Do Stabilisation Agreements Work? Theory and Practice in Managing Sovereign Risk.1

Structure

Need for stabilised investment framework

Necessary but not sufficientSome practical observations on formBilateral investment treaties

Dealing with practical challenges

Governments versus commercial counterparties; the State as participant Resources curse; Fair division of resource rent; Pace of DevelopmentCo-participants; FinancingTelling your story

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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. 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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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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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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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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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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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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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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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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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 (hopefully) international law. The respective protections are unlikely to be

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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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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.

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

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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 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

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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 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

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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. 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

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.

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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

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

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.

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

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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 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 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.

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 ).

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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 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.

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 )

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.

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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 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

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.

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.

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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, 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.

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

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.

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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” 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

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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 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.

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.

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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 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

40 Human Rights Watch, May, 2013 ( http://www.hrw.org ).

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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 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

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 )..

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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 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

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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 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.

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 ).

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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).

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

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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.

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

44 “Fostering the development of green-field mining related infrastructure through project financing”, PPIAF/IFC, April 2013 (http://www.ifc.org ).

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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 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.

45 For example in Guinea concessionary tax treatment for BOT arrangements is provided for in Law L/97/012/AN.

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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 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

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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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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