Third World Mineral Investment Policies in the Late 1980s: From Restriction Back to Business∗

REFERENCES

• See only K. Hossain / S. R. Chowdhury , Permanent Sovereignty over Natural Resources in International Law , New York 1984 .
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• These developments have been regularly review in the reports of the Secretary General on permanent sovereignty over natural resources, see E/C.7/119 or 7 May 1981; E/C.7/1983/5; E?c.7/1985/8 of 25 February 1985; E/C.7/1982/2 of 16 January 1987. See also T. Walde , Permanent Sovereignty over Natural Resources, in Natural Resources Forum , 7 ( 1983 ) 53 ,
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• See, already in 1982 , the case studies by R. Mikesell , Foreign Investment in Mining Projects , Cambridge . The continuation of the metal price and industry crisis has probably multiplied the losses and failures reported in 1982 by Mikesell and is resulting in large-scale restructuring of mining projects both in developed in developing countrties, see a study by D. Gulley on "Restructuring of Mining Projects" for UNDTCD (1986) .
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• The Economist , February 18 , 1984 reports 4% for foreign direct investment in 1978-79 versus 13% for bank loans ; again, the continuation of the mining industry crisis makes these figure appear pale in comparison to the huge losses payable by government funds. Would these large publicy-financed mining projects have been undertaken exclusively by foreign investment, many governments (e.g. Colombia, Peru, Zambia, Guyana, Venezuela el. al.) would probably have saved many billions of US$ .
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• Projects such as Cero Matoso (nickel, Colombia), Selebi-Phikwe (nickel/copper, Botswana) and others have piled up many hundreds of millions of US$ in losses. For example, in Cerro Matoso, costs have been exceeded by over 50%, while production and revenues have been over Vi lower than estimated in the World Bank-sponsored feasibility study, see a study by H. Melo, Bogota 1986, on Cerro Matoso .
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• See M. Radetzki , State Mining Enterprises , 1985 . A UNDTCD Conference on State Mining Enterprises in Developing Countries , Budapest , October 1987, will examine these issues in more detail .
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• The UN (UNCTC) is regularly publishing surveys of foreign investment-related regulations , see UN, National Legislation and Regulations Relating to Transnational Corporations, E.78.11.A.3 .
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• For example, in Colombia, mineral develpment agreements in coal (Cerrejon, 1976), nickel (Cerro Matoso), uranium and petroleum have benefitted from and required special regulations exempting from general applicable law, including Decision 24 of the Andean Pact .
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• E.g. the new investment and mining laws in Chile ( 1984/85 ), Ghana ( 1986 ), Ethiopia (1983), Peru (1981), Costa Rica (1982), see the report of the Secretary-General, E/C.7/1985/8 .
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• Codes des Investisscments in Francophonic Africa ( e.g. Burkina Faso et. al. ) include as a rule such features .
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• See T. Walde , Investment Conditions in the International Petroleum Industry, paper presented to an OAPEC Conference , Tunis , October 1, 1986 and to an IBA/SNREL meeting, New York, September 17, 1986 .
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• See a study by F. St Olive-Madignier for the Ministcre de l' Industrie, 1983, on comparative mining law .
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• The same approach taken as in the 1982 Federal Mining Law (BBergG) of the FR Germany .
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• A paper by T. Daintilh , submitted to a meeting on mineral contracts in Frankfurt , June 1986 , addresses some of these issues for the first time in a practical and satisfactory manner, though it is very much focused on British and Norwegian North Sea petroleum licenses .
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• For a review T. Walde , Third World Mineral Development Recent Issues and Literature , in Journal of Energy and Natural Resources Law , 3 ( 1984 ) 282 .
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• Latin American petroleum codes, e.g. the 1981 Peruvian petroleum contract regulations, tend to govern contract negotiations in very rigid detail .
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• The Mali mining code, e.g., provides for a "convention miniere", in Morocco, petroleum operations are governed by an "accord petrolier", a "convention peiroliere" in addition to exploration and exploitation concessions .
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• The analysis by J. Tilton / D. Ward on " Mineral and Mining Policy in Papua New Guinea " ( 1986 ) support our view that contract negotiations with their excessive use of available resources are wasteful and may not be appropriate for most but the very large mining projects .
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• The Tanzanian mining law of 1979 provides a distinct regime for small-scale mining , followed-up by a small-scale mining policy—of little success—formulated in 1983. Small-scale mining policies are mostly related to relaxation of mining law rules and commercially attractive conditions for purchasing gold to reduce the incentive for smuggling, eg, in Guyana, Brazil, Philippines el al.
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• A recent study by the Ministry of Economy in Peru has revealed that bureaucratic delays, rules, bribery and ovcrregulation operate as major impediments against national business development .
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• See W. Fairbairn , Mining and Marketing of Diamonds and some other precious stones , in: AGID Guide to Mineral Resources Development , 1983 , 357 . UNDTCD has sponsored a very instructive survey of small-scale gold mining conditions in Ethiopia in 1986 .
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• See Fairbairn , op cit.
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• Egypt is but one conspicuous example of the difficulties of changing government behavior through changing legislation .
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• E.g. Niger (uranium), Jamaica, Surinam, Guyana (bauxite), Bolivia, Malaysia, Thailand (tin), Zambia, Zaire, Peru, Chile (copper), Liberia, Mauritania (iron ore), Morocco, Tunisia, Jordan (phosphates), Botswana (copper/nickel).
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• The same applies to petroleum, see T. Walde , Investment Conditions in the International Petroleum Industry , op cit.
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• See D. Gulley , 1986 , op cit. A session at the 1987 Budapest meeting on state mining enterprises (supra) will examine the issue of restructuring failing mining projects .
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• See a study on comparative mining taxation currently undertaken by the Canadian Federal government .
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• See T. Walde , review of Garnaut/Emerson, Mining Taxation in the ESCAP region, in ICSFD-Review , Foreign Investment law Journal 1 ( 1986 ) 233 .
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• For example, in the Peru/OCCIDENTAL agreement of 1985, the fee (i.e. the inverse of royalty) paid to the company is higher for production from "new" wells. The payment mechanism is hence meant to encourage additional exploration .
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• A study by Ward for the World Bank (1986) addresses these issues . See also P. N. Giraud , Geopolitique des Ressources Naturelles , 1982 . H. Elsenhans, Abhaengiger Kapitalismus oder buerokratische Entwicklungsgesellschaft, 1981 .
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• See the case studies on Ireland, AustraliaPapua New Guinea by C. O'Faircheallaigh , Mining and Development , New York 1984 .
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• A strict analysis would focus on the issue if the discount rate of the government is higher/lower than the discount rate of the investor . However, given the political risk aspect, it can well be argued that the public discount rate should be lower. Increasing the revenues from mineral rent gradually may also respond lo the notably low absorption capacities of developing countries. Too-high and too-sudden revenues can. as evidence Nigeria and Iran, create severe disruptions to a country's fabric .
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• Also, contracts quite often provide for a renegotiation clause to make the fiscal regime compatible with the current US tax law and the company's objective to maximize its tax credits , e.g. Jamaica ( 1976 et. seq.), Mali ( 1987 ). It may be good strategy to combine a general review clause with the tax credit renegotiation issue .
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• A working group of the International Chamber of Commerce is currently working on international standards for cost-reimbursable contracts .
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• As in a proposal by M. Gillis , 1982 , for the Departamento Nacional de Planeacion , Colombia .
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• Sometimes, an overhead element is also inherent in the practice of marking-up base salaries (e.g. by 100%) to take into account such factors as fringe benefits, expatriate allowances, sick leave and other non-wage employment costs .
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• See a study by I. Newport for the World Bank (1985) on management contracts .
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• See P. Legoux , Mining Legislation in African countries, in UNECA, Proceedings of first regional conference on development and utilization of mineral resources , Arusha 1981 ; P. Fischer, Die Internationale Konzession, 1974; T. Daintith, op cit. with further references to his own works on petroleum licenses .
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• See T. Dabinovic , Petroleum Service Contracts in Journal of Energy and Natural Resources Law , Vol. 5 ( 1987 ) 15 – 31 .
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• See T. Walde , Management and Control in Mining Agreements , Mt Kisco Conference Papers , UNCTC 1978 .
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• See T. Walde , Three Latin American Mining Agreements, in AIME , Finance for the Minerals Industry ( Tinsley/Emerson/Eppler Eds. ), 1985 , 342 for an extended analysis of such provisions in a Chilean, a Colombian and a Guyanese agreement .
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• The basic substantial function of the ownership of the mineral title is probably in financing. Here, having a transferrable mining/petroleum title may increase the ability of the operator to obtain financing as and if the mining title can be used as collateral. That implication—in our view almost the only real meaning of the title question—is mostly overlooked .
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• A thorough analysis in our experience will tend to demonstrate that such companies keen on selling services rarely are ready to really assume the risk/reward role of an investor. If pushed towards taking up equity, their strategy will generally be to, firstly, minimize equity, and, secondly, to maximize the debt/equity ratio withoul assuming shareholders guarantees; the result is a minimal equity stake, coupled with control over procurement .
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• We have tried to achieve a performance system close to equity exposure in the context of a management contract by a combination of production, profit, localization and cost-savings incentives. These mechanisms are exceedingly difficult to negotiate, have uncontrollable implications, are hard to implement without misdirecting the contractor's efforts and, in practice, rarely come close to the interests of an equity investor in profits and performance ; see also I. Newport, op cit.
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• See I. Newport , op cit .
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• E.g. in Ghana, 1985, for the rehabilitation of SGMC gold mines ; in Sierra Leone, with AUSTROMINERAL, to rehabilitate the Marampa iron ore mines, in Angola to rehabilitate Ferrangol iron ore mines. Rehabilitation with World Bank support is also a feature for state enterprises, such as GECAMINES in Zaire or SNIM in Mauritania, though in these cases the radical action of a complete management contract is not used .
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• Turnkey-plus contracts were frequently used in Algeria in the 1970ies (cle-en-main, produit-en-main). Looking back, these contracts are probably no longer considered as a successful strategy .
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• In the PS-system, production-sharing equals revenue-sharing or income taxation, the cost oil percentage is very similar, functionally, to the amortization' depreciation shedule in an income tax method .
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• See Asante/Stockmayer, in UN/DSE, Legal and Institutional Arrangements in Minerquals Development , Mining Journal , 1982 , 53 .
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• UNDTCD projects of recent date have been designed in order to assist the government in monitoring contract implementation by making available independent expertise .
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• See C. Blitzer et al., Contract Efficiency and Natural Resource Investment in Developing Countries , in ColJ.World Bus . 19 ( 1984 ) 10 .
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• The case study by M. Radetzki on state mining enterprises demonstrates that lack of adjustment capacity to respond to market changes is a feature of the state enterprises scrutinized .
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• See K. Hossain / R. Chowdhury op cit. with further references. T. Riad, Host Countries Permanent Sovereignty over National Resources and Foreign Investors , in Rev. Egypt.Droit International 39 , 1983 , 35 .
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• The leeway left by national law can be large, as in many smaller developing countries, or very reduced; as in Latin American countries such as Argentina, Colombia, Brazil and Peru; see also Daintith, op cit.
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• See with a comment on the role of the legal issuesthe lawyer in international commercial negotiations betraying familiarity with practice Karl Heinz Boeck-steigel, Hardship, Force majeureSpecial Risks Clauses in International Contracts , in N. Horn (Ed) Adaptation and Renegotiation of Contracts in International Trade and Finance , Deventer 1985 , 159 , 161 .
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• Also, specific company history and its culture (or that of its chief executives) can make a considerable difference. In a US company, lawyers tend to dominate more, while, for example, in French companies they are relegated to a quite subsidiary and minor role of checking language of an agreement more or less negotiated. Heavy involvement of lawyers tends to increase negotiating time and costs heavily, and may often focus attention away from the main substantive and financial issues .
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• For example, in our view, the relationship of the general law to the agreement, the filling of graps consciously left open for later negotiations, review and adaptation clauses, the applicability of some non-national legal rules and their substantive content are probably never spelled out in the detail academic and detached analysis would like to see. Ambiguity and delegation of resolution of such issues in subsequent negotiations is hence, as in legislation, a prime device for achieving consent .
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• In the 1985 termination of BELCO' petroleum agreement by PETROPERU (LatAmCommRep 21 February 1986), termination was declared by Peruvian decree after an alleged abuse of the 1981 tax credit facilities by BELCO and failure to reach as settlement within a deadline given by decree. There is little of "taking of ownership" involved in such actions. Political risk is also a host state, not only a company issue, such as dictates of the home country imposing actions on the investor (embargoes) .
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• On risk analysis for mine finance sec several contributions inR. Tinsley et al. Finance for the Minerals Industry, op cit, (pp 417 – 479 ).
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• See T. Mansbach , in Tinsley, op at.; I. Shihata, Towards a Greater Depolitici-zation of Investment Disputes The Roles of ICSID and MIGA , in ICSID-Review-Foreign Investment Law Journal , 1 , ( 1986 ) 1 ff.
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• An issue that came up in the Revere Brass and Copper v. OPIC arbitration, see with extensive references T. Riad, The Applicable Law Governing Transnational Development Agreements , SJD Thesis , Harvard Law School , 1985 .
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• These are basically not risk-prevention, but risk management methods ex post. Legal harassment, as employed subsequent to Indonesian and Chilean nationalizations in the late 1950 ies and the early 1970 ies is part of such strategies. For considerations on possibilities of legal harassment in the context of loan default see LatAmWkly Report , 25 September 1986 (on Peru's creditors) .
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• R. Buxbaum , Modification and Adaptation of Contracts, in N. Horn (ed), op cit. 31 , 50 analyses "bargaining in the shadow of the law". This concept of indirect effect of an arbitration clause even if not actually used, is fully applicable to our context .
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• Traditional stabilization clauses, having a questionable legal value, have been well analysed and evaluated by S. Chowdhury, in Hossain/Chowdhury, op cit . Modern agreements rarely "freeze" legislation, but oblige a state company to compensate for the financially detrimental affects of subsequent legislation on the foreign partner's financial and contractual expectations .
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• Negotiators in the heat of battle and under the smell of bargaining success tend to overlook that a negotiation success won may imperil the smooth implementation of an agreement, once the government side realizes it (and generally someone will be there to point it out) . A change of minister and government is an opportunity to review, or even look for, such criticism. We hence believe that a fair agreement is also a more stable one .
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• See T. Walde , Revision of Transnational Investment Agreements , LawAm. 10 ( 1978 ) 265 – 298 . Very similar S. Asante, Stability of Contractual Relations, in K. Hossain, (ed) legal Aspects of the New International Economic Order, London 1980, 234 .
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• See the contributions in N. Horn (ed.) , 1985 , op cit. T. Walde , Contract Stability, Adaptation and Conflict Resolution , in UN, Legal and Institutional Arrangements, op cit. , 163 .
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• See the report of the Secretary General on permanent sovereignty over natural resources, 1985, op cit. for further details .
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• See R. Buxbaum , op cit. with further references, in particular the ESSEX v. ALCOA case .
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• A. Eschenlauer , in Intl Bar Assn, International Energy Law , 1984 , 1105 . On the application in international loan agreements T. Walde, Sanctity of Debt and Insolvent Countries, in Defenses against Enforcement and Execution of Sovereign Debt, edited by D. Bradlow (Institute of International Law), 1987 .
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• See N. Horn , Buxbaum et al. in Horn, Ed. 1985 , op cit.
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• See T. Riad , op cit. supra .
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• In the Libyan arbitration cases, compensation was paid through oil liftings at a discount price (TEXACO), valued at 67 M$. In the BP case, 24 M$ was paid in cash. A settlement was also reached in the LIAMCO case .
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• Sec G. Deiaume , ICSID arbitration , Journal of Intl Arbitration 1 , 1984 , 1 .
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• See for the concept Buxbaum op cit.
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• See T. Riad , op cit. ; Secretary General, Permanent Sovereignty over Natural Resources , 1985 , op cit.; Hossain/Chowdhury, op cit.
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• ∗ The views expressed are solely those of the author and not necessarily those of the United Nations.
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