“African countries which, up until now, showed less tendency towards resource nationalism are now trying their luck … There is a significant trend and governments are sharing notes with peers.”
Eric Humphrey-Smith, analyst at risk consultancy Verisk Maplecroft (Financial Times, 9 October 2019)
Following a wave of protectionist measures taken by governments in emerging markets, several commentators have observed that resource nationalism appears to be on the rise, echoing a return to the trend of nationalisations that took place throughout the 1960s and 1970s (see, for example, here, here and here). Governments in developing (and developed) countries are asserting economic and legal control over resources in their territory through increasingly sophisticated measures, including through changes to laws relating to tax, the environment and local content. In some instances, this may be done in order to give effect to well-thought through and legitimate policy objectives. In other cases, however, measures taken under the guise of resource nationalism are more opportunistic moves, often caused by local political pressures or a sudden change in a commodity’s price.
Against this backdrop it is unsurprising that the mining sector has come into focus, with several States announcing measures directed at mining companies and their investors. Recent examples include changes to the mining and tax codes of the Democratic Republic of the Congo and Tanzania, measures taken in Zambia, and the changes proposed to Mexico and Peru’s mining laws.
In some cases, the underlying causes of resource nationalism can (to an extent) be addressed through improved dialogue and collaboration between miners and the governments of host States, focusing on the common interests of States and foreign investors. However, history shows that political and financial pressures can all too easily make a more radical form of resource nationalism the preferred course of action for a host government. In order to anticipate and mitigate the potential risks that may arise from resource nationalism, set out below are 10 key issues that mining companies and their investors should consider.
1. Investment structuring. At the outset, thought should be given to the investment structures available to obtain protection under investment treaties and foreign investment laws. Through investment structuring, an investor may be able to gain access to the substantive protections of international law as well as investor-State arbitration, which provides an independent and neutral dispute resolution forum for disputes arising from an investor’s treatment by a State. If no protection is available under an investment treaty or a domestic foreign investment law, it may be necessary to consider negotiating an investment agreement with a State that provides some of these protections.
2. State participation. The risk of resource nationalism is generally heightened when a State perceives that agreements reached with its mining investors are or have become unbalanced, particularly in the sense that the investor has a disproportionate share of the resource profits. While this perception may sometimes be unavoidable, miners and their investors could consider offering a State some form of participation in a mining investment from the outset, such as equity rights via a specific class of shares, or consultation rights in the mining concession or investment agreement. Equally, in circumstances where an investor-State dispute has already arisen, settlement may be achievable by agreeing to a form of State participation in an investment on terms that recognise the expertise and access to capital that a foreign investor can provide, while balancing the interests of the State. Clearly, difficult issues can arise if an equity stake held by a State is “not carried” and requires cash funding from a cash-strapped sovereign – the structures to solve this, such as shareholder loans secured against future State dividends, are not straightforward and can themselves be the focus of adverse State action.
3. Tax. One of the first manifestations of resource nationalism will often be a new or increased mining tax of some description. Tax planning should therefore sit alongside investment structuring. By anticipating this risk, miners and their investors can potentially make use of tax treaties/double tax agreements to manage the risk of tax on, among other things, profits and capital gains. Done correctly, tax planning may also be able to help a mining company achieve greater certainty about their tax risk during the life of a mine, for example, via a stabilisation clause that freezes certain kinds of taxes for a specific period of time in order to encourage further capital investment.
4. Environment and human rights. As environmental and human rights issues move up on the agendas of governments and businesses, they have also become part of the resource nationalism “narrative”, especially in jurisdictions where environmental regulation and human rights protections are lacking. The importance of these issues has been highlighted by recent class actions against miners (including in the English courts) and investor-State disputes where defences or counter-claims have been raised by States based on alleged breaches of environmental or human-rights obligations (see, for example, here and here). Mining companies may therefore wish to consider incorporating environmentally friendly and human rights-focused standards (often described under the heading of Environmental, Social and Governance criteria, or “ESG”) into their culture, policies and practices, and reporting.
5. Sanctions and trade. Alongside environmental and human rights concerns, international sanctions (against individuals, entities or sectors involved in mining) and domestic trade controls (such as export bans or customs controls) are also entering a new era of relevance for foreign investors, especially in the mining sector. In particular, under the rubric of resource nationalism States are using customs and currency controls to restrict the sale of extracted minerals and to control the outflow of capital – sometimes legitimately, and sometimes not. From a legal standpoint there may be little that can be done to prevent this risk from arising, but the use of these measures serves to underline the importance for mining companies in having access to sufficient remedies under investment treaties or an investment agreement.
6. Local content rules. Seen as the least controversial form of resource nationalism, local content rules can be an effective tool to build links between a mining company and their local community. These rules may require foreign investors to, where possible, employ a certain percentage of local workers, contract for products and services locally and, more generally, draw on the broader potential of the local economy. And although local content objectives can be hard to achieve in a developing economy, successful case studies are emerging. There may, however, be instances where local content rules are designed improperly or enforced in an arbitrary manner in contravention of international law. In order to anticipate the risks that might arise from the misuse of local content rules, miners and their investors should consider whether they can negotiate any variations or protections directly with a State and, if not, whether it may be possible to structure their investment to obtain access to investor-State arbitration.
7. Anti-bribery and corruption. The importance of complying with anti-bribery and corruption (ABC) laws goes without saying, but few investors may appreciate that an allegation of bribery or corruption can potentially put at risk an investor’s rights in the event of an investor-State dispute. As recent investor-State disputes show, States will not be slow to make allegations of bribery or corruption in order to seek to have an investor’s claim dismissed by a tribunal. To manage this risk, miners should (alongside any existing ABC policies and internal auditing) consider carrying out and documenting rigorous due diligence prior to investing to ensure that in the event of an allegation of bribery or corruption it will be possible to respond with a robust paper trail.
8. Local laws. In the same way that a State may raise allegations of bribery or corruption to seek to have an investor’s claim excluded, it may also be possible for a State to allege that material non-compliance with local laws will justify excluding the investor’s claim altogether (on the basis that the investment has been “made” illegally) or to argue that the investment was worthless (on the basis that non-compliance with a local law rule would have resulted in the investor’s licence being terminated in due course). Miners and their investors should therefore retain experienced local counsel for legal advice throughout the life cycle of their investment to ensure they keep their house in order from a compliance perspective.
9. Governance. As a catch-all bucket for internal regulation or “soft” laws that seek to ensure compliance with legal, as well as ethical and moral, standards, there are now countless governance frameworks relevant to miners and their investors. These include the Extractive Industries Transparency Initiative or the more recent Responsible Gold Mining Principles (issued by the World Gold Council this year, following consultations with more than 200 organisations and experts). These frameworks contribute to public discourse around resource nationalism, but they can also be relevant in the context of an investor-State dispute, in order to demonstrate a miner’s commitment to good governance and the long-term value of their investment. These soft laws may gain more prominence in the future as new investment treaties focus on the responsibilities of investors as well as States.
10. Employment. As a final (but critically important) matter, employment and labour rights play a crucial role in the cycle of resource nationalism. As protests by mine workers this year show, the mismanagement or perceived mistreatment of local employees can result in serious disruption to a miner’s operations, and may potentially lead to political pressure to nationalise or otherwise restrict the activities of a mine. In the context of an investor-State dispute, employment issues may also affect the long-term value of an investment. Implementing the right culture and the legal framework to manage employment and labour issues should, therefore, be a priority.