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infraread issue 9 13 Mar 2017 Shared use in mining railway infrastructure: Trends in Africa

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The key to economic development for many emerging countries lies, at least initially, in the effective exploitation of their natural resources, which are quite often located in remote and poorly explored areas. A lack of transport infrastructure and, in particular, rail (and port) infrastructure, is therefore often considered, alongside political risk, as one of the key impediments to the development of greenfield mining projects in Africa. 

Given their limited financial resources, governments have historically looked to such mining-related infrastructure, especially mining-related railways, to unlock their economic potential and promote wider economic development. 

A number of African railways were built during colonial times, some of them by private sponsors to support mining activities (e.g. the Zouerate-Nouadhibou railway built by Miferma to exploit the Kedia iron ore deposit in Mauritania and the Hahotoe-Kpeme railway built by CTMB to operate the Hahotoe phosphate mine in Togo, both in the early sixties). Certain African railways have also been financed and constructed by governments, especially in state-controlled economies backed by the USSR (e. g. the Sangaredi-Boké-Kamsar and the Kindia-Conakry railways in Guinea-Conakry in the seventies). 

Given the cost of such infrastructure, the "integrated" model, whereby the railway is built by the mining sponsor, which is in turn granted the right to operate it under a concession agreement, is still the preferred option in Africa. It is also viewed favourably by lenders, as it gives the mining operator control over the use of the infrastructure. 

However, this model has been criticised as creating de facto monopolies, preventing other potential users (and competitors) from accessing the railway.  A number of concession agreements have been singled out as containing no or limited, vague and/or highly conditional undertakings in relation to third-party access (e. g.  provided that third-party access does not impair the conduct of the project at all or subject to terms to be agreed with the "first-mover", with no specific settlement mechanism). 

As a result, it has been suggested that an alternative model, whereby the mining-related infrastructure is owned and operated by a third-party private sector investor, should be developed in Africa. In support of this option, it has been argued that mining operators may prefer third-party private sector ownership over government ownership on account of efficiency and functionality issues, and that they may even prefer this model to the "integrated" model as it would enable them to focus their efforts and their capital on their core business. 

This approach was adopted in the Guinean Mining Code enacted in 2011 and amended in 20131 and by Rio Tinto and the Government of Guinea in relation to the Simandou project in 2014. 

However, this alternative model has not been successfully developed yet. The pool of third-party operators with the required financial, operational and technical expertise is quite small in Africa, and mining companies (and lenders) are wary of losing control over the railway, increasing the structuring and contractual complexity of their projects and, potentially, incurring higher transportation costs in jurisdictions where other risks are already high. 

As a consequence, the case has been made for open-access regulations and tighter third-party access regimes in concession agreements (or for the entry into specific, detailed railway concession agreements) ensuring, among other matters, that the infrastructure is built to accommodate additional capacity and that tariffs are non-discriminatory. 

African governments have also been encouraged to create or bolster independent regulatory agencies to monitor the operation of such infrastructure and the effectiveness of a third-party access regime (e. g. by reviewing or endorsing decisions concerning access and tariffs). 

Other options exist to balance the legitimate expectations of the "first-movers" and the equally legitimate expectations of governments and new users. They include:

  • the provision of "access holiday" or "sunset" clauses, whereby specific priority rights are made available to the "first-mover" for a certain period of time (potentially linked to the amount of tax paid or the profitability of the project) in order to prevent rent situations and anti-competitive behaviours; and
  • the attribution of a golden share or specific rights to the government in relation to the infrastructure built by the "first-mover".

While mining companies are still weathering the current commodity price cycle and while the perceived political risk of doing business in Africa remains high, flexibility is key in encouraging the development of mining projects and related infrastructure in Africa.  This should not discourage governments from using their rights under existing agreements and regulations to support third-party access to existing infrastructure where the "first-mover" costs have been recouped, the project has been de-risked and access is requested by new users. 

 

Note

1. The Guinean Mining Code provides that “the building of the infrastructure necessary for Mining Activity is carried out by the State or within the framework of a Public-Private Partnership (PPP)” and that “Infrastructure projects are subject to an international competitive tender procedure, and shall in all cases comply with the master plan for the transport infrastructure that ensures access to the infrastructure by third parties” 

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This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.

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