1. Do Stabilisation Agreements Work? Theory and Practice in Managing
Sovereign Risk.1
Structure
Need for stabilised investment framework
Necessary but not sufficient
Some practical observations on form
Bilateral investment treaties
Dealing with practical challenges
Governments versus commercial counterparties; the State as
participant
Resources curse; Fair division of resource rent; Pace of Development
Co-participants; Financing
Telling your story
_____________________________________________________________
1. Introduction
This paper acknowledges the importance of correct legal form in drafting
stability agreements with sovereign states, but its emphasis is on practical
issues that arise in relation to stability agreements, and steps that can be
taken to address them. These issues are illustrated by examples most
particularly from Africa, but also from Asia, and relate in the main to minerals
developments rather than oil and gas – although many of the principles apply
to both.
The paper is in two parts. The first seeks to provide context and to raise, in a
non-exhaustive way, some practical considerations in drafting stability
agreements. The second, and more substantial part, relates to practical
contextual issues that affect their successful implementation.
1
Philip Edmands (B.Juris, LLB, MBA UWA), General Counsel, Rio Tinto Iron Ore. All
opinions expressed in this paper are the author’s, and should not be attributed to Rio Tinto
Group.
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2. 2. Need for Stabilised Investment Framework:
Necessary but not sufficient
The concept of individual resource developments being supported by an
agreement with the State - which stabilises the investment framework and has
the force of law - has not only been applied to emerging jurisdictions with
immature investment profiles. Historically the concept has also been applied
in more developed economies.
That said, in more developed economies the relevant stability agreement has
generally been more restricted in scope - providing for such matters as a “one
stop shop” in relation to approvals (general approvals, environmental
approvals and the framework for submission of development proposals),
certain limited fiscal concessions (concessionary tenure lease fees,
restrictions on the applicability of local rates, fixed royalties), grant of tenure
for the development and for supporting infrastructure, services (water and
housing) and politically significant issues (use of local labour and services,
secondary processing).
In developed economies (for example Canada, the United States and
Australia) the total fiscal package has generally not been stabilised – rather
the investor has relied on the relevant State not unduly changing the rules or
unduly altering the division of resource rent - given the rule of law within which
the State operates, and the degree to which it must retain international
investor confidence.2
A couple of observations can be made at the outset.
First, resource nationalism is not restricted to emerging economies. There
has been much recent debate about excess/super profits taxes in developed
and developing economies.3
In Australia, the Minerals Resource Rents Tax4
(MRRT) alters the division of
resource rent (and in its originally proposed form did so to a dramatically
2
See for example Wälde, T.W. “Renegotiating acquired rights in the oil and gas industries:
Industry and political cycles meet the rule of law” Journal of World Energy Law &
Business, 2008, Vol.1, No. 1, 55-97 at p.58 and generally.
3
See for an example of the issue being discussed (in strong terms) in the context of
developing and developed economies Crowson P. “The perennial question of taxes and
Government Stake” a paper delivered in absentia at Minerals Taxation and Sustainable
Development, London, 27-28 June 2012 (organised by the Centre for Energy, Petroleum
and Mineral Law & Policy of the University of Dundee).
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3. greater extent than it does in its enacted form).5
It applies to iron ore and coal
mining. Iron ore mining in particular has historically been the subject of “State
Agreements”, reflecting the scale of the investment required, and the long
payback period during which settled and stable “rules of the game” should
apply. This acceptance of the need for predictable settled “rules of the game”
did not prevent the application of the new tax (although the Australian
government submitted that the investment payback period had passed). (It
should be acknowledged that the relevant “State Agreements” do not in terms
stabilise the fiscal regime. Furthermore the MRRT is in any event a Federal
tax so not within the jurisdiction of Western Australia to proscribe. This is
notwithstanding an unsuccessful constitutional challenge6
in which the State of
Western Australia intervened arguing that the MRRT invalidly curtailed the
State’s powers in relation to control and development of State owned natural
resources.)
Much has been made in Australia of the role of the large mining companies in
the watering down of the tax7
(utilising arguments about the need, in the case
of massive projects, to invest on the basis of settled rules). Putting aside the
minutiae of that debate, two things are clear. First, even in developed
economies the rules change, and, secondly, investors need to constantly
engage with governments to support their investment.
Investors, it is submitted, should expect no less in emerging economies.
Although this seems on its face to be an obvious point, often investors do
seem to expect something different. Arguably they assume greater
negotiating power in relation to emerging states than they would seek to
exercise in developed economies. Some investors seem to have less respect
for emerging economy governments, including the sovereignty of those
governments – or put more simply the relationship lacks mutuality.8
4
Minerals Resource Rent Tax Act 2012 (Cth), and related legislation – Minerals Resource
Rent Tax (Imposition - General) Act 2012 (Cth), Minerals Resource Rent Tax (Imposition -
Customs) Act 2012 (Cth), and Minerals Resource Rent Tax (Imposition - Excise) Act 2012
(Cth).
5
The previously proposed Resource Super Profit Tax was to apply to a wider range of
extractive industries at a higher rate and with lesser deductions.
6
Fortescue Metals Group Limited v The Commonwealth [2013] HCA 34.
7
See for example Ross Gittins “Battle over tax leaves Labor with bloody nose” The
Sydney Morning Herald July 3, 2010 (http://www.smh.com.au ).
8
This point is made by Wälde, op cit, in a slightly different context when he points out that
contracts made at a low point in the resources cycle or with inexperienced governments,
but which one way or another reflect unequal bargaining positions, come under
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4. It is submitted that a concluded stability agreement is a first and vital step but
is only part of broader and constant engagement. Whilst the ongoing
expectation might be that there will be no subsequent dramatic changes that
fundamentally alter the basis of the investment it is difficult for any State to
promise that everything will stay precisely the same for the life of a long
project. Circumstances change and States work within a fluid political
environment, to which they must respond.9
Accordingly, it is submitted that it is not useful to view a stability agreement as
the end point that secures a project and allows the developer to turn its
complete attention to technical implementation. Instead it is better to view it
as as a set of ground rules for governing a relationship between the
developer and the State – a relationship that, on signing of the stability
agreement, may still be quite new, will likely be very dynamic, and will need
ongoing and constant management and effort.
The relationship will also exist within a wider stakeholder context – including,
for the developer, its shareholders and those people and entities that create
its brand and reputation and, for the State, the populace and relevant centres
of political and geopolitical power. A philosophical approach that turns
attention to technical implementation once the stability agreement is
concluded ignores the point that successful project development relies not
only on technical skill and management of the commercial aspects, but on skill
in dealing with a political entity, and with a range of other stakeholders in a
politicised environment. Furthermore, each polity is different, and the fact that
a developer has well developed skills in dealing with a polity in a developed
economy does not mean that it will have the necessary skills to deal with the
polity in an emerging economy – nor if it is skilled in dealing with the polity in
one emerging economy does this mean it will have the skills to deal with the
polity in another. And yet many developers venture into new countries
possessing all necessary technical skills and a clear understanding of the
renegotiation pressure when circumstances change – for example because the resources
cycle turns.
9
As pointed out by Professor Ross Garnaut in a paper entitled “The new Australian
Resource Rent Tax” delivered on 20 May 2010 at the University of Melbourne
(http://www.rossgarnaut.com.au ) (at p 12), whilst investors may seek stability in all areas
of policy what if established arrangements are unfavourable for economic efficiency or
even the prospects for future stability? Stability could not completely block improvements
to national productivity or inhibit activities that were damaging to the community or the
environment, and if there was absolute stability unsatisfactory arrangements of any kind,
once established, would continue forever.
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5. economics, but having done very little work to understand the political, cultural
and social environment of the new country they propose to invest in.
As an aside it is ironically the case that whilst polities are very different there
are often parallels in how governments seek what they consider to be
appropriate returns in relation to State resources - indeed governments in
emerging economies are not necessarily all that different in this respect from
governments in developed economies. So, for instance in relation to the
Simandou development in Guinea, the payment to the State of seven hundred
million US dollars in the context of altered arrangements announced at that
time10
amounted to a variation of the ground rules – and many saw this as an
example of the high risk of investing in emerging jurisdictions.11
However, in
Western Australia the State similarly negotiated increased royalties
notwithstanding provisions in State agreements fixing those.12
Furthermore,
the State negotiated a payment of three hundred and fifty million Australian
dollars in exchange for removing restrictions under State agreements that
prevented pooled developments (for example developments that allowed
infrastructure under one State agreement to be developed for the benefit of
production under another State agreement).13
The proposition that the State/investor relationship is centrally important might
be countered by observing that a concluded stability agreement will have
rights of enforcement – and so will have teeth. A project in an emerging
jurisdiction without proper stabilisation and enforcement rights will generally
not be financeable. However, ultimate enforcement of a stability agreement –
generally through arbitration – needs to be seen in context. Practically, it is a
last resort when all else fails and the damage to the relationship with the State
is already done. For practical reasons it is a blunt instrument. Oftentimes the
threat of arbitration is more valuable than actually arbitrating because a State
will generally not want the damage to investor confidence of a successful
10
Rio Tinto media release “Rio Tinto and Government of Guinea sign new agreement for
Simandou iron ore project”, 22 April 2011 (http://www.riotinto.com ).
11
For instance David Winning writing for The Wall Street Journal on 25 April 2011 in an
article entitled “Rio Tinto agrees to give Guinea Stake in Project” said “The settlement
shows how Western companies like Rio Tinto are increasingly being pressured to
renegotiate contracts with governments in less developed regions like Africa, or risk being
shut out of lucrative resources developments” ( http://online.wsj.com ).
12
Ministerial Media Statement from Hon Colin Barnett “WA benefits from changes to State
Agreements”, 10 November 2011 (http://www.mediastatements.wa.gov.au ).
13
Ministerial Media Statement from Hon Colin Barnett “Changes to State agreements
finalised”, 3 December 2010 (http://www.mediastatements.wa.gov.au ).
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6. arbitral action against it. Similarly, an investor will not want to resort to
arbitration unless forced to. So the threat of arbitration provides some useful
negotiation tension when stability agreements come up for renegotiation. But
arbitration itself takes a long time, can fundamentally affect the relationship,
and provides a remedy often difficult to realise against impecunious States
(not just because they do not have assets but because seizing assets which in
effect belong to a very poor population is difficult in a reputational sense).
It follows that maintaining strong engagement with the State and bolstering
sources of soft power is a crucial adjunct to any stability agreement – as is
good local political and geopolitical advice so that pressure points can be
anticipated and prepared for. These more intangible and practical aspects
form much of the subject matter of this paper.
It is also worth noting that a well-drawn stability agreement is often protective
not just because of, or even because of, rights it provides against the State,
but because pressure for abrogation of rights often comes from competitors.
Competitors need in those circumstances to be cognisant of the exposure
they have if they wrongfully procure breach of the investor’s rights under the
investor’s agreement with the State – in particular liability of any such
competitor to potentially account for benefits it might receive.14
Furthermore competitors that pose a threat in these circumstances are often
smaller entrepreneurial companies who will need to join with larger players to
develop the project or realise benefit from it. If they have acquired a title that
is tainted because its acquisition involved procuring breach of an existing
incumbent’s rights this makes it much harder to interest any blue chip co-
investors or sovereign investors, who will be reluctant to invest in “tainted”
property. So, in this way, the stability agreement provides a further layer of
protection.
This is not to say that, if a State has wrongfully terminated an investor’s title, it
is not open to a third party to receive title from the State over the same area.
However, this will need to be a new grant unaffected by the wrongful
termination, rather than one that derives from it. In exercise of its sovereign
power a State can always terminate title, albeit that it might be liable to a
wronged investor in damages. It then has sovereign power to grant a new
14
Causes of action could include misuse/misappropriation of confidential information,
misappropriation of trade secrets/ideas/investment opportunities, unfair competition,
tortious interference with contract and prospective economic advantage, fraud, civil
conspiracy, unjust enrichment, conversion and the like. An issue for the complainant will
be finding an appropriate forum – since the jurisdiction itself may be problematic if its
government is complicit – and then persuading that forum to take jurisdiction.
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7. title. However, if for instance an applicant bribes a State official to cause that
official to terminate a third party’s title and to grant substitute title to that
applicant it will be exposed given its wrongful interference with the rights of the
third party that has lost title. Furthermore, it may be hard for an incoming new
participant acquiring an interest in the title so granted to avoid exposure if it
turns a blind eye to the manner of its acquisition, or ignores red flags. An
incoming party is only fully secure if it is acquiring an entirely new title
divorced from issues of prior breach such that the wronged investor is left with
its damages suit against the State but no recourse against the new investor –
and the due diligence of any incoming investor needs to confirm no taint to
title from past dealings.
Some Practical Observations on Form
As mentioned above, this paper does not seek to deal at any length with the
technical issues of stability agreements. However, it is useful to make a few
observations about some practical issues that are sometimes not fully
addressed in the drafting of those agreements, or more particularly are not
fully addressed in their implementation.
First, in drafting the fiscal package it is obviously important to specify that
there will be no imposts, taxes, levies, duties or fees other than as permitted
by the agreement, rather than seeking to limit specifically named charges of
that type (otherwise if a new type of charge is then imposed it may not in
terms be proscribed). Separately, though, it is important to then trace through
how each fiscal concession is to be lawfully implemented. There may well be
a range of further requirements for exercise of discretion to grant remission
under applicable legislation or subsidiary legislation, gazettals of concessions
and the like. If so, unless these are all in place there may be a contractual
promise by the State in the stability agreement to grant the concessions, but
they may at law not yet have in fact been granted.
What this illustrates is that the whole constitutional framework needs to be
understood to properly draft and implement any stability agreement in a way
that ensures that it is not simply a private contract representing a promise by
the State to do certain things, with the remedy for breach being damages, but
that it represents the law (or at least in certain jurisdictions where stabilisation
is by contract, such as Mongolia, that the stabilised provisions are legally
enforceable according to their terms, not abrogated by any law, and will be
recognised and applied generally in the jurisdiction and by Government
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8. agencies).15
This will involve determining what parliamentary
ratification/approval process may be required but also what actions under
existing statutes or subsidiary legislation are required - as well as the
constitutional arrangements that will render the arrangements legally effective
at a regional or provincial government or authority level.
Beyond then ensuring that those further steps as required are attended to,
thought needs to be given to how practically the agreement terms will be
made known to, and implemented by, local authorities and officials – the
customs officer dealing with a specific import cargo, the local authority limited
to a specified rates regime and so forth. That ideally comprises a planned
rollout with the co-operation of the State instituting appropriate processes for
dealing with the project. Sometimes this can be facilitated by setting up a joint
technical committee with the State that operates as a clearing house for
dealing with technical issues relating to project implementation (although
where there is requirement for exercise of administrative discretions the
committee would help in laying the groundwork for the necessary requests to
be made, but would not involve itself in any decision reserved by law for a
particular decision maker or authority for fear of rending that decision
invalid).16
As a final introductory comment, it is useful to consider whether mediation
should be included as a step preparatory to any arbitration, given the
difficulties with arbitration already mentioned, and the fact that resolution
without resorting to arbitration is preferable if possible. Mediation can provide
a structured process for engagement with the State - the threat of arbitration
will provide a backdrop but no overtly hostile (and public) action need be taken
15
Whilst in Mongolia a stability agreement is not ratified by Parliament, entering into a
stability agreement is expressly contemplated by the Minerals Law of Mongolia for mineral
developments of a requisite size, and a procedure is provided for the Executive to
conclude such agreements (articles 29, 30 and 65). Under article 30.4 once such an
agreement is executed the Central Bank of Mongolia and other relevant authorities are
notified. At the time of writing a new investment law had just been passed by the
Mongolian Parliament introducing a new mechanism for obtaining stability for certain key
taxes, depending upon the level of investment. It also provides for entering into a more
general ‘stability agreement’ covering non-tax areas for very large investments. However,
it is not yet clear whether the new investment law will supersede, augment or override the
Minerals Law provisions (for new investments).
16
On the basis that the decision maker did not exercise independent judgement as
required by the legislation, or took into account irrelevant considerations, or failed to follow
due process in some way by affording one interested party unfair opportunity to make
submissions without allowing others do to likewise.
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9. to pursue the mediation. Although theoretically it should always be open to
parties to engage with the State this is sometimes practically very difficult
because major threats to projects often occur in circumstances where the
surrounding politics are fraught, and the government is sometimes weak or
divided. A structured process for engagement with some outside mediator
and which the State must engage with to avoid clear breach can be helpful as
a vehicle for bringing the parties to the table.
Even if there is no such structured process available, or in any event if a less
structured approach is favoured, it can be useful to have independent
moderators engaged – for instance one at the instance of the State and one at
the instance of the investor – to facilitate engagement and seek to resolve
disputes or simply unlock logjams. There are many individuals who are happy
to act as moderators, but obviously anyone chosen needs to have a track
record and credibility – he or she cannot be an apologist for one or other point
of view, and needs in particular to be trusted by the State as a fair and
credible analyst of the issues. The setting up of a working group between the
State and the investor with the involvement of moderators (similar to the
technical committee referred to above but in this case dealing with more
substantive investment issues and with very senior membership) can be an
effective clearing house for each to articulate their point of view to the other
and to understand the issues the other faces. Albeit again at one level trite,
the way in which such a group is proposed and set up, and the choice of
moderators, is fundamental to success (or determinative of failure), and
investors should seek expert advice on these matters.
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10. Bilateral Investment Treaties
Finally, whilst it is not the purpose of this paper to deal with bilateral
investment treaties (BIT’s) in any great depth, it is worth for completeness
making some reference to them before turning to practical challenges
investors may face.
A modern BIT between State A and State B grants private investors from State
A directly enforceable rights in the form of investor protections against State B,
generally in an international arbitration forum such as the International Centre
for Settlement of Investment Disputes (ICSID) or, alternatively, another
institutional or ad-hoc forum (such as the International Chamber of Commerce
(ICC) or under the United Nations Commission on Trade Law (UNCITRAL)
rules), depending on the specific arbitration provisions of the BIT. Typical
substantive investor protections include (non-exhaustively) fair and equitable
treatment, full protection and security, most favoured nation treatment, national
treatment and protection against expropriation.
These substantive rights are granted as a matter of international law, and are
in addition to any rights set out in any stability agreement with the host State.
The State’s behaviour is judged against the standard set by the treaty
independently of any contractual provisions that may exist in relation to a
specific investment. Notwithstanding the comments made above in relation to
taking enforcement action against a host State BIT protection will act as a
restraint on State behaviour and provide investors with additional leverage in
negotiating resolution of disputes. That being the case it is sensible as an
element of overall political risk mitigation for investors, wherever possible, to
structure their investments so that they fall under the cover of a BIT (that is so
that, subject to tax considerations, investments are made through a country
which has a BIT with the host State).
It is noteworthy that BIT protections should not be seen as substitutes for
protections in a stability agreement, but in addition to them. Contractual and
treaty protections are not synonymous or interchangeable – they operate in
different ways and complement one another. For instance a stability
agreement will usually only have one arbitral forum whereas under a BIT there
is typically a choice, tests for breach will often be broader under a BIT,
sometimes separate claims can be brought under the BIT and stability
agreement, some State behaviour may be difficult to categorise as a breach of
contract but may be clearly a breach of the treaty, treaty claims are governed
by international law and subject to extensive investment treaty jurisprudence
whereas stability agreements are generally governed by local law together with
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11. (hopefully) international law. The respective protections are unlikely to be
identical so having both provides greater optionality, and the fair and equitable
treatment provision in a modern BIT provides valuable fall back protection
where the conditions for a claim under another category are not met.
3. Dealing with Practical Challenges
Governments versus commercial counterparties; the State as participant
There is a danger that comparisons between investors and countries will be
made, at least to some degree, by reference to scale. Multi-nationals in
particular often have a market capitalisation and annual turnover many times
larger than the gross national product of poorer emerging countries in which
they are investing.
Comparisons by reference to scale, however, on analysis would generally be
accepted as comparisons of apples and oranges. Countries have, simply by
virtue of being sovereigns, a whole range of influences and powers that
companies can never have – such as a seat at the table of regional and
international organisations17
, relationships established through various bilateral
and multilateral agreements and contacts (such as double taxation avoidance
agreements and investment promotion and protection agreements) and a
legitimacy and strategic role depending on their location that can far outweigh
their economic significance (for example Mauritius18
, or countries in West
Africa variously seen as at risk of al Qaeda or other radical influence travelling
south from countries like Mali19
).
17
Organisations such as the Economic Community of West African States ( ECOWAS) ,
the United Nations and its agencies, the African Union (AU), the Economic Community of
Central African States (CEMAC), the Intergovernmental Authority on Development
(IGAD), the Southern African Development Community (SADC), the Indian Ocean Rim
Association for Regional Co-operation (IOR-ARC) and the Association of Southeast Asian
Nations (ASEAN).
18
Mauritius has regularly topped the World Bank’s Ease of doing business in Africa Survey
and positions itself as a gateway to Africa partly on the basis of its strong relations with
most African countries as evident in its Africa Strategy launched in London on 15 June
2012.
19
David Lewis frequently writes on this topic for Reuters (http://blogs.reuters.com/david-
lewis ) including on associated linkages with for example the Nigerian Islamist group Boko
Haram.
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12. What is more interesting is to consider whether companies negotiating with
States in fact reflect in their negotiating approach the difference they at face
value likely accept exists between countries and commercial counterparties.
A few areas illustrate the point.
First, it goes without saying that States must answer to a complex web of
stakeholders, and that local politics and regional strategic issues matter. So in
Guinea the concept of an operational railway through central Guinea has been
a popular aspiration since the pre-existing rail network fell into disrepair after
independence in the 1950’s. This drives popular views about whether rail
infrastructure for iron ore projects in the east of the country should be routed
through Guinea, or should take the shorter less mountainous and cheaper
route through Liberia. Added to this is the fact that the State wishes to see the
hinterland of Guinea opened up by infrastructure – not only in respect of
minerals but for the significant population engaged in agriculture in what is a
potentially very productive agricultural area. Finally, Liberia has been in recent
times very unstable, and involved in a bitter civil war. Clearly there is a
strategic issue for Guinea if its main export artery travels through Liberia -
unless it can be sure those troubles will not reoccur.
In an analogous example Mongolia has until recently been firmly under
Soviet/Russian influence, and there has been significant fear within Mongolia
about Chinese domination. In Mongolia wide rail gauge has been used
consistent with Russian practice – China uses narrow gauge. However, coal
and other minerals now being produced in southern Mongolia are destined for
the Chinese market. There is considerable local sensitivity about whether the
railway to be developed to transport them should be wide gauge – with costly
transhipment onto narrow gauge at the Chinese border – or narrow gauge.
All of these factors are not picked up by a negotiating position that focusses on
economics. In Guinea the most economic solution (in a narrow sense) may
well be a railway through Liberia. In Mongolia the most economic solution is a
narrow gauge railway. However, any investor needs to understand local
sensitivities to determine whether the most economic solution is practical, and
whether it will push for that solution or seek to find a way of meeting local
aspirations in a way that still works for the project.
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13. What these simple examples illustrate is that, in negotiating stability
agreement terms, an investor should not go in focussing simply on the
technical and financial aspects. Work on deeply understanding the local
environment is fundamentally important. Oftentimes investors seem to go in
with little upfront understanding of the local environment and then learn as
they go. Doing this expends political capital, takes time and makes
establishment of a workable relationship of trust between investor and the
State more difficult. Ultimately, as mentioned before, the quality of that
relationship will be as much the security for the project as the stability
agreement.
An allied issue is making sure that the negotiating team for the investor
includes someone who is local and understands local sensitivities and culture
– to prevent incidents but also to assist with reading the true situation.
Offended States – or more particularly offended State officials – often do not
articulate that offense very baldly. Investors are sometimes surprised to find
that they are not as universally loved or admired as they think they are (albeit
well informed competitors may be well aware of this). Investors need good
ongoing intelligence (as referred to later in this paper), and having a well-
connected local member of their negotiating team is part of ensuring this.
As a related point, language is obviously in part an expression of culture.
Quite apart from it degrading the ability to communicate ideas, negotiating
through interpreter means much cultural meaning is lost or missed. It is
submitted that it is a mistake to ignore appropriate language skills as centrally
important both to concluding arrangements with the State, and to ongoing
engagement with the State. In particular, for Australian companies
communicating with Francophone African governments it is worth bearing in
mind that French will generally be the second or third language of the State
representatives (and English their third or fourth language, if they can speak
English at all). Other than having a local representative on the negotiating and
engagement team it may be difficult to communicate in State representatives’
first language (and commerce will generally not be conducted in that language
anyway), but serious consideration needs to be given to having negotiators at
least fluent in their second language (French).
Another difficult issue is confidential information. Investors will often jealously
guard their information, and are reluctant to share detailed project confidential
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14. information with the State – whether in its capacity as the State or as a
participant. In some senses the approach seems akin to where the investor is
majority participant in a joint venture with another commercial participant.
However, whilst the State typically is also a participant, its position is very
different from other commercial participants. One of the ongoing challenges
for the investor is articulating the commercial challenges of the project to the
State as context for seeking a representative rate of return. It is not possible
to sensibly do this if the financial model is not shared (albeit each party will
input their own assumptions about certain matters such as price).
Furthermore the State needs detailed information to properly exercise its
taxing and other functions.
What often seems to happen is that the investor is reluctant to share other
than high level information initially, and then over time, and to an extent under
duress, shares increasingly more information. The difficulty with this is that a
perception can develop on the State side that the investor is hiding something,
or cannot be trusted because it is unwilling to be transparent – and yet it may
be that, ultimately, there has to be sharing of the disputed information anyway.
Arguments against sharing of information are that it will be leaked, it will fall
into the hands of competitors for the project, or that it is proprietary. Certainly
there is a security risk in relation to the information. However, it is
fundamental to a frank discussion between the State and the investor about
appropriate division of resource rent and a reasonable return for the investor
that there be transparency around who is getting what – what ultimate share of
the net present value of the project is going to the State and what share is
going to the investor.
There will of course be difficulties with this. One may be lack of capacity on
the State side to adequately analyse and engage on this information, another
might be the appropriate risk premium to use when calculating the appropriate
rate of return – the State may not believe or accept that it should attract such a
high risk premium. Where there is lack of capacity, involvement of technical
experts – for instance experts who can attest to the risk premium debt markets
in fact attach to the jurisdiction or who can take relevant government
representatives through technical aspects of the project – can facilitate
discussions, and indeed the State will likely welcome opportunity for capacity
building so that State expertise can grow with the project. However, none of
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15. this will be possible without some reasonable degree of transparency. That
will always be a risk, but it is submitted that it is part of the risk the investor
takes in investing in the jurisdiction. It is preferable if that risk is going to be
taken to start committed to an appropriate level of transparency, rather than
have that transparency dragged out of the investor with attendant loss of
political capital.
In some cases sharing of information can carry safety or security risks. So, for
instance, expatriate contracts are sometimes called for by the State. If those
are provided in their totality they will obviously contain not only income levels
but also personal information such as home addresses. In some jurisdictions
if government held information leaks these contracts could fall into the wrong
hands (indeed appear on the internet) and put those employees at risk of theft,
and potentially associated violence. It is submitted that the expectation going
forward should be that the financial basis and terms of employment of
expatriates is something that investors need to be prepared to be transparent
about with the State. Instead of resisting that disclosure attention should focus
on how security risks can be ameliorated – sharing aggregate information or
sharing it in a way in which individual details are not apparent even if the
information is leaked (and which does not breach the privacy entitlements
expatriates may have at law in the investor’s or their home jurisdiction or the
project jurisdiction).
There are also potential public relations issues in disclosure of expatriate
terms. As has been exemplified for instance in the case of a project in
Malawi20
disclosure of expatriate terms can create an outcry because
payments to expatriates are often many multiples of payments to local
employees. Sharing of information with the State in a way that mollifies this
risk is preferable, but there is always the danger of this type of disclosure, so a
clear policy regarding who constitutes an expatriate and why, and what factors
justify the disparity in payments, needs to be developed. Furthermore, the
justification will no doubt be that there is no relevant expertise in the local
market, it cannot be attracted other than by offering these expatriate terms,
and there are programmes in place that will indigenise employment by passing
on skills. Application of the policy needs to then be scrupulously objective.
20
See for example “Paladin fires 110 Malawians, as huge salary disparities haunt
Kayelekera Uranium Mine”, Malawi Voice, 1 February, 2013
(http://www.malawivoice.com) in which there were allegations that expatriates were being
paid 20 times more than their local counterparts on the same grade and qualification.
Page 15

16. For instance returning diaspora who might fall into these categories would
receive like terms even though they might not consider themselves, or be
considered, expatriates in their own country (and albeit this may raise
separate sensitivities in-country).
An overhang in negotiations with emerging jurisdiction governments is that
competitors of the investor may not just be other private investors, but other
sovereigns who represent market for the product. Sovereign investors,
depending on their size, obviously have a host of advantages over a private
investor such as access to better intelligence, the ability to engage at a
geopolitical level, deep pockets, their broader aid programmes and so forth.
They often also have greater appetite for risk (because they have separate
geopolitical power that moderates the risk), and may be prepared to accept a
much lower risk premium. They may also be prepared to accept a lower
return for other reasons such as having strategic supply reasons for investing
rather than pure commercial return reasons.
However, they also carry risks for the target State, including risks of foreign
hegemony. Private investors offer the attraction of technical skill, their non-
alignment, and the investor credibility they bring. There is also some
alignment of interest in that, typically, both the private investor and the State
are in aggregate producers, not buyers. Although there will be an issue as to
the division of rent between them it is in their interests to maximise revenue for
their product whereas the sovereign investor that seeks supply is interested in
securing it at the cheapest price possible. This point is made simply to
emphasise that there are commonalities of interest between the private
investor and target State that help form a basis for engagement. Private
investors need to look to their separate strengths rather than trying to
overcome the strengths of competitor sovereign investors – and to potentially
look to alliances with sovereign investors who are attracted to operators with
the technical skills to develop and manage projects.21
21
For example China, which may have the financial capacity and demand for product, but
have less development or operational experience – at least for mega projects – or the
Middle East, which may be in a like position. The Gulf for instance has demand because
of policies to develop domestic processing (eg steel and aluminium) industries
notwithstanding being short raw material (eg iron ore or bauxite). It is also strategically
interested in promoting spin off agricultural development along infrastructure routes to
assist with its domestic security of food supply policies.
Page 16

17. Often it is mandatory that the State also be participant in the project. This can
create a range of issues, as can partnering with the State in more general
terms – not least in matters of security. Particular issues arise where the
security or military situation is fraught. If the security position is difficult mine
workers might be reluctant to turn up to work unless there is adequate
security. Where there is a lack of security a policy decision often needs to be
taken regarding whether guns will be allowed on site – even in the hands of
security personnel, and how the investor should work with the State in
maintaining security. There are recent examples of matters getting out of
hand when guns are involved.22
It is submitted that guns as a matter of policy
should only be permitted on site in exceptional cases23
and then only with
stringent safeguards and training consistent with the Voluntary Principles on
Security and Human Rights.24
An alternative to guns on site is some arrangement with the State whereby it
will provide protection through the army or police. In concept this is preferable
to private armed security, since it is generally appropriate that the State
maintains law and order. The difficulty arises where the army or police cannot
be relied on to avoid colourable incidents which the investor may then come to
be (rightly or wrongly) associated with. Related to this point is the
circumstance where investor assets (for example trucks) are requisitioned by
the army, or the army otherwise requires assistance from the investor.
Two comments can be made here. First, as a general principle it is submitted
that assistance should not be rendered to a military agency save under
compulsion, and, secondly, it is important if the local security situation may
22
For example where the police opened fire killing of more than 30 people at Lonmin’s
Marikana Mine is South Africa – see for example “South Africa’s Lonmin Marikana Mine
clashes killed 34” BBC News Africa, 17 August 2012 (http://www.bbc.co.uk ).
23
In some cases these may exist for instance to secure passage of diamonds or cash,
where statutory obligations are imposed to secure eg explosives (as in Mongolia), or
where the threat is not from people but for instance wild animals such as bears.
24
These were established in 2000 through a multi-stakeholder initiative involving
governments, companies and non-governmental organisations that promotes
implementation of a set of principles that guide oil, gas and mining companies on
providing security for their operations in a way that respects human rights.
Page 17

18. give rise to these types of incidents to have well developed internal emergency
response processes and a well-developed public relations position if there is
compulsion to render assistance.
There have been a number of recent examples of these types of issues. One
is the issue that developed at Bougainville in Papua New Guinea where action
was taken against the investor in the US District Court under the Alien Tort
Statute alleging war crimes and genocide25
in concert with the government.
This was ultimately unsuccessful because of a US Supreme Court decision
that effectively meant there was no jurisdiction.26
However, the case was
widely reported27
and illustrates the consequences of such an action even
where (as here) there was no evidence on record and there may well be no
wrongdoing whatsoever.
Another example, which illustrates some of the public relations damage that
can be done in these types of security situations, is the position Anvil Mining
Limited found itself in at its operations in the Democratic Republic of the
Congo. As reported28
Anvil trucks branded as such and seats on Anvil planes
were used by the army in a military exercise to put down a rebellion in the
remote fishing town of Kilwa in which between 70 and 100 civilians were
massacred, many of them women and children. In the ensuing media report
and interview with the company’s chief executive29
questions were put about
assistance rendered to the military and about one of the directors of the locally
incorporated company that ran the mine (whom the media report pointed out
had been mentioned in a UN report as implicated in the looting of
25
Sarei v Rio Tinto PLC dismissal of which was confirmed by the 9th
US Circuit Court of
Appeals on 28 June 2013.
26
Kiobel v Royal Dutch Petroleum Co., No. 10-1491, slip op. at 5 (U.S. Sup. Ct. Apr. 17,
2013).
27
The reporting varied in approach but linking companies to these types of events,
whatever the actual facts, of itself has serious potential reputational ramifications – see for
example the report by Brian Thomson for the SBS Dateline programme “Blood and
Treasure” aired on 26 June 2011 ( http://www.sbs.com.au/dateline ).
28
For example “Anvil Mining and the Kilwa Massacre, D.R. Congo: Canadian Company
Implicated?” MiningWatch Canada (http://www.miningwatch.ca ).
29
Australian Broadcasting Corporation (Sally Neighbour) “Four Corners” broadcast June 6
2005 (http://www.abc.net.au/4corners )
Page 18

19. US$5,000,000,000 from the country under the former Mobutu regime). The
chief executive was not clear on whether the trucks and flights were
requisitioned or simply provided upon request – a key point. Certainly if
assistance is to be provided to the military this should only be if there is
compulsion, and if that occurs this needs to be capable of being shown.
Further, the chief executive’s answers to questions about the director
appointed at the insistence of the State did not come across clearly. They
seemed directed at initially denying any link between that director and Anvil
and defending that director when arguably the better course was simply to
point out that the State was entitled to a statutory interest in the relevant
holding company and to appoint the director. It being the case that the
company had no discretion in the matter questions regarding their nominee
should arguably have directed either to that nominee or the State.30
In this
particular case the position was further clouded by the fact that there were
other commercial links between the company and the nominee director.
A particular issue that can arise in certain jurisdictions is international action
against the relevant State that can proscribe the activities of investors. In
some cases there are wide ranging bars to investment31
but in other cases
various forms of more limited sanction. An example of the latter is the
sanctions that were imposed by the European Union (EU) on Guinea following
a massacre and atrocities by government troops in a sports stadium in
Conakry in 2009.32
The sanctions prevent explosives and related equipment
being sourced from an EU member state, and contain wide ranging
prohibitions on any EU national being involved in widely defined “Prohibited
Activities” in relation to the sourcing of those explosives or related equipment.
Issues have arisen regarding the sourcing of explosives and related
equipment necessary for mining and infrastructure projects. On application
the EU has reviewed the Council Decision imposing these sanctions and
30
Under the regime (which is currently subject to review) established by the Congolese
Mining Code (Law No. 007/2002) and Mining Regulations (Decree No 038/2003), at
exploitation stage the State is entitled to at least a 5% interest in the project. A further
condition often imposed, although not presently legislatively required, is for the interest to
be greater and in the range of 15% to 35%. As a shareholder the State is then entitled to
board representation.
31
For example sanctions imposed by the United States against Iran, in some cases by
Executive Order and in others by legislation (in particular The Iran Sanctions Act (ISA))
proscribing various investment activities in relation to that country.
32
EU Regulation 1284/2009 and the EU Military List.
Page 19

20. determined that exceptions should be made to the blanket prohibition to allow
the Prohibited Activities - provided the explosives and related equipment are
intended solely for use in mining and infrastructure developments, the storage
and use of the explosives and related equipment and services are controlled
and verified by an independent body, and the Prohibited Activities have been
approved by the relevant EU member State prior to them occurring.
An overlay to these types of concepts are the hard laws33
and soft laws34
that
provide a framework law on business and human rights, and should inform
any investors operating policies.
Resources Curse; Fair division of resource rent; Pace of Development
The so called resources curse trap is well documented. Simply described the
resources curse is the paradox that countries with abundant natural resources
can often have lower economic growth and outcomes than countries with fewer
resources. Various potential negative effects of abundant resources include
“Dutch disease” – an increase in the real rate of exchange and wage increases
which damage other sectors of the economy, inflation that those directly
benefiting from resource development in terms of employment and service
provision may be insulated against but which can badly affect others not so
fortunate, revenue volatility, and depriving other sectors of the economy of
skills - quite apart from the potential for corruption and conflict.35
In certain emerging jurisdictions its effects are, if anything, potentially magnified
because, first, the reliance on resources projects can be particularly acute,
33
In Australia the legislation on racial discrimination, native title and privacy for instance.
34
The UN Global Compact, the OECD Guidelines for Multinational Enterprises, the IFC
Performance Standards, the Equator Principles, the UN Voluntary Principles on Human
Rights and the Voluntary Principles on Security and Human Rights referred to at note 24.
35
See generally (including as to the proposition that resource abundance is not
necessarily linked empirically to poorer economic performance, and certainly does not
need to be) Ascher, W. “The ‘Resource Curse’” in Bastida, Wälde and Warden-Fernández
(eds.), International and Comparative Mineral Law and Policy (Kluwer Law International,
2005), 569 - 588
Page 20

21. and, secondly, individual projects often account for a very significant proportion
of the economy36
so have the potential on their own, as individual projects, to
create these types of issues – meaning individual project proponents are
sometimes asked to ameliorate these affects, or alternatively are in any event
affected by the reaction to them.
36
As examples current estimates suggest that the Simandou project will more than double
Guinea’s current GDP, and annual payments to Government will be more than twice total
current Government revenues. Similarly the Oyu Tolgoi project in Mongolia is very
significant relative to the size of the Mongolian economy, and is expected to increase
Mongolian GDP by one third once in full production.
Page 21

22. Overlaying these threats are the pressure points that naturally arise in any
development. Particular points of vulnerability of a mining project during its
development are illustrated by the following diagrammatic (where year 0 is
build completion):
A few issues arise in this context that are interesting to explore, including how
far an investor goes in taking on the mantle of Government regarding these
matters - or at least in taking action that will ameliorate deleterious effects - and
how an investor should approach the issue of division of resource rent, in its
own interest.
In relation to division of resource rent the proposition that companies and
countries are different is a particular truism. Whilst in a commercial bargain
getting the best deal is generally good, in a negotiation with a State it may be
the investor’s undoing. Investors need to try and ensure that at the times of
greatest vulnerability of the project there are as many other bulwarks to the
relationship as possible. There need to be things the State is getting that
incentivise it to move past the points of vulnerability. Some of that “pull factor”
Page 22

23. is the wider community engagement programme of the investor. That can
create local support for the ongoing project that the State, politically, might be
reluctant to challenge. It also gives the State something it can hold out as the
fruit of good governance and policy. But the State also needs money, and in
order for this to be supportive of good policy formulation, and allow the State to
meet the aspirations of the population, it needs money in consistent and
building quantities, not simply in lump sums, and especially not in long dated
lump sums.
However trite this point may be there nonetheless seem to be many instances
where investors bake in renegotiation points in their stability agreements
because they do not smooth payments to the government across the life of the
project. Tax deferral of any magnitude, it is submitted, only works if there are
other ways in which State coffers are being adequately supplemented in the
interim. Put more prosaically investors cannot afford to be too greedy since, if
they are, the generous fiscal concessions they negotiate may end up being, not
only ephemeral, but their petard.
Related to this point is the issue of offshore share dealings in the
shareholdings of ultimate holding companies of project assets. In Africa for
instance a number of jurisdictions do not have tax systems that impose tax on
the ultimate holders of mining assets where the dealing in these assets is by
share transfer in offshore holding companies.37
On one view this simply
reflects an immaturity in those tax systems – in many developed jurisdictions
tax would apply in these circumstances.38
Furthermore, consent requirements
to dealings in mining assets in many African jurisdictions do not extend to
dealings in the shares of ultimate offshore holding companies.39
However, African governments are extremely sensitive about what they see as
entrepreneurial investors acquiring mining title by grant (effectively for free),
undertaking some very limited work on the relevant area, and then by way of
37
For example Guinea and Mozambique.
38
In Australia for instance these dealings may be imputed as dealings in land attracting
transfer duty for purchasers and capital gains tax for sellers.
39
Frequently the consent requirement attaches to direct transfers of title interests (typically
held by a locally incorporated project company) but does not address indirect transfer
through offshore dealings in the shares of a parent company.
Page 23

24. offshore share transfer selling an interest in the title for a massive profit.
Putting legal form aside their sensitivity may be understandable. They may not
be willing to distinguish this type of trafficking in mining titles from a situation
where foreign investors have made high-risk exploration investments and,
where they have been successful in identifying new resources for the host
country, seek to earn an appropriate return by selling those resources to
companies better able to develop them.
Whatever the situation, from the point of view of the population this is an
example of outsiders speculating using State resources and earning huge
profits when the population to whom those resources belong earns no return.
Oftentimes the degree of liaison with the State has been minimal on the basis
that there is no formal requirement for State consent.
It is submitted that increasingly buyers who participate in a sale of this type are
laying up problems for themselves. At worst the State may simply not accept
no return, and will look to the buyer for that return because the seller will often
by then be less accessible (having taken its profits and left). So, even if there
is no legal requirement for State consent, and even if there is no legal
requirement to pay tax, an incoming buyer would be well advised not to
proceed with such a purchase unless with the knowledge and endorsement of
the State. The State may otherwise assert that in any event its consent is
required, and may in any event seek to impose tax – issues that will then need
to be negotiated.
Of course if the State is approached it is likely to ask for something. However,
if it is going to ask for something anyway, better to know upfront before
committing to the purchase. Furthermore, at that stage a negotiation can
occur, and if there is no basis for levying tax it may be possible to negotiate
something more palatable with the State – such as some altered State share in
the development.
As to the separate question of undertaking other community programmes to
bolster the investor’s licence to operate – especially at vulnerable points - it is
important when designing those programmes not to thereby become a
substitute for the State – so the policy implications of the work being
Page 24

25. undertaken need to be considered. It is one thing to assist with sinking of wells
for fresh water, it is quite another to become embroiled in assisting in regional
water or dam developments or generation of electricity for a region rather than
privately for the mine.
An illustration of unintended consequences where companies might be asked
to step in for the State and take responsibility is the situation of coal mining in
Mozambique. Human Rights Watch has recently issued a publication entitled
“What is a House without Food?”.40
That publication describes how mining
companies in collaboration with the State have been involved in the
resettlement of river communities to an inland area of Mozambique. The area
chosen was endorsed by the State. However, it is quite different to the area in
which those communities originally lived – it is not along the river and is much
drier. The ways in which those communities fed themselves on their original
land are not available to them in the resettled area. So whilst they have much
better accommodation, they are reliant on food aid and their way of life is
altered. The question then arises of the extent to which the companies
involved in resettling them (to enable those companies to mine the original
land) must assist with ongoing food aid - or indeed other assistance so that
those resettled can establish a viable way of life.
Finally, an issue that arises in this context is timing of a development.
Companies have various corporate priorities that can affect optimal timing of a
development. From a State's point of view delayed timing is often an acute
issue. This is not just an issue in emerging jurisdictions. In Australia it was at
least a contextual issue in the regulatory blocking of Shell’s proposed takeover
of Woodside.41
In an emerging jurisdiction an individual mineral development
can have an enormous effect on gross national product. Delay in development
may affect the livelihoods of the population in significant ways. In that scenario
a few issues arise. First, as a practical matter, if development is to be delayed
40
Human Rights Watch, May, 2013 ( http://www.hrw.org ).
41
The bid was blocked on national interest grounds by Federal Treasurer Peter Costello
following advice from the Foreign Investment Review Board. What exactly constituted
public interest in these circumstances was not made public but the Treasurer’s decision
was made in the context of outspoken criticism from then Western Australian Energy
Minister Colin Barnett that Shell could put development of its competing overseas LNG
projects ahead of Australian interests - see for example “Shell awaits federal decision on
Woodside”, Gulf News, February 10, 2001 (http://m.gulfnews.com )..
Page 25

26. what other ameliorating benefit may an investor be able to offer to maintain its
licence to operate and protect its investment? Secondly, how will that investor
hold competitors at bay if it is to delay the investment – competitors who may
include sovereign investors seeking off take who have a quite different basis
for assessing the necessary investment? Finally, at what point does delay in
investment raise ethical issues – particularly if there are others who are
prepared to proceed with investment if given the chance? Take as an
example a company that makes safety its priority. Delay in investment could
literally cost lives if it delays necessary state funds for investment in health
infrastructure. How does a company balance its commercial objectives with
these imperatives? It is submitted that companies which do not articulate an
ethical approach here will be increasingly exposed in an age where
shareholder activism and interest in responsible investing is increasing.
Co-participants; Financing Issues
Choice of co-participants will have both a commercial and a wider context. It is
useful to comment on some of the reasons behind introduction of selected
categories of co-participant (equity, debt, procurement and advisory).
In a context where the State is often a required participant, and there is a high
degree of political risk, some co-participants can bring geopolitical cover (for
instance Chinese, Indian or Middle Eastern co-participants). Theoretically all
participants should be able to rely on support from the government of their
home jurisdiction. However Western governments, whilst supportive of the
commercial interests of companies domiciled there, and of appropriate
investment protections, do not see those companies as instruments of
government policy. Arguably some sovereigns do see their State owned
companies as instruments of that sovereign State’s policies. That said, it is
submitted that it is easy to overstate the extent to which this is the case, or
alternatively to overstate the extent to which third party investors can
manipulate geopolitics through sovereign co-participants.
State investing companies (for example Chinese State Owned Enterprises –
SOE’s) frequently compete aggressively against one another, and are
expected by their State owners to act commercially. They will be subject to
Page 26

27. regulatory constraints in their home jurisdiction (for instance in the case of
SOE’s to approvals from the State Owned Assets Supervision and
Administration Commission of the State Council - SASAC, the National
Development and Reform Commission – NDRC, and the Department of
Outward Investment and Economic Cooperation of the Ministry of Commerce),
and consequently they may be subject to directives in relation to their
investment, or ongoing investment. However, they will not engage with other
participants in any express way on geopolitical issues – indeed they will have
no mandate to speak for their sponsoring government on those issues. This
obviously makes sense – no government could be expected to engage
vicariously through a State company with third party investors on geopolitical
matters, which after all will be part of a complex web of strategic interests and
relationships of that sovereign.
Of course a recipient State may for wider geopolitical reasons be reluctant to
move against a sovereign investor. So an exogenous factor capable of
analysis is the extent to which introduction of a sovereign investor in fact
provides some protection against hostile acts by the recipient State. However,
it is submitted that this is simply a factor that needs to be weighed in deciding
whether to introduce a sovereign co-participant, and if so on what terms – it is
not something that can be engineered. In weighing whether to introduce such
an investor other factors will also need to be weighed, such as the motives of
the sovereign in investing (is it for instance principally interested in off take),
the extent to which this opens up other avenues of financing referred to below,
the extent to which the sovereign co-participant itself has deep pockets and so
forth. Often there will be inconsistencies between the objectives of the third
party investor and the sovereign investor (for instance a clash over off take or
marketing rights, differing views regarding volume versus price, and the fact
that introduction of a sovereign investor could affect other sovereign markets
for the product or deleteriously affect the chances of obtaining funding from
export credit agencies or providers of import finance where those agencies of
providers are not associated with the sovereign investor). These differences
will lead to a natural tension - and the question will be whether each investor,
notwithstanding this tension, offers to the other enough to ensure both maintain
the equilibrium and stability of their relationship.
There are of course other multi-lateral agencies to consider, such as the
International Finance Company (IFC). It will typically only take a small equity
position in any single project, and will also want to avoid being overly exposed
Page 27

28. to a relationship with any single third party investor. Again here, it is submitted,
it is important not to overreach in terms of expectation. Whilst the IFC does of
itself and as a subsidiary of the World Bank, have deep relationships with
governments, its purpose in investing is to further the objectives of its charter,
and it necessarily therefore may at times have different objectives to a third
party investor. It can be expected to act as a voice of reason with governments
(not least because one of its primary objectives is to advance economic
development by promoting investment in strictly for-profit and commercial
projects42
) and governments will think hard before moving against the IFC, but
it should not be expected to go out on a limb for a particular project or investor.
Furthermore, it will have its own requirements in terms of governance,
environmental and social standards43
and the like - which may impose further
layers of process on the project but which have the collateral benefit that they
support the respectability that the IFC brings. There is (correctly) an
expectation that the IFC takes a very strong line on proper governance and
standards, which enhances the reputational standing of projects in which it is
involved.
The above of course focusses on the IFC as an equity participant. It is also
able to marshal loan funds, but for any major single development these are
likely to be relatively modest (although the IFC tends to carry influence within
lender groups disproportionate to its lending commitment).
The way in which financing is obtained, and the entities from which financing
are obtained, can operate to reduce risk and so bolster the security provided by
a stability agreement. As mentioned previously a properly drawn, enforceable
and justiciable stability agreement will generally be an absolute requirement for
obtaining finance in an emerging jurisdiction. Depending on the lender a
realistic aspiration is to limit lenders’ recourse to commercial and not political
risks. If the lenders include multi-laterals, this will generally assist in
discouraging political interference (because that interference will bring the host
State into conflict with those multilaterals).
42
Article 1 of the IFC’s Articles of Agreement describes the purpose of the IFC as being to
“further development by encouraging the growth of productive private enterprise in
member countries, particularly in the less developed areas” (http://www.ifc.org ).
43
The IFC has comprehensive Performance Standards to address environmental and
social risk in the private sector, which form part of the IFC’s Sustainability Framework
2012 Edition (http://www.ifc.org ).
Page 28

29. However if import finance is to be obtained (for instance from JBIC of Japan or
KfW/UfK of Germany or KExim of Korea) then this will likely be required to be
done on the basis of long term commitment to product supply. Consideration
of potential commitment to relevant long term sales contracts needs to occur at
an early stage if these sources of funding may be sought (so that optionality is
retained).
Similarly OECD export finance such as USExim or KfW/Hermes would be
secured on procurement, and procurement strategy needs to factor in this
possibility to maintain optionality.
In many cases political risk insurance will not only be prudent but a necessary
adjunct to financing facilities (potentially available from parties such as MIGA).
Notwithstanding all these factors there will be limits to the extent to which
finance arrangements can be used to spread risk. First, lenders will often not
accept the credit risk of the recipient State. They will want an adequate
security package (which may quite possibly exclude the State’s interest in the
project given States will generally strenuously resist this), amplified potentially
by some form of on demand bond in addition to a debt service reserve account.
They may well seek a direct agreement with the State rather than simply
relying on the stability agreement rights of the investor. In relation to relevant
infrastructure lenders are likely to require the sponsor to assume the risk of
successful and timely construction to required specifications and relevant ramp
up of the mine to appropriate levels to support infrastructure payments
necessary to meet debt repayment requirements. If the relevant mine is the
lynchpin demand for the infrastructure then some form of take or pay in relation
to infrastructure capacity will also be required.
One factor to bear in mind in relation to political risk carve-out (which, as
mentioned above, is a realistic expectation) is that if lenders perceive the
stability agreement to be unbalanced they may well resist breach of contract by
the recipient State as a political risk event because they will reason that the
stability agreement by its design is unstable and liable to renegotiation
pressure.
Page 29

30. As to the State’s participation in financing or provision of funds there are a few
observations that can be made. Whilst a State may have significant
aspirations as a participant in the project and potentially particularly in the
infrastructure (which may well be seen as more in the nature of public purpose
infrastructure because of the likely pressure for multi-use) there may well be
practical limitations that affect these aspirations. The Public-Private
Infrastructure Advisory Facility (PPIAF) and the IFC have just issued a report44
which examines the financing of mine related infrastructure (including rail and
port infrastructure) in Sub-Saharan Africa. As has already been mentioned
States will resist providing their participating interest as security. More
fundamentally, as the PPIAF/IFC report observes, public sector ownership of
major infrastructure is not realistic in many countries because the relevant
States simply do not have the borrowing capacity to support this. (Indeed and
separately, other than where free carried, contributory State interests in
projects need to identify where the money is going to come from – there is a
real policy issue around stretched Government coffers disbursing large cash
call amounts). States may also face other restrictions on taking on major
liability – for instance pursuant to arrangements made with the International
Monetary Fund (IMF), or because this will affect their eligibility for debt relief
from the IMF or World bank given their status as one of the Heavily Indebted
Poor Countries (HIPC).
One potential way to seek to ameliorate participation issues in infrastructure, if
the mine owner is not to own that infrastructure, is to consider whether the
manner in which it is constructed and financed offers some solutions. In
particular whether for instance using a BOO (Build, Own, Operate) with a
construction consortium is appropriate, or a BOT (Build, Own, Transfer). Some
jurisdictions contemplate these possibilities and provide incentives or tax
concessions for them.45
Finally, increasingly there are agencies that seek to promote good governance
and development of natural resources in emerging jurisdictions. One
particularly active example is the Revenue Watch Institute (RWI). Whilst these
44
“Fostering the development of green-field mining related infrastructure through project
financing”, PPIAF/IFC, April 2013 (http://www.ifc.org ).
45
For example in Guinea concessionary tax treatment for BOT arrangements is provided
for in Law L/97/012/AN.
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31. agencies are focussed on assisting countries realise the development benefits
of their natural resource wealth – in other words cannot be expected to be the
advocates of the investors’ interests – they seek to do this on the basis of
sound economic and investment fundamentals, capacity building and advice.
So they can be expected to be a voice of reason, and they also support
governments in themselves obtaining expert advice.
Telling your story
Whilst much of this paper has concentrated on the relationship with the State
as a significant element of the security of any investment (over and above any
relevant stability agreement), it is worth reflecting on the fact that the State
needs to be responsive to the general populace, and indeed it is also very
important that investors have a good relationship with the general populace.
As has been observed, many of the projects being considered here will be
significant in the context of the recipient State economy, and so will have high
political significance. Oftentimes there is a general perception that foreign
investors wish to speculate with projects to earn quick returns, and a cynicism
about their bona fides.
All this may be occurring in a context where there are many competing factions
within government, sometimes high levels of corruption affecting some of those
factions, and a range of competitors, including competitors with higher levels of
tolerance to sharp practice.
Two factors, it is submitted, are important here. First, it is important to have
access to good intelligence – political intelligence and intelligence about what
is happening “on the ground”. As mentioned foreign sovereign competitors will
generally have very good intelligence. So too will entrepreneurial competitors,
some of whom may have close connections with the relevant government (for
instance because they are separately brokering strategic or security advice to
the government, or key government officials). It is difficult for an investor to
take pro-active protective action if it does not have a “finger on the pulse.”
There are a number of professional and reputable agencies that can provide
specialist intelligence services.
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32. Finally, perceptions within the general populace matter. Often reputable
investors have a very conservative approach to public relations.
Entrepreneurial and speculative ones generally do not. In the context of
sensitivity about pace of development and benefits of development, the latter
can sometimes, through well-resourced public relations programmes, become
popularly perceived as having outspent the former and be much more pro-
active even in circumstances where this is demonstrably false. Prudent
investors, it is submitted, should invest in responsible public relations
programmes that articulate their story – what they are doing and what benefits
their investment is bringing – not just to increase their support within the
general population as a means of bolstering their licence to operate, but
because if the general populace believes the project is a good one which is
bringing benefits this makes the government look good, and can help insulate
the project against hostile government action – hostile action which in those
circumstances may not enjoy popular support.
4. Conclusion
This paper has focussed on practical and relationship factors that support
stability agreement compliance and implementation. In conclusion it is useful
to quote some comments by the former Secretary General of the UN, Kofi
Annan in the context specifically of Australian mining company investment in
Africa.46
These related in particular to tax issues, but their sentiments are more
generally applicable:
“Australian investments in Africa must be seen to be transparent to create
long-term partnerships needed for generating the best returns … Managed
correctly, foreign expertise and investment … represents enormous
opportunity to improve the lives of millions in Africa. Long-term partnership
will be key to generating the best returns. Australian investments in Africa
must be seen to be fair … meanwhile, increasing internet access and the
return of many well-educated Africans from overseas are helping to boost
awareness of tax avoidance issues. And Africa’s tolerance is declining.
For companies, this will likely emerge as a hot reputational issue that may
46
“Rewards for mining companies that play fair on tax in Africa”, Kofi Annan, Australian
Financial Review, 30 August 2013 (http://www.afr.com ).
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33. ultimately impact access to mining resources ... Some companies, such as
Rio Tinto, have shown impressive effort to become more transparent with
their tax payments. Other Australian companies, including the small and
medium-sized, may wish to enhance their reputations and long-term
relationships in Africa, their “social licence to operate”, by taking the
initiative on tax and transparency issues … Africa and Australia have
common interest in creating a predictable and fair global business
environment. This is particularly important to the people of Africa, who
expect their fair share of the wealth beneath their soils and waters. What
Australian companies may lose by accepting to pay fair taxes and investing
in their host countries’ economies, they will regain many times over through
the benefits of a predictable, rule-based and transparent business
environment and positive long-term partnerships.”
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