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Balancing mining contracts and mining legislation: experiences and challenges

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Abstract

This paper considers how to balance bilaterally negotiated mining contracts with mining legislation that applies to all companies. Its backdrop is the perception that mining contracts have become more widely used, especially in less-developed countries. Experiences have been mixed, prompting the questions of whether too much emphasis has been placed on them and whether this has come at the expense of strengthening sector legislation and the wider governance context for attracting investment. Drawing on a roundtable discussion convened for the 2017 Mining Seminar at the University of Dundee’s Centre for Energy, Petroleum and Mineral Law and Policy (CEPMLP), the paper lays open the ambiguous discussion on mining contracts and legislation. It first reviews the rationale for the use of mining contracts and then discusses their impact on the stability of investment conditions, the risk of corruption, the administrative burden on governments and on the development of generally applicable mining legislation and regulations, before going on to explore some underlying issues at stake.

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Notes

  1. See Global Witness (2006). One of the anonymous reviewers of an earlier version of this paper pointed out the poorly negotiated mining contracts signed in the aftermath of the privatisation of Zambia’s mining sector.

  2. Some publications on mining contracts have compared these to the contracts used in the oil and gas sector, namely ‘production sharing contracts’ (PSCs) and ‘service contracts’ (SCs). However, there are fundamental differences between these types of contracts and the mining contracts discussed here. Unfortunately, this study does not offer the space to outline and discuss these differences. See Otto and Cordes (2002, “Discussion” section) for a description of the type of mining service contracts that can be compared to PCSc and SCs.

  3. See Otto (2010) for a push supported by the World Bank (2012) to recommend negotiated community development agreements as a tool to redress the local impacts of mining projects and deliver social and economic development to impacted communities.

  4. See Dietsche (2013) for a review on the issue of resource property rights and sector legal frameworks.

  5. See Carter Center (2017) on this experience in the Democratic Republic of Congo (DRC).

  6. It has been noted—arguably somewhat cynically—that in the reverse situation, when times are hard for miners, governments tend not to come forward to ease the situation for companies that have moved ahead with projects on terms that were more suitable to better times. However, another—perhaps equally cynical—view is that companies draw on a variety of means to influence and lobby governments to (always) gain terms that suit them and their investors.

  7. For further commentary on the norms underpinning mineral exploration and exploitation, see Ortega Girones et al. (2009); Scott (2008) and Bastida (2008). Campbell (2009) places African mining legal reforms in the historical context of the security of tenure principle.

  8. In relation to clear and transparent rules for transiting from exploring to producing minerals, it has been highlighted that it is sometimes necessary to differentiate between title to ‘property’ and ‘activity’, which some countries have introduced. If a licence or permit is merely granted as a title to property, the plan for pursuing production activities can be subject to negotiation as the negotiated contract then complements the granted title. In such instances, companies see negotiations as fairer, lower risk and easier, based on the understanding that the title to the property is already secure, but do not per se constitute an authorisation to produce.

  9. In addition, where exploration activities carried out during the recent boom period have been successful, companies have been facing numerous challenges in getting new mines off the ground.

  10. Notably, in light of the risks associated with working in less mature mining countries, some international mining companies have been refocusing their investments away from these and back towards more mature mining countries.

  11. See also Ortega Girones et al. (2009).

  12. See Carter Center (2017) for a description of the practices of Gécamines in the DRC benefiting from its retained role in the granting and trading of mining permits.

  13. An anonymous reviewer has pointed out that orally negotiated contracts can also be valid and enforceable. Such contracts looming in the background can complicate the use of mining contracts, apart from anyhow being problematic in terms of transparency.

  14. Hubert and Pitman (2017) have documented the extent to which contracts are disclosed across EITI-signatory countries.

  15. An exception to this statement is historical research that has considered tax collection and modes of tax administration in the context of nation state-building—for example, see Tilly (1990) and Levi (1988).

  16. For example, writing from a legal perspective, Otto (1995) provides largely descriptive information on the taxation of mineral enterprises across different countries. Two decades later, the same author notices that some mineral-led developing countries have made great strides in strengthening their tax administrative capacity (Otto 2017a, p. 2). Among the unaddressed questions are why and how these countries have come around strengthening their tax enforcements systems and whether they have stopped replacing incumbent civil servant with the next set of political allies every time an election is held.

  17. The World Initiative of Mining Lawyers (WIOML) has proposed the development of a Model Mining Code to guide countries on the development of more detailed mining legislation. See Annex A Table 1.

  18. See also Carter Center (2017).

  19. Furthermore, the expectation in the 2000s was that the rising demand for minerals and metals reflected an enduring situation, but this expectation has since been qualified.

  20. See Otto and Cordes (2002, p. 4–21) for a discussion on the conflicting principles of the succession of laws and the sanctity of contracts.

  21. Here ‘better contracts’ could—simultaneously—mean that (i) better fiscal deals, (ii) better impact management and (iii) more benefits are derived at the local and regional level.

  22. Notably, some international mining companies have themselves flagged concerns about capacity constraints on the side of their counterpart governments to negotiate mining contracts that ensure stable investments in the sector. They have encouraged the provision of support to contract negotiations, not least to safeguard their own reputations from being exposed to the risk that mining contracts could otherwise be perceived per se as unfair and illegitimate without considering the details of what has been agreed. Annex A shows that, at least in part, funding for support for contract negotiations has come from countries where the largest mining companies and private sector interests in the minerals and metals industry are more generally based.

  23. See Dietsche (2017) for a detailed discussion on this subject.

  24. See Acemoglu and Johnson (2005) for a discussion and empirical study on this fundamental challenge.

  25. Lamentably, the Carter Center (2017, p. 11) has found that ‘Reputation damage aside, the most successful investors in DRC … are those who have been prepared to deal with Gécamines and the political elite on their terms’.

  26. See Otto (2017a, p. 21). This author also specifically mentions the case of Indonesia that abolished the ‘contracts of work’ that it had used since the early 1970s in favour of now taxing the mining sector under general legislation.

  27. Table 1 in Otto (2017b) only mentions Canada, clarifying in FN 6 that agreements relate to First Nations. In Australia, similar agreements are signed with Aboriginal communities.

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Acknowledgements

The lead author is very grateful to all contributors, reviewers and commentators for their support and encouragement in developing this paper. Special thanks go to Sven Renner, Åsa Borssen and three anonymous peer reviewers. The lead author received financial support from the German Federal Institute for Geosciences and Natural Resources (BGR).

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  1. UNU WIDER, Helsinki, Finland

    Evelyn Dietsche

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  1. Evelyn Dietsche
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Correspondence to Evelyn Dietsche.

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With contributors Enrique Ortega, Ken Haddow, Paulo de Sa and Jane Korinek. Additional reviewers and commentators have included Amir Shafaie (Natural Resources Governance Institute), Al Gourley (Fasken), Ana Elizabeth Bastida (University of Dundee) and Peter Cameron (University of Dundee). Contributors have expressed views in their personal capacity. The responsibility for any mistakes or misunderstandings remains with the lead author.

Appendix

Appendix

Table 1 International initiatives on mining contracts and mining legislation
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Dietsche, E. Balancing mining contracts and mining legislation: experiences and challenges. Miner Econ 32, 153–169 (2019). https://doi.org/10.1007/s13563-018-0156-9

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