energysource | issue 21
30 Jul 2019
Governments and the resource industry: recent trends in Africa
Over the past two years, the market has seen substantial updates to the mining codes and other natural resource-related regulations of several African countries, reflecting similar trends of increased activism by governments in the natural resource economy. These activities, often referred to as "resource nationalism", range from the introduction of laws that mandate partial government ownership of extractive projects, raising taxes and royalty rates, requiring larger proportions of local employees or vendors for procurement purposes ("local content"), or setting quotas (or even imposing bans) on the export of resources that have not been processed locally. These trends, explored in further detail below, have posed challenges for resource companies operating in the region. In this article we offer a contextual explanation behind some of the trends we are seeing, and provide an overview of strategies for resource companies to address some of the challenges posed by the current environment.
Recent trends
Increased royalty rates and taxes on companies operating in the mining industry
In March 2018 Zambia fined Canadian company First Quantum Minerals US$7.9bn for unpaid import duties. Zambia also announced new mine tax measures in September 2018, including a royalty increase of 1.5 per cent, a new 5 per cent charge on copper and cobalt concentrate imports and a 15 per cent duty on the export of precious metals and gemstones. Zambia's finance minister stated that the new measures are intended to ensure that "Zambians benefit from the mineral wealth". Zambia also announced a plan to abolish VAT in 2019, and replace refundable VAT on mining exports with a non-refundable sales tax, resulting in increased revenue from the mining sector. The Government has committed to paying many millions in VAT credit arrears to businesses, particularly in the mining sector. The Zambian Chamber of Mines has, however, warned that the changes would cause 58 per cent of copper mines to be lossmaking at current prices and could lead to about 21,000 job losses).1
In 2017 Tanzania handed UK-registered Acacia Mining Plc a tax bill for $190 billion. Based on the current revenue of the company, it is estimated this will take two centuries to pay and is the equivalent to four times the country's gross domestic product.2 Adding to the company's problems in Tanzania, in May 2019 Acacia Mining Plc was fined $2.4 million by the Government for alleged pollution at its North Mara mine.
In March 2018, the Democratic Republic of Congo (DRC) revised its Mining Code to increase royalty rates on most minerals and designate cobalt as a "strategic" metal, with the new designation being used to justify a hike in the royalty rate from 2 per cent to 10 per cent. Another key measure is the removal of a clause that protects miners from changes to the fiscal and customs regime for ten years.
Minimum state shareholding rights or "indigenous" shareholding rights
In July 2017 Tanzania enacted amendments to its 2010 Mining Act, which included a minimum 16 per cent non-dilutable free-carried government interest in any mining company operating under a mining licence. The Mining Act was amended to entitle the Government to acquire, in total, up to 5o per cent of the shares of a mining company, commensurate with the total tax expenditures incurred by the Government in favour of the mining company. In January 2018 new regulations under the Mining Act introduced a requirement for prospective licensees to have at least 5 per cent ownership by an "indigenous Tanzanian company" to be eligible for the grant of new mining licences.
In 2017 Kenya's new Mining (State Participation) Regulations introduced a free-carried 10 per cent state equity interest in any mining right granted after 27 May 2016.
South Africa's new Mining Charter III (The Broad-Based Socio-Economic Empowerment Charter for the Mining and Minerals Industry), which came into force on 1 March 2019, has introduced similar requirements for minimum black investor shareholdings. The Charter, which has been subject to various revisions and legal challenges, is intended to bring benefits to the country through its black economic empowerment obligations, but there is ongoing uncertainty about the extent of these obligations and their application to existing and future mining entitlements.
Minimum requirements for local sourcing of goods, labour and services and bans on the export of unprocessed minerals (requiring processing to take place domestically)
An export ban on unprocessed minerals was a key component of Tanzania's 2017 changes to its Mining Act. New regulations introduced in January 2018 also include elevated quotas for local recruitment, training and the procurement of local goods and services, as well as a requirement to conduct business through Tanzanian banks and use only the services of Tanzanian financial institutions, insurance brokers and legal practitioners.
In February 2017, Ghana announced that it would begin to certify the value of gold exports as part of its efforts to tighten controls on the sector to ensure the state receives the revenues it is due, and also that it was considering passing legislation to provide that at least 50 per cent of Ghana's gold output would be refined locally within five years.3
Factors influencing resource nationalism
There are a number of interrelated factors at play that help to explain the recent rise in resource nationalism in Africa, ranging from global economic trends, to domestic economic and political influences, and the contractual structures applicable to certain types of resources. Understanding these factors can help to inform a company's potential short- and long-term legal and strategic mitigation solutions. When negotiating mining agreements in a transitional political context, it is particularly important to consider the structure of any agreement and its future enforceability — for example, through negotiating stability clauses, deferred royalties or payments, or by seeking political risk or investment guarantees, as further described below.
Macroeconomic factors
Historically, resource nationalism has gone through major ups and downs globally, and has been driven by a number of factors including commodity price cycles. A number of resource nationalisation waves have tracked commodity booms, such as those that occurred in the 1970s and from 2004 to 2012, and the current wave coincides with a moderate recovery in commodity prices over the last two years. Conversely, the commodity price crashes of the 1980s and 1990s produced a wave of liberalisations in the energy and mining sectors across Africa and Latin America.4
Domestic economic and political factors
In a recent series of election cycles in a number of African countries, coinciding with the moderate recovery in commodity prices over the last two years, there has been a significant populist influence; leaders and candidates have capitalised on resource nationalism policies as a way to galvanise domestic support. For example:
- Tanzanian authorities pushed through a Mining Act in 2010, just before the national elections, when the internal discourse on better utilisation of natural resources was robust. In addition, current President Magufuli was elected on a strong populist platform, and we continue to see this influence in Tanzania's recent and significant amendments to its mining code, updated in 2016 and 2017 as outlined above.
- The Government of Mali announced in March 2018, in advance of elections set to occur between April and November 2018, that it would seek to update the mining code applied to producers in the country, despite existing stability provisions. Mining companies in Mali are protected from changes to the fiscal regime for 3o years, but the Government announced that it aimed to reduce those protections and stated that if negotiations did not pan out, it would "be a unilateral decision like in the DRC" (though no substantive changes have yet been implemented). Recently, it was reported that the new draft code would seek to include a tax rate that varied according to market changes, and also include a strengthening of local content requirements and increased social and environmental responsibilities.5
- The DRC, which has also seen significant developments in resource nationalism as described above, held elections in December 2018. Populist rhetoric was significant in the run-up to the elections; ultimately the victor was a successor to the existing government, who had taken a hard line towards foreign interests in resource companies and had been increasingly using new powers introduced under its new mining code.
Contractual regimes and government involvement: Why do we see more of this activity in the mining space, as compared to oil and gas?
Over the last two years, the majority of "headline stories" relating to resource nationalism in Africa have stemmed from the mining sector, as compared to the oil and gas sector. Comparing the underlying contractual structures and approaches taken in relation to government participation can help to explain, and provide "lessons learned", in respect of some of the challenges faced by the mining sector in particular.
Concessions vs production sharing contracts: Until the mid-20th century, the vast majority of host state resource contracts were concession agreements that granted international companies significant autonomy, with limited government involvement. This model has changed significantly in the oil and gas industry, which in many countries in Africa has moved to a production sharing contract (PSC) regime. In contrast to a concession agreement, under PSCs the state, as the owner of the mineral resource, engages a private company as a contractor. The PSC regime inherently requires more government involvement both at the outset of negotiations, and through the life cycle of an oil and gas project, including in respect of general operational and development decisions in many cases. However, mining industry contracts in the region are still generally based on the concession model, and typically involve the grant of a permit or licence, paired with a "mining convention" or "mining agreement" which sets out the terms of the company's right to operate, and produce and export minerals, including fiscal terms.6 A brief comparison of the key terms of mining convention/concession arrangements as compared to PSCs is set out in figure 1.
Figure 1
| Mining Convention/Concession | Production Sharing Contract | |
| Taxation | Taxes are usually imposed on corporate profits but the mining life cycle involves significant capital investment up front that may be carried forward as losses for many years, and often mining companies benefit from a tax holiday during the initial years of a mining convention. | Typically, income tax is imposed only on profit oil. |
| Royalty | Typically payable on a metal sales price basis and not on a profits basis. | If royalty is included, it is payable on production basis and the royalty amount determined at the wellhead. |
| Profit sharing | If any, government right to dividend is based on equity interest in the project company. | Government will get a share of "profit oil" after costs of production (and royalty, if applicable) have been deducted. Typical PSCs have a periodic cost-recovery limit which allows unrecovered costs to be carried forward and recovered in the next period. |
| Government voting rights at operating level | Typically there are no voting rights at operating level and no right to approve work programmes and budgets. | Typically government will have representation on the operating committee for the PSC and will have a right to vote on work programmes and budgets. |
Generally, under a typical mining contract model:
- The government will be entitled to taxes or royalties, which are typically payable on a metals sale price basis, and not on a profits basis —which can result in an incentive misalignment for both host states and resource companies, depending on commodity prices.
- The government will have limited involvement contractually, and limited or no decision making power on operational decisions.
- The government may have an equity interest in the project. This has been an increasing trend and we are seeing more governments negotiate for an equity stake in mining projects under a number of new mining codes. Government equity interests in mining projects are typically awarded on a "free carry" basis (i.e. the government does not pay their pro rata share of costs and expenses, but is entitled to a dividend based on their equity share). However, because of the project economic life cycle of a mine, and the underlying contractual regime, countries with an equity stake may still feel like they are not getting their "fair share" of benefits. For example, the Ghanaian Government has publicly stated that the Government's "carried interest" in mining operations, usually 10 per cent, is "virtually useless" and has yielded zero dividends for the country for years. This is a direct result of the investment life cycle of a mining project, which sees heavy capital investment at the outset carried forward as tax losses, often for decades, before any dividend would ultimately be payable to a government equity holder.
Conversely, an oil and gas industry PSC typically requires government "buy-in" from the outset, and the incentive structures are more broadly aligned for both resource company and host state. Under a PSC regime, typically:
- The government's share of "profit oil" is directly linked to the ability of the resource company to operate at lower cost within the country, so the incentive structures are broadly more aligned than in a typical straight royalty structure, as is commonly applied in the mining context.
- Pre-negotiated targets for local content and local procurement are generally included, allowing an operating company to plan from the outset to meet these targets or procurement requirements as it builds its development or operating plan.
- The government will generally be entitled to a voting seat or seats on the project's operating committee, which ensures that they remain involved and connected to the project throughout its life cycle, including in respect of approving annual work programmes and budgets. This can help prevent "surprises" or unexpected outcomes as the government is regularly made aware of plans and developments.
How can companies protect their investments?
The effects of resource nationalism can have significant impacts on a resource company's investment in a host country. Various options, including legal strategies and solutions, are available to mitigate exposure to these effects. The particular circumstances of the relevant project/jurisdiction and some of the factors described above will influence which tactics are best employed.
Long-term mitigation strategies
Contractual protection: when negotiating a "host country agreement", which in the mining context typically takes the form of a mining convention, concession or mining licence agreement, companies can seek to negotiate a "stabilisation clause" which is designed to protect the investor, usually by maintaining the application of the laws in place at the time the agreement is signed against a potential future change in law or regulation which adversely affects the investor's legal and economic interests (a "freezing clause") or by providing for an adjustment of the agreement's terms to reflect changes of law of the host country such that the host country and the investor will seek to renegotiate the agreement to restore the investor's position to its pre-change of law position or for compensation to be paid to the investor (an "equilibrium clause"). An investor may also be advised to make reference in the host country agreement to any relevant bilateral investment treaties (as further described below) and include confirmation that the investor is an "investor" and the contract is an "investment" for the purposes of that treaty. Such contracts are also usually subject to international arbitration as the method of dispute resolution.
Treaty protection: one of the more frequently invoked ways to protect investments is by ensuring that there is an investment treaty in place between the state in which one is investing (the host state) and the home state of the investor. There are essentially two types of such treaties: Bilateral Investment Treaties (BITs) and Multilateral Investment Treaties (MITs). These treaties offer varied protections for foreign investors, but usually include protection from expropriation without compensation and also an entitlement to fair and equitable treatment by the host state. If there is no treaty between the host state and the investor's home state, it may be possible to route the investment through a state that does have a treaty in place with the host state. Care must be taken with this option, however, as structuring an investment in order to protect against the effects of an existing, or foreseeable, dispute may not attract protection under the treaty.
Host state investment laws: the laws of the host state may provide protection for foreign investors, although reliance on such laws may be less productive in circumstances where it is the host state that has implemented measures giving rise to a complaint.
Political risk insurance or investment guarantee: in certain circumstances investors can insure against risks such as changes in law or regulation. Insurance providers often look to see if there is existing investment treaty protection which, ideally, might include a subrogation clause allowing the insurer to step into the shoes of the investor for the conduct of any dispute with the host state. Another form of political risk insurance is to seek an investment guarantee through MIGA (the Multilateral Investment Guarantee Agency and a member of the World Bank Group), which may also assist by lending the legitimacy and counterbalancing influence of a multilateral organisation. MIGA guarantees can include coverage against expropriation, breach of contract coverage for host state agreements, and coverage against currency-related risks (protects investors against losses from an inability to convert local currency into foreign exchange for transfer outside the host country). For example, even when governments impose a moratorium on moving currency, as shareholders of MIGA, they may agree to exclude MIGA-insured projects, and permit the transfer.
Reactive solutions
Political lobbying or strategic litigation: this is an option available to investors after any event. Examples of this strategy being employed include the various legal challenges to the Mining Charter in South Africa, while a group of mining companies operating in DRC, including Zijin Mining Group and Glencore, have joined forces and established a body, the Mining Promotion Initiative, to lobby the DRC Government on issues such as their concerns about the new Mining Code.
Enforcement: fundamental to the effectiveness of most of the protections listed above is the enforcement of an investor's rights should the host state breach its obligations under the relevant treaty or contract. Most treaties provide for disputes to be resolved by way of international arbitration, often in accordance with the rules of the International Centre for Settlement of Investment Disputes (ICSID). It is therefore important for investors to be knowledgeable as to their rights and also the process of arbitration. Arbitration is preferable to having disputes heard and litigated in domestic courts, where judges may favour the host state, in addition to disputes being aired in public and involving greater financial expense for the parties. An international arbitration award is also more readily enforceable globally than a domestic court judgment.
Conclusions
While there is no "quick fix" to address the impacts of resource nationalism, companies operating in the region can take proactive steps to ensure they place themselves in the best possible position to engage with governments in a positive and productive manner. Continuous, transparent and consistent reporting and communication with governments from an early stage of a project can assist governments in understanding the operational and economic realities of a project. Inclusion of stability clauses in a project's contractual documents at an early stage, as well as creating clear expectations and processes for "local content", reflecting these obligations in the relevant contractual structures and ensuring consistent communication with governments in the course of fulfilling those obligations, are useful mechanisms that may prevent a breakdown of understanding between project proponents and host governments and can lessen the potential for "surprises" down the road when an otherwise uninvolved government may decide it is unhappy with a company's practices.
1. https://www.businesslive.co.za/bd/companies/mining/2019-01-21-barrick-swims-against-rising-tide-of-resource-nationalism-in-zambia/
2. Source: Bloomberg.
3. https://www.reuters.com/article/ghana-gold/ghana-to-tighten-controls-on-gold-exports-to-protect-revenues-idUSL8N1QH6EX
4. https://worldview.stratfor.com/article/what-explains-ups-and-downs-resource-nationalism
5. https://uk.reuters.com/article/mali-mining/update-1-mali-says-negotiating-mining-code-revision-but-could-act-unilaterally-idUKL8N1QY5RN
6. For example: Mauritania, Ghana, Burkina Faso, Mali, DRC, Cote d'Ivoire, Ethiopia.
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