Addressing resource nationalism with Control Risks and Blake, Cassels & Graydon LLP
Bringing up resource nationalism can instil panic among even the most knowledgeable mining executives, and when speakers addressed a packed crowd at Control Risks, London, they certainly had their work cut out. Risk analysts Simiso Velempini and Roddy Barclay from Control Risks’ Africa desk, and managing partner David Glennie and senior associate Jennifer Maxwell of Blake, Cassels & Graydon LLP succinctly broke down the issue, answered some of the toughest questions it raises and drew from their experiences in advising a range of companies.
Kicking off proceedings, Velempini outlined the key drivers of this trend in Sub-Saharan Africa. She highlighted the commodity price supercycle, emergence of Chinese and mid-tier companies as alternatives to traditional players, politicisation of the mining sector, the growing accountability of governments to their citizens, increased government assertiveness vis-à-vis mining companies and advice from international partners in renegotiating mining codes or royalties. Velempini drew on what South African Mines Minister Susan Shabangu refers to as the ‘evil triplets’ – poverty, inequality and unemployment – as a driver present across the continent. Focusing on Southern Africa, she explained how pressure and changes associated with elections can spark investor fears about nationalisation, as has been the case in Zambia. She said the new administration remains committed to a consultative approach to the mining code review and is unlikely to opt for nationalisation given their failed experiment in the 1970s. According to Velempini, the upcoming general election has pushed resource nationalism to the forefront of the government’s agenda and investors can expect more stringent application of the indigenisation bill in the short-to-medium term. Regarding South Africa, she said policy clarity in the mining sector is unlikely before 2013, after the ruling African National Congress (ANC) holds its national elective conference. She explained that the financial costs and constitutional implications rule out nationalisation but the ANC will seek increased state participation in the sector through a range of means that will result in its transformation.
Barclay began looking at how the trend is affecting the operating environment in West Africa. He said the vein of resource nationalism witnessed in the region was typically more moderate than in Southern Africa, both in rhetoric and policy. However, a sweeping wave of legislative reform in the past three years has generated investment and contractual uncertainties, creating new challenges and concerns for foreign investors, he added. Using regional case studies to identify dynamics that affect the how resource nationalism manifests itself, he said in a country like Ghana where the mining sector is well-developed and substantial investor interest remains, the government has a stronger hand in seeking to increase its stake and take. In Ghana’s case, this has likely been influenced by upcoming elections this year, he noted. Elsewhere, in countries like Sierra Leone or Côte d’Ivoire, conflict and political turbulence have historically restricted foreign investment and host governments remain wary of imposing harsh fiscal terms, he said, referring to when Ivorian President Alassane Ouattara rejected a new mining code in April, and warned its stringent terms would scare investors. Barclay then spoke about a more general problem surrounding the uneven implementation of mining legislation at the contractual level, drawing on the example of recent contractual renegotiations in Sierra Leone. He concluded by talking about Guinea, where many dynamics of resource nationalism come to a head —the region’s most prominent proponent of increasing government benefits from the mining sector. Despite the broadly consultative process of reviewing the mining code and beginning contract reviews in Guinea, Barclay said, he felt the process pitted investor interests against the government amid an atmosphere of mutual suspicion. Contractual uncertainties persist after years of mining sector mismanagement and tense government-investor relations, he surmised, but the strategic importance of Guinea’s mineral wealth will ultimately keep investors interested.
Control Risks’ key challenges facing mining clients in Sub-Saharan Africa
- Unpredictability of operating conditions on long-term projects
- Increasing costs of doing business; stringent terms in some jurisdictions
- Uneven implementation of laws and regulations, corruption, political interference
- Impartial valuation and fair compensation
- Governmental capability to meet financial commitments
- Political change disrupting contractual stability
Control Risks’ key considerations to manage the risks associated with resource nationalism
- Monitor, analyse and adapt to the situation
- Work through scenarios and impact analysis
- Seek broad and constructive engagement with governments
- Forge long-term relationships based on mutual respect
- Engage in social investment as a responsible partner Implement training schemes to build local capacity, local job creation
- Seek and retain expert legal advice
Leading on from Velempini and Barclay’s thought-provoking discussion, Glennie and Maxwell began by outlining four resource nationalism scenarios: expropriation, license revocation, tax/royalty changes, and extraterritorial tax claims.
There are three major legal means to fight resource nationalism, Glennie said, referring to international investment treaties, double taxation treaties and contractual investment agreements. He described in detail the importance and the limitations of Bilateral Investment Treaties (BITs), Direct Tax Treaties (DTTs) and investment agreements before handing over to Maxwell who tackled each of the aforementioned using real world examples.
She explained why Blakes believes that mining companies should consider investment protection due to growing incidents of resource nationalism, and considered the challenge of direct expropriation, brought sharply into focus by recent events in Argentina’s oil & gas sector. Maxwell took the crowd through a range of governments which have established BITs, DTTs, investment agreements and other mechanisms, and Glennie provided anecdotes from his time working in Zambia with Equinox, and in the Kyrgyz mining sector. Describing how investment agreements are not possible in every jurisdiction, he emphasised the importance of forging terms that are long-lasting enough to offer protection, but not so much so that they restrict a company or government. In agreement, Maxwell said that contracts must ultimately be balanced, protective and clearly demonstrate how each party benefits from being involved.
Blake, Cassels & Graydon’s advice:
- Take advantage of treaties with strong country support
- Sign clear investment agreements that truly benefit the country and anticipate “windfall” profits and losses
- Engage local investors
- Consider the government as an equity partner
- Consider international investors (including multinationals like the IFC)
- Political risk insurance
- Engage with local communities through sustainable HR and CSR policies
- Maintain continuous communications with host and home governments
For more information about the participating companies, speakers or subject of resource nationalism, please contact WIM (UK). WIM (UK) thanks Control Risks and Blake, Cassels & Graydon for staging this highly interesting and enjoyable seminar.