At the recent Africa Down Under conference in Perth, Michael Ostrove, DLA Piper’s Global Co-Chair of International Arbitration, chaired a panel discussion on African mining concessions. Shane Murphy, a Perth-based Energy and Natural Resources Disputes partner of DLA Piper, covers key insights from that discussion.
With more than 200 listed Australian companies now operating in Africa, one of the challenges they face is managing myriad stakeholder relationships, particularly key relationships between the mining company and the government. If you neglect this challenge or get it wrong, it could be at your project’s peril.
Mining regimes in African jurisdictions generally provide for contract-based concessions, in contrast to the standardised licence-based concessions in Australia. Together with the relevant Mining Code and other local laws, these concession agreements provide the framework for miners’ rights and obligations.
While many jurisdictions adopt model concession agreements to drive consistency and simplify administration, in practice these continue to evolve and are often refreshed (or even radically revisited) on a change of government. There is therefore often considerable flexibility to negotiate the terms of concession agreements when dealing with issues such as:
- confidentiality verses public transparency under the Extractive Industries Transparency Initiative (EITI);
- work plans, expenditure commitments, project schedule expectations and warehousing allegations;
- royalty and tax incentives and stabilisation clauses;
- transfer pricing;
- downstream processing commitments;
- local content commitments;
- sustainability, environmental, social and governmental frameworks;
- local community engagement and benefits; and
- choice of law and dispute resolution procedures.
In terms of a miner’s development commitments, concession agreements:
- deal with the exploitation of minerals;
- may seek to achieve governments’ goal to prevent ‘warehousing’ of reserves; and
- may include obligations to incur a certain amount in direct expenditure on mining activities.
Experience tells us that securing the most favourable concession agreement terms possible does not optimise a project’s prospects. On the contrary, it invariably results in relationship difficulties with government counterparties and quite commonly concession review or termination events, particularly following a change of government.
A successful concession negotiation can mitigate sovereign risk by delivering a balanced agreement and an alignment of expectations but there is no silver bullet to achieving this.
There are still tendencies to progress with the project and deal with the issues as they come up rather than take a proactive approach early. The result is inevitable: relationship difficulties – be they operational, financial or political – which may ultimately result in disputes with government.
“Many issues are structural and arise repeatedly because the private sector and governments are coming at the same projects from very different perspectives,” notes Michael Ostrove, DLA Piper’s Global Co-Chair of International Arbitration. “The more each party can be attuned to the other’s perspective, the more likely interests can be aligned for long term success.”
Michael went onto say, “It’s not always about negotiating the ‘best’ deal or about identifying some abstract ‘best practice’. In our experience it’s about entering into balanced concession agreements with terms that are not only fair but are also perceived as fair on all sides”. And it’s about being proactive to achieve this.
A good example is the approach to minimum work or expenditure requirements, which are used to address concerns of ‘warehousing’ by giving governments comfort that mineral resources will be developed in a timely manner. Work and expenditure commitments need to be balanced and governments need to have realistic expectations as to the amount of work which is required to prove up feasibility before mining commences.
Seeking to procure a balanced deal rather than the ‘best’ deal reduces the prospects that the terms of agreement may be revisited later down the track. Miners should look to agree a royalty rate which is defensible and that is not going to be seen to be too low on a change in government. If a miner secures a royalty that is more favourable than competitors in the region, the concession may be subject to a review event in future.
It is also critical to ensure that the government understands the finances of a project on an ongoing basis, to minimise any concerns they have as to whether the State is getting its fair share and to give comfort to the community, civil society and NGOs that the mineral resources of the State are being effectively managed. Transparency, regular reporting and maintaining an ongoing dialogue with government can achieve this.
In negotiating concession agreements, miners should have one eye to the future, and must accept reasonable obligations to the State and to the local communities in which they are operating to ensure stable, enduring relationships.
