-[1.30]) Common concepts in analysing mining law: • • •

risk (requirement of large uncertain investment needs large potential reward) international competitiveness (companies will go where get best deal) obsolescing bargain (after mine in operation, investment cannot move)

Dynamics which may influence advocacy: •

parties rarely forego advantages

9

Mining policy and law

• •

5

10

negotiating positions usually exceed requirements political pressure and outcomes difficult to predict

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