Are the characteristics of the new Colombian mining code sufficiently competitive in attracting investment to the mineral sector?

Abstract

During the past 40 years, developing countries with non‐renewable natural resources have sought to develop their mining industries along lines parallel with the political climate current at the time. In the 1970s, the Colombian government followed the current trend in the developing world when they opted for direct participation, as owner‐operator in the exploitation of natural resources, especially coal, deeming it to be of great importance in Latin America. However in the 1990s, the country, in line with a changing global trend, adopted policies that focused its strategy on regulation of the mining sector, while leaving the operational risk in the hands of the private sector. The role of the state was redefined from ‘owner operator’ to ‘regulator’. The new mining code of Colombia (Law 685/2001) is a contribution to the ongoing modernisation process in the mining sector, the aim of which is to develop a regulatory framework which can be used as an instrument to attract investment. This paper will attempt to identify the main characteristics of this new law and compare them with the idealised criteria defined by the World Bank for attracting mineral sector investment. It will also critically analyse the potential of this new law to serve as an effective means of attracting private investment in the context of an intensively competitive globalised mining industry.

Keywords:

• Regulation
• mineral investment
• economic development
• competitiveness

Notes

Colombian Mining Code, Law 685, 2001, <http://www.upme.gov.co/mineria/codigoMinas/index_i.­htm>.

The World Bank Group, Review of Legal and Fiscal Framework for Exploration and Mining, (chapter 4) (London, England: Mining Journal Books,2001).

Decree 2655 (entered into force 1988).

Colombian National Constitution of 1991 <http://confinder.richmond.edu/columbia_­const2.html>.

Centre for Energy, Petroleum and Mineral Law and Policy CEPMLP, Mineral Law and Policy: The distance Learning Material. (1.14–1.18), http://www.natural‐resources.org/minerals/education/docs/Mineral%20Law%20&%20Policy‐Unit1.pdf See also The World Bank Group, Review of Legal and Fiscal Framework for Exploration and Mining, (4–19) (London, England: Mining Journal Books,2001).

See The World Bank Group, supra note 1, at 4–19.

The Cerrejón mine is a major coal mining operation (measured by production) in Latin America. The annual coal production in 2001 was of 23.2 mt, of which 21.5 mt were exported from the country. See <ftp://www.upme.gov.co/boletin/­estadisticas_me_1996‐2001/estadisticas.html>.

For more information see Waelde T., Investment Policy and Investment Promotion in the Mineral Industries, in Foreign Investment Law Journal, 96, (1991).

After 24 years, the financial balance of the Cerrejón mining project showed that the state lost part of its investment. The financial projection that was made in 1985 assumed that the mineral coal price would be US$ 80 per ton by the year 2000. However, in this year (2000) the average price per ton was US$26. Finally, in the year 2000, the state participation (50%) in the Cerrejón mining's project was sold for US$554.6 million. From: <http://www.­dinero.com/larevista/122/NEGOCIOS.asp>.

For instance: from owner‐equity partner to regulator. See: The World Bank Group supra note 1, at 4–19.

See id., 12. See also paper: Warden‐Fernandez J., and Waelde T., Mining Law in Latin America: A comparative Study of Chile, Peru, Argentina, and Bolivia, in Mining and Oil & Gas Development in Latin America, RRMMLF, Mineral Law Series, 2001 (3). Some points are: 1) Geology potential for target metals and minerals; 2) Political stability; 3) Mineral Law: Mineral ownership, security of tenure (right to mine), exploration/mining terms, right to transfer ownership, access of the investors to mineral resources; 4) Fiscal regimes: stability and/or predictability of fiscal regimes, equitable tax regimes, ability to repatriate profits, level of tax liability, reasonable foreign exchange regulation, permitted external accounts, and 5) Institutional factors.

Almost 50% of the Andean zone and more of 90% of the Guyana Shield has not been explored. From: Strategies for the Mining Development in Colombia in Scenes and Strategies: Mining and Energy (No. 8). http://www.upme.gov.co/revista/­web/estrategias.htm#.

World Bank Technical paper No. 345. A Mining Strategy for Latin America and the Caribbean. 13. (Washington, D.C., USA: The World Bank,1996). The World Bank in 1994 undertook a study of changes that were occurring in Latin American mining sector in order to understand what policies and legal and institutional reforms were working, and why. The results of the World Bank study were published in 1996 as World Bank Technical Paper No. 345, entitled A Mining Strategy for Latin America and the Caribbean. Among other things, that study highlighted key features of the legal framework for minerals exploration and mining in Latin American countries that had achieved the greatest success in promoting investment in, and modernisation of, their mining sector. The aggregate of those key features is what is referred to as the Latin American Mining Law Model.

See the World Bank Group; supra note 1, at 38.

See id., 45.

See id., 38.

See id., 53. For instance, the exploration of the Cerrejon's mineral coal project began in the 1960s, and its exploitation began in 1984. At the moment the mine has reserves for an additional 50 years. This is an example of the long periods of time required for the development of a mining project (24 years for the Cerrejon project). At an international level it is recognised that an average project development takes 19 years. See also Akpan G., Towards a Regime of Secured Tenure in the International Mining Industry, in Oil and Gas Law and Taxation Review 26 (1998).

Bastida E., A Review of the concept of security of mineral tenure: issues and challenges, 2 (2001) in Journal of Energy and Natural Resources Law, Vol. 19 Number 1.

See the World Bank Group; supra note 1, at 52.

See the World Bank Group; supra note 1, at 37.

“First come first served”: The mining right is granted to the first applicant once it has complied with the regulatory requirements. “First come first considered”: The petition of the first applicant has priority right for acceptance and is therefore granted the mining right, though some subjective criteria are involved. Discretionary system: The authority will issue the mining title according to subjective criteria, which weighs the merits of all solicitants at the same time. See Otto James, The Regulation of the Mineral Enterprises: A Global Perspective on Economic, Law, and Policy.

See World Bank Technical paper No. 345, supra note 13, at 11.

Janeth Warden‐Fernandez., A comparative study of the mining and investment regimens in Chile, Argentina, Peru and Bolivia: what are the main issues that determine their global attractiveness for mining investment? (Unpublished LLM Dissertation submitted to the CEPMLP, University of Dundee,2000).

World Bank Technical paper No. 345, supra note 13, at 12.

World Bank Technical paper No. 345, supra note 13, at 13.

In this case the mining title is granted and extinguished by judicial authority, which is totally independent of administrative bodies.

Through this system the administrative authority (Ministry of Mines) grants and extinguishes mineral rights.

World Bank Technical paper No. 345, supra note 13, at 13.

Through this system the law entrusts authority to a specialised state‐agency to assign mining titles. This must be in accordance with general standards contained in the law, and the title‐holder is allowed to carry out mining activities.

See the World Bank Group; supra note 1, at 26.

See World Bank Technical paper No. 345, supra note 13, at 18.

See the World Bank Group; supra note 1, at 26.

See id., 54–61.

See World Bank Technical paper No. 345, supra note 13, at 63.

See the World Bank Group; supra note 1, at 62.

See id., 62.

See Colombian Mining Code, Law 685, 2001 supra note 2 at article 13.

“State” means a form of government, an apparatus, a mechanism, an organization, a physical framework, a structure that does not imply any values for governance like “good” or “democratic” or “inclusive”. See Torhavn, What does “State” mean? See http://www.geocities.com/torhavn/state.html.

“The word “nation” in keeping with common political science, to wit: a group of human beings which possesses the will to be identified as a nation and to determine its common destiny as a nation, and has a common identity which can be historical, racial, ethnic, linguistic, cultural, religious or territorial”. See Id.

See Colombian Law 685 of 2001; supra note 2, at article 5.

“On the one hand, the distinction that can be made about “states” and “nations” is that the former are artificial constructions or creations that come and go through centuries. Nations on the other hand, are evolutionary communities with a certain sense of themselves as having distinct identities and languages.” See INQ7.net, The Concept of Nation http://www.inq7.net/opi/2002/aug/30/opi_­commentary1‐1.htm.

“The opposite case is seen in Argentina: to be a federal state, the national code regulates the substantive and procedural aspects, and each province regulates the other procedural aspects privately. For that reason, the country has diversity of formal procedures to obtain the concession, though nowadays the provinces have shown interest to unify procedures, for benefit of the investors”. See: Argentinean Law No. 24,196 Mining Investment Law, Section 22. <http://www.­politicalresources.net/argentina.htm>.

See Colombian Law 685 of 2001; supra note 2, at article 45.

For instance: from the exploration to the exploitation phase.

See the World Bank Group, supra note 1.

The Peruvian legislation contemplates that the concession is a single one that authorises the concessionaire to explore and exploit minerals. In addition, it has an irrevocable character while the title holder fulfils the obligations that the law indicates. See UPME‐Martinez Cordoba, Compendium: Mining Compared Legislation.

“Within the three (3) years following the date of the contract inscription, the concessionaire should make the technical exploration of the contracted area. At the request of the proponent, an inferior period of exploration can be indicated in the contract, as long as it does not imply freeing him from the minimum obligations requested for this phase of the contract”. See Colombian Law 685 of 2001, supra note 2, at article 71.

See Id., at article 74.

See Id., at article 72, 73 and 74.

See Id., at article 77.

“Stability of royalties: The amount of royalties and the system to liquidate and readjust them will be in force from the time of the concession contract and will be applied during its validity. The modifications that on these matters the law adopts will only be applied on the contracts celebrated and completed after its promulgation”. See Id., at article 228.

See Id., at article 46.

See Id., at article 46–61.

See Id., at article 62.

The Carbocol S.A. and Intercor S.A contract (signed 17. 12. 76): the requested area was 38000 hectares and with Drummond Ltda. (23.08.88) the area was 9020 hectares. From: <http://www.minercol.gov.­co/showGrid.jsp?idProceso=Proceso_181&tipo=43>.

See Colombian Law 685 of 2001; supra note 2 at article 65.

See id., at article 59.

See id., at article 112.

See id., at article 22.

In Peru the concessionaire can transfer his concession to a third party, and inclusively the assignee can return to yield the title to another person. In Ecuador there is authorisation to celebrate “promise of cession” (transfer). Those “promises” can take upon maturity or not. See UPME‐Martínez‐Córdoba; supra note 44, at 64.

See Colombian Law 685 of 2001; supra note 2 at article 24.

In Chile the material division of the granted concession is viable, with previous authorisation of the authority, and whenever each part conserves the technical specifications on form of the concession. The transfer must be done by means of public writing or testament and will have to be registered in the Conservative of Mines (Registry). See UPME‐Martínez‐Córdoba, supra note 44, at 65.

See Colombian Law 685 of 2001; supra note 2 at article 16.

“The concession contract is executed between the State and an investor to carry out by their own risk, the studies and works for the development of the project. This contract is different from the so‐called public work, and from the public service's concession. The concession contract includes as part of its objectives the stages of technical exploration, economic exploitation, and transformation of minerals by the risk of the concessionaire”. The concession also is a non‐negotiable contract and for that reason its terms and general conditions are indicated only in the mining code. See Colombian Law 685 of 2001; supra note 2 at article 45 and 49.

See id., article 15.

See id., article 31.

See id., article 34 and 35.

See id., article 355.

See id., article 18 and 19.

See the World Bank Group, supra note 1, at 38.

See Colombian Law 685 of 2001; supra note 2, at article 327–330.

Colombian Law 99 of1993, <http://www.elaw.­org/resources/text.asp?ID=788>.

See Colombian Law 685 of2001, supra note 2, at article 199.

See id., article 85 and 197.

See id., article 207.

See id., article 233.

See id., article 236.

See id., article 235.

See id, at article 227.

Royalties in Colombia are “ad valorem” calculated as a percentage of the mineral price at pit head. The Ministry of Mines and Energy is in charge of setting the official reference price used for the calculation of due royalties. There are three cases that appear in the estimation of the price at the pit head: 1) for exports of coal, nickel, precious metals (gold, silver and platinum) and poly metals, the price of the mineral in the international market is taken as reference; the costs of both benefit and transport are deducted from it, 2) for minerals commercialised within the country the price at pit head is deduced from the value of the mineral in the market less total costs (retracted from the point of sale up to the pith head, 3) for emeralds the price at pit head is the value declared by the exporter at the moment of registering the exportation. As the government finds it very difficult to oversee the production process, revenue collection is carried out at the end of the mining cycle. Emeralds exported in brute have a 10% tax deduction, while the deduction reaches 60% if the precious stone is exported carved. See Colombian Law 141 of1994, and Resolution Number 81938 and 82187 of 1995.

See Colombian Law 685 of2001; supra note 2 at article 228.

See id., chapter 14.