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South African Journal of InternationalAffairsPublication details including instructions for authors andsubscription informationhttpwwwtandfonlinecomloirsaj20

The 2011 Guinean Mining CodeReducing risks and promoting socialbenefit in AfricaKinnari Bhatt aa University of East Anglia Norwich UKPublished online 12 Jul 2013

To cite this article Kinnari Bhatt (2013) The 2011 Guinean Mining Code Reducing risks andpromoting social benefit in Africa South African Journal of International Affairs 202 247-270DOI 101080102204612013811819

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The 2011 Guinean Mining Code Reducing risks and promoting socialbenefit in Africa

Kinnari Bhatt

University of East Anglia Norwich UK

This article analyses some of the key investment terms of the Guinean MiningCode relating to taxation government equity stake permitting and environ-mental and social needs in the light of criticisms from mining companies whoclaim it will deter investment The article argues that projects which providegovernments with a fair share of revenues through increased equity participationand taxation provisions and have positive environmental and social provisionsconstitute a less risky investment for both banks and their borrowing investorswho will benefit from such provisions when they seek project financing a popularform of financing used in capital intensive extractive industries The argumentsmade in this article can be applied more broadly to other African countries whichare reforming their mining laws and are in the process faced with similarcriticisms from the private sector

Keywords Africa Guinea Sierra Leone mining law environment miningcompanies sustainable development project finance

Introduction

This article will examine the key terms of the 2011 Guinea Mining Code (GMC)

which replaced the 1995 Guinean mining code The purpose of the GMC is to ensure

that the Guinean people benefit from the countryrsquos abundant natural resources by

promoting the transparent management of the mining sector to guarantee durable

economic and social benefits for Guinea while striking an equitable balance with the

interests of the private sector

The Republic of Guinea in West Africa has abundant natural resources including

diamonds gold and iron ore and is the worldrsquos largest exporter of bauxite the raw

material for aluminium Paradoxically it is also one of the poorest countries in the

world with the World Bank classifying 53 of the population as living below the

national poverty line in 20071

There is a large body of academic literature that analyses why countries with an

abundance of finite natural resources tend to have less economic growth and worse

developmental outcomes than those with fewer resources Similarly there is evidence

that natural resources can prolong conflicts within societies as different groups and

factions fight for their share2 Governments as well as insurgent groups are easily

able to use the proceeds from natural resources to arm militia movements The

devastating civil wars experienced in Angola and Sierra Leone are tragic cases in

point

Email kin150478yahoocouk

South African Journal of International Affairs 2013

Vol 20 No 2 247270 httpdxdoiorg101080102204612013811819

2013 The South African Institute of International Affairs

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However the primary objective of this paper is not to reopen the frequently

rehashed debates on how natural resources can prolong civil war Rather the paper is

more concerned with how resources can be properly managed to achieve develop-

mental not destructive ends As Collier and Hoeffler point out large resource rents

are not intrinsically a curse take the example of Botswana which has used its

diamond wealth to accelerate peaceful development3 Collier and Hoeffler refer to

the presence of conditioning circumstances such as governance the degree of relianceon one primary commodity type of political institution (autocracy type of

democracy) and checks and balances on government4 One of the strong condition-

ing circumstances must be laws and regulations that promote the equitable

management of those resources All of the above can mitigate the vicious cycle of

resources financing conflict and allow natural resources to be used for developmental

purposes

The policy question that arises is this should governments leave these assets in

the ground to prevent the potential consequences from mismanagement of abundant

natural resources or should the resources be extracted One could argue that for

African countries blessed with natural resource abundance the capital derived from

effectively managed and sustainable exploitation of these resources is the only

financial lifeline out of a future otherwise punctuated with worsening poverty and

bloody civil war International aid is not a long-term solution Civil war and

economic decline are by and large man-made events if bad policies can create these

negative results surely sound policies can help generate positive developmentaloutcomes Countries like Botswana show that the resource curse is not inevitable as

long as the right policies leading to favourable conditioning circumstances are firmly

in place

One of the starting points for any developmental mining policy has to be

domestic law5 Of equal importance to legislation is the political will to enshrine the

rule of law by putting in place the institutions and human resources to implement the

letter and spirit of the law President Alpha Conde Guinearsquos first democratically

elected president pledged during his electoral campaign in 2010 that mining sector

reforms would be the linchpin of his reform agenda6 The following September

Guinearsquos National Transitional Council (Guinearsquos interim parliament) unanimously

adopted the 2011 Guinean Mining Code7 which repealed the 1995 mining code The

2011 GMC was groundbreaking in a number of areas It was designed to ensure that

the government obtains a fair share of the countryrsquos natural resource wealth with the

intention that capital can be ploughed back into development policies such as better

healthcare and housing and improved infrastructure Laudable principles of good

governance transparency local development and employment redistribution offunds and environmental and social issues feature strongly in the GMC8 Clearly the

GMC was drafted with the overarching goal that increased government revenue

applied in accordance with these principles would create the perfect set of conditioning

circumstances to enable the country to lift itself out of poverty and prevent any

potential conflict associated with natural resources

The GMC was met with criticism from mining companies however arguing that

the increased taxation provisions for example would undercut profitability and

deter investment in Guinearsquos mines9 As a result the execution of the GMC was

suspended in September 2011 Subsequently on 17 April 2013 President Alpha

Conde promulgated a law amending the GMC10 The 2013 amendments to the

mining code maintain the principles contained in the 2011 GMC in that it still aims

248 K Bhatt

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to strike a fair balance between providing a stable and attractive environment for

investors and increasing the environmental and social benefits from mining for local

communities

The analysis which follows examines some of the key provisions of the GMCrelating to fiscal provisions the obtaining of permits equity participation and

environmental and social issues These are discussed in the light of the mining

sectorrsquos criticisms with reference to the 2013 GMC amendments as appropriate and

as available at the time of writing

Fiscal provisions

Royalty rates

The GMC introduces several changes to the tax and royalty regime for mining

companies as set out in Article 161 One of the main criticisms of the GMC concerns

royalty rates which are paid to the government by mining firms and are based on

various factors such as sales rates (ad valorem) or quantity of mineral produced11

Mining companies claimed that the GMC imposed higher rates compared with those

in other African countries Article 161 sets out a detailed table containing changes to

the mining taxes Upon closer analysis however Guinearsquos royalty rates which are advalorem rates paid as a percentage of the sales price per metric tonne of mineral

extracted are in fact in line with those of other African countries Article 161

categorises royalty rates with for instance iron ore fixed at 15 per metric tonne

standard bauxite at 055 and alumina at 10 and precious metals such as silver

gold and ingot at 50 per ounce These percentages are all based on seller price of

the relevant commodity based on international sales rates such as the London Metal

Exchange As such the royalty rates are highly dependent on the relevant commodity

priceLooking at the gold rate 50 is not an unprecedented figure According to a

2012 working paper of the African Development Bank12 the average royalty rate for

gold in Africa is 40 Botswana Sierra Leone and Zambia each have a 50 royalty

for gold while Niger requires a royalty payment of 55 Article 148 of the 2009

Sierra Leone Mines and Minerals Act sets out the royalty rates for its mining sector

which like Guinearsquos are fixed as a percentage of the sale value of the relevant

commodity which is received in an armrsquos length market-based transaction In

comparison to Guinearsquos Sierra Leonersquos rates are high with 15 for special stones(defined as those with a market value in excess of $500000) 65 for precious

stones 50 for precious metals such as gold and 3013 for all other minerals

From this analysis it appears that Guinearsquos new royalty rates are neither

unprecedented nor unreasonable

International benchmarking of prices

One of the major changes in the GMC is that an international benchmark is now

used for calculating mining taxes Under Article 139 of Guinearsquos 1995 mining code

taxes were calculated on the lsquofree on boardrsquo value of the mineral however the GMC

incorporates armrsquos length pricing into policy and now calculates prices on the

London Metal Exchange three-month seller value14 Linking mining taxes to

transparent international index prices ensures that governments receive a fair market

South African Journal of International Affairs 249

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price for minerals and encourages transparency in pricing International indexing of

prices is an extremely useful tool in the fight against transfer pricing15 issues between

related companies which is a problem in developing countries African governments

are waking up to the lost revenues caused by transfer pricing arrangements and areentrenching such specific armrsquos length requirements into legislation For example the

Sierra Leone 2009 Mines and Minerals Act requires the sale of all mineral products

obtained in mining operations to take place on an armrsquos length basis16

Similarly the Mineral Development Agreement between the government of

Liberia and Mittal Steel was renegotiated in 2007 One of the biggest problems in the

contract was that the price of iron ore was set by Mittal and all iron ore was sold to

Mittalrsquos affiliates thus encouraging transfer pricing and depriving Liberia of revenue

Under the amended contract the price of iron ore is set under the armrsquos length rulemeaning that it will be based on the international market price of iron ore Given the

lack of transfer pricing legislation in Africa in general it is important that such

provisions are stipulated in legislation

Project finance

The reasons for governments to insist on international prices are fairly clear but why

is it beneficial for mining companies to fix prices in accordance with internationalbenchmarks If a mining company can sell a mineral product to an affiliate at a

discounted rate surely this will procure a short-term financial advantage However

from a long-term perspective the financial arrangement may have a negative impact

on the company This is due to the fact that typically mining companies will turn to

project finance as the preferred method to finance the development construction

and operation of mining projects According to the Financial Times in 2011 the

number of foreign direct investment (FDI) projects in Africa grew by 27 compared

with 2010 with a particularly strong growth in the metals and minerals sectors17 TheUnited Nations Conference on Trade and Development estimated that in 2008 $630

billion in FDI flowed to the Global South According to Thomson Reutersrsquo regional

data approximately $1134 billion went towards project finance developments in the

Global South18

Put simply project finance refers to a non-recourse or limited recourse financing

structure in which debt equity and credit enhancement are combined for the

construction and operation or the refinancing of a particular facility or capital-

intensive industry Under such arrangements lenders base credit approvals on theprojected revenues from the operation of the facility rather than on the general assets

or the credit of the sponsors of the facility and rely on the assets of the facility

including the revenue-producing contracts and other cash flow generated by the

facility as collateral for the debt19

Ensuring that the project is built and properly operational is crucial for lenders as

it is fundamental to the success of the project and the ultimate repayment of the debt

Project finance lenders lend substantial amounts of capital which will be used for the

construction of a mine for example and will not see any repayment of principal andinterest until a project is constructed which can take many years

Notwithstanding the above project finance remains the preferred method of

financing for many private sector sponsors as it achieves a number of corporate

objectives While it is beyond the scope of this article to detail these objectives it is

worth pointing out a few which we will refer to later on in the article Project finance

250 K Bhatt

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enables private sponsors to leverage large amounts of debt without diluting existing

equity and this debt can come from a variety of different sources For example

development finance institutions (DFIs)20 which have investment portfolios for

projects with a high risk and a high developmental effect will be attracted to projectsin emerging markets which have the potential to deliver developmental returns

Commercial banks may not independently invest in projects in politically unstable

countries or those with untested legal systems However the presence of DFIs in the

financing plan will incentivise commercial banks to invest thus increasing the debt

capacity of the project Another major benefit for sponsors is that project finance

allows the sharing of risks involved in a project This is to the advantage of mining

companies when they come to the financing stage of the project A mining company

can spread risks over all of the project participants including the lenders and thegovernment which theoretically also increases the likelihood of success of the project

The process by which banks decide to invest (often referred to as the lsquobankabilityrsquo

analysis) involves an assessment of the financial and legal status of the borrowing

entity21 In a project finance scenario banks will have recourse only to the assets of

the project for repayment of their debt and so a careful analysis of the borrowerrsquos

contractual rights and obligations is paramount A major consideration will be the

pricing of the finished product and any bank with an eye on the future of its

investment will be averse to a situation where the special purpose vehicle borrower isselling its product to a third party at a rate below market value for obvious reasons

a lender will not look kindly on any circumstances which could adversely affect the

repayment profile of the project

Furthermore as financing in mining projects is typically long term where it is

common to see repayment over a 30 year period it would make sense for banks to

ensure pricing is determined in accordance with international standards to minimise

future social discontent over contracts and potential lobbying for renegotiation

which can have a disastrous effect for private sponsors22

Tax exemptions under the GMC

The fiscal and customs benefits afforded to investors depend on the phase of the

mining operation whether prospecting under construction or in full operation

Broadly speaking tax exemptions are more prevalent in the prospecting and

construction phase rather than the operation phase This makes sense from an

investment point of view During the prospecting stage there is uncertainty as to theamount and quality of the ore and during the high-risk construction phase mining

companies will be investing substantial capital costs into the project with no

incoming revenue for a significant period of time It is thus fair that during the

prospecting and construction phases the fiscal provisions are broadly speaking less

onerous

It is worthwhile to take a closer look at a few examples of this During the

prospecting and construction stages companies benefit from VAT exemptions for the

import of materials equipment and spare parts In addition all imported equipmentplant machinery and commercial vehicles listed as fixed assets as well as materials

and spare parts for commercial vehicles have a total exemption from customs duty

during the prospecting and construction stages

Taxes are thus typically ramped up during the operating stage Pursuant to

Article 177 of the GMC companies will be taxed on all expenses incurred for the

South African Journal of International Affairs 251

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purposes of generating income and will be subject to a customs duty of 6 on all

equipment material plant machinery and commercial vehicles which are to be used

for transforming ore into finished and semi-finished product Furthermore raw

materials and petroleum products necessary for transforming ore to finished productwill also be subject to a 6 customs duty The 2011 GMC applied a rate of 8 for

the import of equipment and raw materials used for the extraction of ore23 but it

appears that the changes to the GMC promulgated on 8 April 2013 have reduced

import tax on operation-related mining equipment from 8 to 65 in a bid to

attract more FDI24

Looking at the tax provisions in more detail illustrates that holistically the tax

regime is not one-sided It is entirely equitable that companies are given tax

exemptions during the more uncertain phases of prospecting and constructionHowever why should such exemptions continue during operations when companies

are making profits There is clearly a strong moral and developmental argument

against this but there is also a commercial rationale The 1995 code was arguably

overly generous in the long tax holidays it provided to investors which for certain

projects ran from the start of commercial operations when the project effectively

would have been generating income

It is important to remember the geopolitical climate in which the 1995 code was

written was a time of state withdrawal increased liberalisation of markets andincreased privatisation Caught up in the tide of neo-liberal economic policy and

seeking to attract much-needed foreign capital and technology African governments

provided attractive tax breaks and incentives when they opened up their natural

resources to inward investment but with little or no attention to the developmental

effects of such policies25 During this period African governments saw economic

stagnation and increased poverty

Times have since changed The current political and economic climate surrounding

natural resource extraction in Africa is strongly punctuated with themes of equitysound natural resource management transparency good governance and civil society

engagement With funding from international non-governmental organisations DFIs

and donors governments and civil society understand the importance of obtaining a

share of natural resource revenues and using them effectively26 By pushing for blanket

tax exemptions for the entire lifetime of a mining project companies are creating

problems for themselves in the long run In the current climate such contracts will likely

be re-opened and renegotiated at some point during the projectrsquos lifespan The more

unfair the terms the worse the reputational impact is likely to be on mining companieswhich sought excessively generous terms This is not good news for a company

planning to operate in a country for up to 30 years Mining companies need to be

mindful that these transactions interplay with governments and communities they are

not like many corporate transactions with no tangible interface with societymining

operations have very real impacts on people and their livelihoods and a negative

impact can translate ultimately into a negative commercial result

Stabilising the fiscal investment climate

What is the problem if a government forces a renegotiation of the fiscal terms of the

concession contract Most mining codes and concession contracts will at the request

of the investor contain a stabilisation clause a contractual device which provides

that the terms of the investment agreement will not be altered unilaterally or

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terminated by the state The aim of the clause is to ensure that future changes in the

legislation of the host state do not vary the terms of the contract on the basis of

which entry was made27 A stabilisation clause may be found in a mining code or a

private investment agreement or both It is intended to immunise the foreigninvestment contract from a range of matters such as taxation environmental

controls and other regulations and even regime change throughout the life of the

project

The GMC guarantees the stabilisation of the tax and customs regime for a period

not exceeding 10 years (for both operating permits and mining concessions) with the

possibility of a one-off extension for a period of five years in return for the payment

of an annual premium by the investor This provides mining companies and their

financiers with much needed long-term fiscal stability The 1995 code did provide alonger stabilisation period of 25 years so mining companies may find this reduction

a disincentive However it is very difficult and even unrealistic to lock a government

into fiscal terms for up to 30 years Governments change and policies change The

reality is that many governments will look to renegotiate terms much earlier than

this Ten years is therefore a far more reasonable and realistic time period and should

signal to investors that the government has actually thought through its policies with

a view to making them practical and workable for the foreseeable future rather than

offering investors the best terms to attract them to a country and then reneging onthem in future

The predictability stability and perceived legitimacy of a fiscal regime are of

paramount importance to investors A regime with slightly higher taxation rates

which has the support of parliament and civil society should be more attractive to

the prudent investor than one which has lower and more enticing taxation rates but is

the subject of local dispute Despite cries by mining companies that the GMC will

deter investment the entry into law and government backing of the GMC may give

investors the predictability and stability they crave attracting investors which have sofar taken the wait-and-see approach when considering investment in Guinea A fairer

fiscal package which provides real returns to government and to society may mean a

larger tax bill for companies in the short term but a more stable investment climate in

the long term which must make sense for long-term extractive industry financing

Increased equity participation

Article 150 of the GMC gives the state immediately upon the issuance of a miningtitle a free 15 stake in the share capital of the title holder with the option to

purchase an additional 20 for all minerals bringing the total share to 35 This

right applies to high-value minerals such as bauxite iron ore uranium gold and

diamonds Under Article 167 of the 1995 code the state had a 15 share in the

capital of companies engaged in the mining of precious stones with high-value

commodities like iron ore and bauxite excluded Interestingly under the GMC it will

be possible in certain circumstances to trade off a proportion of the statersquos equity

entitlement with an increase in taxation rates28

Mining companies argue that increased state participation will cut their revenues

without reducing capital outlay Access to a 35 interest is without doubt the highest

percentage noted in an African mining code On a comparative basis the 2000

Minerals and Mining Law of Liberia permits the government access to a free equity

interest in certain large scale lsquoClass Arsquo mining projects of anywhere between 10 and

South African Journal of International Affairs 253

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15 of the outstanding share capital of the mining company Section 162 of the

Sierra Leone Mines and Minerals Act 2009 permits the government of Sierra Leone

to participate in any large-scale mining operations on terms to be agreed upon

between the holder of a large-scale mining licence and the government Even thougha percentage amount is not specified in Sierra Leone there is an explicit expectation

that governments have the right to take an equity stake in mining projects The

Angolan government has the right to at least a 10 participation in the share capital

of the concessionaire and the statersquos share will increase as the project becomes more

profitable29 In theory the Angolan governmentrsquos equity share could increase to

levels comparable with those of Guinea

Clearly increased state participation is a growing trend so why is it important

Equity gives the state a share in the distributed profits of the special purpose projectcompany after its cash needs are met It also gives governments a degree of control

over a project In the context of a 25-year fully operational high-grade iron ore mine

distributable profits can be substantial so one can appreciate that mining companies

would not choose to give away a greater proportion of their profits Equally

governments must realise that these natural resources are finite national assets from

which maximum return should be extracted for societyrsquos benefit The balance must

be struck so that the governmentrsquos equity stake in conjunction with other provisions

in an investment agreement does not make the project uneconomic for commercialinvestors Indeed it is important to look at the entire taxation regime to see if it is

holistically well-designed and if the sum total of the regime strikes a balance between

giving investors the incentives to explore for and develop resources and ensuring that

the state as owner of those resources becomes richer than it was before extraction

Research by the Frasier Institute and the World Bank

With a view to measuring the impact of competitive markets and governmentintervention on the welfare of individuals each year the Frasier Institute30 conducts

an annual survey of metal mining and exploration companies to assess among other

questions how mineral endowments and public policy factors such as taxation and

regulation affect exploration investment Survey results represent the opinions of

executives and exploration managers in mining and mining consulting companies

operating around the world The 20112012 survey includes data on 93 jurisdictions

around the world including Guinea under the 2011 GMC31

The survey covers 17 policy-related factors that contribute to the ability ofjurisdictions to attract exploration investment as well as the overall attractiveness of a

jurisdiction under current and best practice Some of these policy-related factors

include the countryrsquos legal regime taxation regime level of political stability and

environmental regulations Mining companies are asked to rate a jurisdiction on the

17 policy-related factors on a scale of one to five with one being a policy factor which

encourages exploration investment two being a policy factor which is not a deterrent

to investment three being a policy factor which is a mild deterrent four being a

factor which is a strong deterrent and a score of five illustrating that a companywould not pursue exploration investment in this region because of this factor32

It is worth looking at some of the policy factors for Guinea which are directly

relevant to this article in order to determine whether the Frasier Institutersquos research

can provide evidence for the assertion that mining companies will cease operating in

Guinea owing to the GMC According to the study 50 of mining companies said

254 K Bhatt

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that current law and regulation in Guinea was not a deterrent to investment no

companies voted in category five For the category of lsquopolicymineral potential

assuming no land use restrictions in place and assuming industry lsquolsquobest practicersquorsquo rsquo

53 of mining companies voted in category one with no votes placed in category fiveIn relation to the taxation regime (which includes personal corporate payroll

capital and other taxes and complexity of tax compliance) 35 of mining

companies voted that the tax regime was not a deterrent to investment and only

13 voting in category five For the category lsquouncertainty concerning environmental

regulationsrsquo 32 of mining companies voted in categories one and two with the

remaining amounts shared equally at 12 between categories three to five The fact

that 15 out of 17 respondents voted that Guinea has the least favourable policies

towards mining overall is not borne out by the exploration budgets which aregrowing So the picture is not entirely clear However in general when asked to rate

the importance of mineral potential vs policy factors 59 responded that mineral

potential was more important than policy factors33 Tied to mineral potential of

course is the price of those minerals in any given period and as has often been said

the answer to most things lies in lsquofollowing the moneyrsquo

Commercial decisions on whether and how much to invest will revolve around

the expected direction of movement in commodity prices Although the Frasier

Institutersquos research found less optimism among mining companies about commodityprices than in the recent past the research notes that the decline should not be

overstated34 Averaging across the minerals only 144 of mining companies expect

prices to decline while 49 expect prices to increase by 10 or less (roughly at the

rate of inflation) over the next two years One-third of mining companies expect

increases of 2050 while 4 expect increases over 50 Price projections for gold

and silver seem to be the most positive which is good news for Guinea given its vast

reserves of these metals Fifty-one per cent of mining companies believe that gold

prices will increase by more than 50 over the next two years with gold assigned thelargest proportion of each companyrsquos budget by far at 47

The World Bank35 notes that historically metal prices decreased in 2012 but are

expected to increase marginally in 2013 It notes that aluminium prices fell below

$2000 per ton in the third quarter of 2012 near to their pre-2005 levels Prices

nevertheless are now unlikely to fall much further and the World Bank notes that

aluminium prices are expected to increase almost 3 in 2013 and remain at that level

for the two subsequent years As bauxite is the raw material for aluminium Guinea is

well-positioned in this regardThere will be a tipping point of course where the effects of increasingly extreme

and onerous government policies will override expected profits from surging

commodity prices and may over time deter companies from investing regardless

of the productive potential of a mine However outside of these exceptions (of which

the GMC is certainly not an example) the research from the Frasier Institute shows

that mineral potential and economic potential and not fiscal policy appear to be the

determining factors for companies when making investment decisions

Permitting requirements

The GMC introduces more stringent requirements for obtaining mining permits than

existed under the 1995 code For example applicants must provide a completed

feasibility study incorporating (among other things) an environmental and social

South African Journal of International Affairs 255

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impact study a detailed work schedule a plan for supporting local Guinean

businesses and for utilising locals to provide the goods and services required for the

mining project an economic and financial plan and a community development plan

covering training medical facilities social work education road works water supply

and electricity36 Requiring this level of information from the outset may seem overly

cumbersome to mining companies in the long term this level of due diligence and

planning will no doubt pay off in terms of risk identification mitigation planningand increased government and community support for the project Potential project

finance providers will also look more favourably on investing in companies with a

track record of taking environmental and social issues seriously (in view of the risk

analysis this covers as we will discuss in more detail in the next section) thus helping

private sponsors seeking project finance to achieve one of their commercial

objectives leveraging as much debt as possible Overall this level of information

and detail gives a strong signalling effect to stakeholders that an investor is a

responsible long-term partner

The GMC also provides for a process by which government power is subject to

checks and balances these ensure decisions are not subject to one decisionmaker and

are filtered through a number of channels to promote transparency legitimacy and

credibility in the process of awarding mining rights Under Article 18 of the GMC

the Minister of Mines can only sign a mining contract with the consent of the

National Commission for Mines and with the authorisation of the Council of

Ministers Mining contracts will then be submitted to the legal opinion of theSupreme Court and ratified by Parliament

Although mining companies may argue that the permitting process is now more

time-consuming and overly administrative it is worth noting that the long-term

benefits can be immense Mining contracts have regularly been re-opened owing to

civil society opinion that a contract has been unfairly awarded In a worst case

scenario civil society groups may lodge a formal appeal in a competent court against

the awarding of a mining right and a mining company may find itself in the

unenviable position of being locked into lengthy and costly litigation challenging the

legality of the concession contract (which contains the companyrsquos most important

contractual right the right to mine) It would not be uncommon for litigation of this

type to sit in courts for over 50 years especially as many African jurisdictions do not

have functioning fast track commercial courts37 and possess judicial systems which

are inexperienced in handling large-scale commercial claims By requiring companies

to think more deeply about a broad range of issues prior to applying for the licence

and by requiring a wider cross-governmental consultative approach the GMC is

effectively mitigating the risk of the project being derailed later on as a result ofinterested stakeholders uncovering environmental andor social risks In the next

section we will look at the important issue of community rights and whether

companies now have an obligation to obtain a social licence to operate in addition to

the legal right to mine and how this relates to key themes in this paper

Mining companies should note that Article 32 of the GMC has increased the

duration of operating permits to 15 years (up from 10 years in the 1995 code) with the

possibility of several five-year extensions subject to the holder being in compliance

with its obligations In addition article 18 of the GMC prescribes a maximum duration

of 25 years for mining agreements which may subsequently be renewed through 10

year extensions This would align the term concession very well with the long-term

nature of most project finance arrangements By extending the concessions the

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government has also removed the need for companies to frequently renew operating

permits which entails a bureaucratic process that can be can be time-consuming and

costly Furthermore and for obvious reasons lenders prefer the term of the concession

agreement to be fixed as closely as possible to the life of the project it is not goodbusiness sense to lend millions or even billions of dollars to a project that does not

explicitly permit the project company to mine for a number of years as the lenders are

repaid out of the cash generated from the project Clearly this provision will be most

useful for sponsors when trying to attract project financing

Environmental and social issues

The GMC prioritises environmental and social issues As noted above in order toobtain a mining permit an applicant must provide a detailed feasibility study

incorporating (among other things) an environmental and social impact study and

management plan and a community development plan

The GMC further requires mining companies to prevent and minimise negative

environmental and health outcomes of mining activities Mining right holders are

required to prevent andor treat spillages and waste minimise the use of harmful and

hazardous chemical products and prevent water air and soil pollution Neighbouring

Sierra Leone also prioritises environmental health and safety issues seriously in its2009 Mines and Minerals Act38 In the context of environmental protection Sierra

Leone has gone one step further and in 2008 it set up the Environment Protection

Agency which is in the final stages of passing a landmark set of environmental and

social regulations for the mining sector aimed at regulating and minimising the

harmful environmental effects of mining activities in the country39 Sierra Leone is

also producing detailed health and safety regulations for inter alia open pit mining

underground mining waste disposal explosives and blasting dredging activities

reclamation and mine closure Guinea may follow Sierra Leonersquos lead and drafthealth and safety regulations for the mining sector The new mining code in Angola

published by Law No 3111 of 23 September 2011 sets forth environmental

obligations by requiring compliance with environmental impact assessment imposi-

tions and the implementation of environmental protection measures

The GMC specifically requires mining companies to plan for and mitigate

hardship for those forced to move owing to mining activities The GMC requires

companies to provide compensation to displaced persons for loss of income in

accordance with international principles aligned to the World Bank policy objectivesfor involuntary resettlement which include minimising involuntary resettlement

consulting with affected communities and providing adequate compensation where

resettlement occurs40

Mining companies may well be worried by the increased cost of compliance with

a new raft of international environmental and health and safety standards imposed

on the mining sector Another issue is the time it will take for them to comply and the

penalties imposed on them for non-compliance Time and money are often the

salient reasons forwarded by companies in resisting new regulation in this area aswell as a perceived reluctance on the grounds that regulations are somehow going

above and beyond international standards There are a few points worth noting here

Firstly international mining companies operating in developing counties will in all

likelihood already be complying with environmental and social standards in

developed countries in which they operate By arguing against new regulations as

South African Journal of International Affairs 257

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time-consuming and expensive companies send the underlying message that the

citizens of Guinea deserve less protection of human rights than those in more

developed countries

In many African countries governments are simply enacting environmental and

social legislation which has been lacking By lobbying against such legislation mining

companies are signalling that they would prefer no regulation in these areas and thus

have no regard for the environmental and social impact of their mining operations

or that of other companies However there are several more commercial incentives

for prioritising environmental and social issues in mining operations These include

reputational damage the spectre of lengthy court battles and retaining access to

finance especially in view of the Equator Principles discussed below

The commercial rationale for prioritising environmental and social policies

Moving away from ethical considerations the benefits of sound environmental

compliance are also robust from a commercial perspective in both the short and long

term Discussions regarding direct loans to companies operating in these sectors

either in the form of project finance or as corporate facilities take into account the

level of sustainability of the companyrsquos operations and how this can negatively

impact a business Ignoring sustainability risks can also lead to conflicts with

communities who may feel they have been resettled unfairly or inadequately

compensated Potential conflicts with the wider population (including civil society

groups) are as a result more likely causing reputational damage to a mining

company and potential litigation

Delays in the construction and operation of the mine owing to civil unrest strikes

or lengthy court battles arising from poor social or environmental management can

have disastrous effects on contractual arrangements Mining companies may not be

able to commence construction or continue operations owing to stoppages on site

Depending on the contractual arrangements in place delays in construction caused

by such stoppages may result in the mining companyrsquos sponsor having to pay

liquidated damages pursuant to the terms of the construction contract In addition

the sponsor may then have to pay damages under the borrowerrsquos sales contracts if

there are delays in construction leading to the final product not being ready for sale

as per the contractual arrangements The possible scenarios are multifarious Delays

such as these can have a disastrous effect on the economics of the project as in a

project finance deal the sponsor will be largely relying on payments under the sales

contracts to repay the debt A company that fails to prioritise sustainability and the

social aspects of its licence to operate could find itself in a position where it

potentially defaults on debt repayment as per its financing arrangements is unable to

construct the project and is thus liable to pay a substantial damages bill pursuant to

its long-term sales contracts

Mining companies must also take a long-term view when it comes to appreciating

the benefits of integrating sustainable practices into operations Giving full support

to legislation which puts environmental and social considerations into investment

practice makes business sense investing in compliance would reap good results in the

future in terms of mitigating potential defaults caused by sustainability risk and will

generate goodwill with the host government and local communities After all the

mining companies plan to be present in the host state for a number of years and it is

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

South African Journal of International Affairs 259

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

South African Journal of International Affairs 261

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

262 K Bhatt

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

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people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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to strike a fair balance between providing a stable and attractive environment for

investors and increasing the environmental and social benefits from mining for local

communities

The analysis which follows examines some of the key provisions of the GMCrelating to fiscal provisions the obtaining of permits equity participation and

environmental and social issues These are discussed in the light of the mining

sectorrsquos criticisms with reference to the 2013 GMC amendments as appropriate and

as available at the time of writing

Fiscal provisions

Royalty rates

The GMC introduces several changes to the tax and royalty regime for mining

companies as set out in Article 161 One of the main criticisms of the GMC concerns

royalty rates which are paid to the government by mining firms and are based on

various factors such as sales rates (ad valorem) or quantity of mineral produced11

Mining companies claimed that the GMC imposed higher rates compared with those

in other African countries Article 161 sets out a detailed table containing changes to

the mining taxes Upon closer analysis however Guinearsquos royalty rates which are advalorem rates paid as a percentage of the sales price per metric tonne of mineral

extracted are in fact in line with those of other African countries Article 161

categorises royalty rates with for instance iron ore fixed at 15 per metric tonne

standard bauxite at 055 and alumina at 10 and precious metals such as silver

gold and ingot at 50 per ounce These percentages are all based on seller price of

the relevant commodity based on international sales rates such as the London Metal

Exchange As such the royalty rates are highly dependent on the relevant commodity

priceLooking at the gold rate 50 is not an unprecedented figure According to a

2012 working paper of the African Development Bank12 the average royalty rate for

gold in Africa is 40 Botswana Sierra Leone and Zambia each have a 50 royalty

for gold while Niger requires a royalty payment of 55 Article 148 of the 2009

Sierra Leone Mines and Minerals Act sets out the royalty rates for its mining sector

which like Guinearsquos are fixed as a percentage of the sale value of the relevant

commodity which is received in an armrsquos length market-based transaction In

comparison to Guinearsquos Sierra Leonersquos rates are high with 15 for special stones(defined as those with a market value in excess of $500000) 65 for precious

stones 50 for precious metals such as gold and 3013 for all other minerals

From this analysis it appears that Guinearsquos new royalty rates are neither

unprecedented nor unreasonable

International benchmarking of prices

One of the major changes in the GMC is that an international benchmark is now

used for calculating mining taxes Under Article 139 of Guinearsquos 1995 mining code

taxes were calculated on the lsquofree on boardrsquo value of the mineral however the GMC

incorporates armrsquos length pricing into policy and now calculates prices on the

London Metal Exchange three-month seller value14 Linking mining taxes to

transparent international index prices ensures that governments receive a fair market

South African Journal of International Affairs 249

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price for minerals and encourages transparency in pricing International indexing of

prices is an extremely useful tool in the fight against transfer pricing15 issues between

related companies which is a problem in developing countries African governments

are waking up to the lost revenues caused by transfer pricing arrangements and areentrenching such specific armrsquos length requirements into legislation For example the

Sierra Leone 2009 Mines and Minerals Act requires the sale of all mineral products

obtained in mining operations to take place on an armrsquos length basis16

Similarly the Mineral Development Agreement between the government of

Liberia and Mittal Steel was renegotiated in 2007 One of the biggest problems in the

contract was that the price of iron ore was set by Mittal and all iron ore was sold to

Mittalrsquos affiliates thus encouraging transfer pricing and depriving Liberia of revenue

Under the amended contract the price of iron ore is set under the armrsquos length rulemeaning that it will be based on the international market price of iron ore Given the

lack of transfer pricing legislation in Africa in general it is important that such

provisions are stipulated in legislation

Project finance

The reasons for governments to insist on international prices are fairly clear but why

is it beneficial for mining companies to fix prices in accordance with internationalbenchmarks If a mining company can sell a mineral product to an affiliate at a

discounted rate surely this will procure a short-term financial advantage However

from a long-term perspective the financial arrangement may have a negative impact

on the company This is due to the fact that typically mining companies will turn to

project finance as the preferred method to finance the development construction

and operation of mining projects According to the Financial Times in 2011 the

number of foreign direct investment (FDI) projects in Africa grew by 27 compared

with 2010 with a particularly strong growth in the metals and minerals sectors17 TheUnited Nations Conference on Trade and Development estimated that in 2008 $630

billion in FDI flowed to the Global South According to Thomson Reutersrsquo regional

data approximately $1134 billion went towards project finance developments in the

Global South18

Put simply project finance refers to a non-recourse or limited recourse financing

structure in which debt equity and credit enhancement are combined for the

construction and operation or the refinancing of a particular facility or capital-

intensive industry Under such arrangements lenders base credit approvals on theprojected revenues from the operation of the facility rather than on the general assets

or the credit of the sponsors of the facility and rely on the assets of the facility

including the revenue-producing contracts and other cash flow generated by the

facility as collateral for the debt19

Ensuring that the project is built and properly operational is crucial for lenders as

it is fundamental to the success of the project and the ultimate repayment of the debt

Project finance lenders lend substantial amounts of capital which will be used for the

construction of a mine for example and will not see any repayment of principal andinterest until a project is constructed which can take many years

Notwithstanding the above project finance remains the preferred method of

financing for many private sector sponsors as it achieves a number of corporate

objectives While it is beyond the scope of this article to detail these objectives it is

worth pointing out a few which we will refer to later on in the article Project finance

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enables private sponsors to leverage large amounts of debt without diluting existing

equity and this debt can come from a variety of different sources For example

development finance institutions (DFIs)20 which have investment portfolios for

projects with a high risk and a high developmental effect will be attracted to projectsin emerging markets which have the potential to deliver developmental returns

Commercial banks may not independently invest in projects in politically unstable

countries or those with untested legal systems However the presence of DFIs in the

financing plan will incentivise commercial banks to invest thus increasing the debt

capacity of the project Another major benefit for sponsors is that project finance

allows the sharing of risks involved in a project This is to the advantage of mining

companies when they come to the financing stage of the project A mining company

can spread risks over all of the project participants including the lenders and thegovernment which theoretically also increases the likelihood of success of the project

The process by which banks decide to invest (often referred to as the lsquobankabilityrsquo

analysis) involves an assessment of the financial and legal status of the borrowing

entity21 In a project finance scenario banks will have recourse only to the assets of

the project for repayment of their debt and so a careful analysis of the borrowerrsquos

contractual rights and obligations is paramount A major consideration will be the

pricing of the finished product and any bank with an eye on the future of its

investment will be averse to a situation where the special purpose vehicle borrower isselling its product to a third party at a rate below market value for obvious reasons

a lender will not look kindly on any circumstances which could adversely affect the

repayment profile of the project

Furthermore as financing in mining projects is typically long term where it is

common to see repayment over a 30 year period it would make sense for banks to

ensure pricing is determined in accordance with international standards to minimise

future social discontent over contracts and potential lobbying for renegotiation

which can have a disastrous effect for private sponsors22

Tax exemptions under the GMC

The fiscal and customs benefits afforded to investors depend on the phase of the

mining operation whether prospecting under construction or in full operation

Broadly speaking tax exemptions are more prevalent in the prospecting and

construction phase rather than the operation phase This makes sense from an

investment point of view During the prospecting stage there is uncertainty as to theamount and quality of the ore and during the high-risk construction phase mining

companies will be investing substantial capital costs into the project with no

incoming revenue for a significant period of time It is thus fair that during the

prospecting and construction phases the fiscal provisions are broadly speaking less

onerous

It is worthwhile to take a closer look at a few examples of this During the

prospecting and construction stages companies benefit from VAT exemptions for the

import of materials equipment and spare parts In addition all imported equipmentplant machinery and commercial vehicles listed as fixed assets as well as materials

and spare parts for commercial vehicles have a total exemption from customs duty

during the prospecting and construction stages

Taxes are thus typically ramped up during the operating stage Pursuant to

Article 177 of the GMC companies will be taxed on all expenses incurred for the

South African Journal of International Affairs 251

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purposes of generating income and will be subject to a customs duty of 6 on all

equipment material plant machinery and commercial vehicles which are to be used

for transforming ore into finished and semi-finished product Furthermore raw

materials and petroleum products necessary for transforming ore to finished productwill also be subject to a 6 customs duty The 2011 GMC applied a rate of 8 for

the import of equipment and raw materials used for the extraction of ore23 but it

appears that the changes to the GMC promulgated on 8 April 2013 have reduced

import tax on operation-related mining equipment from 8 to 65 in a bid to

attract more FDI24

Looking at the tax provisions in more detail illustrates that holistically the tax

regime is not one-sided It is entirely equitable that companies are given tax

exemptions during the more uncertain phases of prospecting and constructionHowever why should such exemptions continue during operations when companies

are making profits There is clearly a strong moral and developmental argument

against this but there is also a commercial rationale The 1995 code was arguably

overly generous in the long tax holidays it provided to investors which for certain

projects ran from the start of commercial operations when the project effectively

would have been generating income

It is important to remember the geopolitical climate in which the 1995 code was

written was a time of state withdrawal increased liberalisation of markets andincreased privatisation Caught up in the tide of neo-liberal economic policy and

seeking to attract much-needed foreign capital and technology African governments

provided attractive tax breaks and incentives when they opened up their natural

resources to inward investment but with little or no attention to the developmental

effects of such policies25 During this period African governments saw economic

stagnation and increased poverty

Times have since changed The current political and economic climate surrounding

natural resource extraction in Africa is strongly punctuated with themes of equitysound natural resource management transparency good governance and civil society

engagement With funding from international non-governmental organisations DFIs

and donors governments and civil society understand the importance of obtaining a

share of natural resource revenues and using them effectively26 By pushing for blanket

tax exemptions for the entire lifetime of a mining project companies are creating

problems for themselves in the long run In the current climate such contracts will likely

be re-opened and renegotiated at some point during the projectrsquos lifespan The more

unfair the terms the worse the reputational impact is likely to be on mining companieswhich sought excessively generous terms This is not good news for a company

planning to operate in a country for up to 30 years Mining companies need to be

mindful that these transactions interplay with governments and communities they are

not like many corporate transactions with no tangible interface with societymining

operations have very real impacts on people and their livelihoods and a negative

impact can translate ultimately into a negative commercial result

Stabilising the fiscal investment climate

What is the problem if a government forces a renegotiation of the fiscal terms of the

concession contract Most mining codes and concession contracts will at the request

of the investor contain a stabilisation clause a contractual device which provides

that the terms of the investment agreement will not be altered unilaterally or

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terminated by the state The aim of the clause is to ensure that future changes in the

legislation of the host state do not vary the terms of the contract on the basis of

which entry was made27 A stabilisation clause may be found in a mining code or a

private investment agreement or both It is intended to immunise the foreigninvestment contract from a range of matters such as taxation environmental

controls and other regulations and even regime change throughout the life of the

project

The GMC guarantees the stabilisation of the tax and customs regime for a period

not exceeding 10 years (for both operating permits and mining concessions) with the

possibility of a one-off extension for a period of five years in return for the payment

of an annual premium by the investor This provides mining companies and their

financiers with much needed long-term fiscal stability The 1995 code did provide alonger stabilisation period of 25 years so mining companies may find this reduction

a disincentive However it is very difficult and even unrealistic to lock a government

into fiscal terms for up to 30 years Governments change and policies change The

reality is that many governments will look to renegotiate terms much earlier than

this Ten years is therefore a far more reasonable and realistic time period and should

signal to investors that the government has actually thought through its policies with

a view to making them practical and workable for the foreseeable future rather than

offering investors the best terms to attract them to a country and then reneging onthem in future

The predictability stability and perceived legitimacy of a fiscal regime are of

paramount importance to investors A regime with slightly higher taxation rates

which has the support of parliament and civil society should be more attractive to

the prudent investor than one which has lower and more enticing taxation rates but is

the subject of local dispute Despite cries by mining companies that the GMC will

deter investment the entry into law and government backing of the GMC may give

investors the predictability and stability they crave attracting investors which have sofar taken the wait-and-see approach when considering investment in Guinea A fairer

fiscal package which provides real returns to government and to society may mean a

larger tax bill for companies in the short term but a more stable investment climate in

the long term which must make sense for long-term extractive industry financing

Increased equity participation

Article 150 of the GMC gives the state immediately upon the issuance of a miningtitle a free 15 stake in the share capital of the title holder with the option to

purchase an additional 20 for all minerals bringing the total share to 35 This

right applies to high-value minerals such as bauxite iron ore uranium gold and

diamonds Under Article 167 of the 1995 code the state had a 15 share in the

capital of companies engaged in the mining of precious stones with high-value

commodities like iron ore and bauxite excluded Interestingly under the GMC it will

be possible in certain circumstances to trade off a proportion of the statersquos equity

entitlement with an increase in taxation rates28

Mining companies argue that increased state participation will cut their revenues

without reducing capital outlay Access to a 35 interest is without doubt the highest

percentage noted in an African mining code On a comparative basis the 2000

Minerals and Mining Law of Liberia permits the government access to a free equity

interest in certain large scale lsquoClass Arsquo mining projects of anywhere between 10 and

South African Journal of International Affairs 253

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15 of the outstanding share capital of the mining company Section 162 of the

Sierra Leone Mines and Minerals Act 2009 permits the government of Sierra Leone

to participate in any large-scale mining operations on terms to be agreed upon

between the holder of a large-scale mining licence and the government Even thougha percentage amount is not specified in Sierra Leone there is an explicit expectation

that governments have the right to take an equity stake in mining projects The

Angolan government has the right to at least a 10 participation in the share capital

of the concessionaire and the statersquos share will increase as the project becomes more

profitable29 In theory the Angolan governmentrsquos equity share could increase to

levels comparable with those of Guinea

Clearly increased state participation is a growing trend so why is it important

Equity gives the state a share in the distributed profits of the special purpose projectcompany after its cash needs are met It also gives governments a degree of control

over a project In the context of a 25-year fully operational high-grade iron ore mine

distributable profits can be substantial so one can appreciate that mining companies

would not choose to give away a greater proportion of their profits Equally

governments must realise that these natural resources are finite national assets from

which maximum return should be extracted for societyrsquos benefit The balance must

be struck so that the governmentrsquos equity stake in conjunction with other provisions

in an investment agreement does not make the project uneconomic for commercialinvestors Indeed it is important to look at the entire taxation regime to see if it is

holistically well-designed and if the sum total of the regime strikes a balance between

giving investors the incentives to explore for and develop resources and ensuring that

the state as owner of those resources becomes richer than it was before extraction

Research by the Frasier Institute and the World Bank

With a view to measuring the impact of competitive markets and governmentintervention on the welfare of individuals each year the Frasier Institute30 conducts

an annual survey of metal mining and exploration companies to assess among other

questions how mineral endowments and public policy factors such as taxation and

regulation affect exploration investment Survey results represent the opinions of

executives and exploration managers in mining and mining consulting companies

operating around the world The 20112012 survey includes data on 93 jurisdictions

around the world including Guinea under the 2011 GMC31

The survey covers 17 policy-related factors that contribute to the ability ofjurisdictions to attract exploration investment as well as the overall attractiveness of a

jurisdiction under current and best practice Some of these policy-related factors

include the countryrsquos legal regime taxation regime level of political stability and

environmental regulations Mining companies are asked to rate a jurisdiction on the

17 policy-related factors on a scale of one to five with one being a policy factor which

encourages exploration investment two being a policy factor which is not a deterrent

to investment three being a policy factor which is a mild deterrent four being a

factor which is a strong deterrent and a score of five illustrating that a companywould not pursue exploration investment in this region because of this factor32

It is worth looking at some of the policy factors for Guinea which are directly

relevant to this article in order to determine whether the Frasier Institutersquos research

can provide evidence for the assertion that mining companies will cease operating in

Guinea owing to the GMC According to the study 50 of mining companies said

254 K Bhatt

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that current law and regulation in Guinea was not a deterrent to investment no

companies voted in category five For the category of lsquopolicymineral potential

assuming no land use restrictions in place and assuming industry lsquolsquobest practicersquorsquo rsquo

53 of mining companies voted in category one with no votes placed in category fiveIn relation to the taxation regime (which includes personal corporate payroll

capital and other taxes and complexity of tax compliance) 35 of mining

companies voted that the tax regime was not a deterrent to investment and only

13 voting in category five For the category lsquouncertainty concerning environmental

regulationsrsquo 32 of mining companies voted in categories one and two with the

remaining amounts shared equally at 12 between categories three to five The fact

that 15 out of 17 respondents voted that Guinea has the least favourable policies

towards mining overall is not borne out by the exploration budgets which aregrowing So the picture is not entirely clear However in general when asked to rate

the importance of mineral potential vs policy factors 59 responded that mineral

potential was more important than policy factors33 Tied to mineral potential of

course is the price of those minerals in any given period and as has often been said

the answer to most things lies in lsquofollowing the moneyrsquo

Commercial decisions on whether and how much to invest will revolve around

the expected direction of movement in commodity prices Although the Frasier

Institutersquos research found less optimism among mining companies about commodityprices than in the recent past the research notes that the decline should not be

overstated34 Averaging across the minerals only 144 of mining companies expect

prices to decline while 49 expect prices to increase by 10 or less (roughly at the

rate of inflation) over the next two years One-third of mining companies expect

increases of 2050 while 4 expect increases over 50 Price projections for gold

and silver seem to be the most positive which is good news for Guinea given its vast

reserves of these metals Fifty-one per cent of mining companies believe that gold

prices will increase by more than 50 over the next two years with gold assigned thelargest proportion of each companyrsquos budget by far at 47

The World Bank35 notes that historically metal prices decreased in 2012 but are

expected to increase marginally in 2013 It notes that aluminium prices fell below

$2000 per ton in the third quarter of 2012 near to their pre-2005 levels Prices

nevertheless are now unlikely to fall much further and the World Bank notes that

aluminium prices are expected to increase almost 3 in 2013 and remain at that level

for the two subsequent years As bauxite is the raw material for aluminium Guinea is

well-positioned in this regardThere will be a tipping point of course where the effects of increasingly extreme

and onerous government policies will override expected profits from surging

commodity prices and may over time deter companies from investing regardless

of the productive potential of a mine However outside of these exceptions (of which

the GMC is certainly not an example) the research from the Frasier Institute shows

that mineral potential and economic potential and not fiscal policy appear to be the

determining factors for companies when making investment decisions

Permitting requirements

The GMC introduces more stringent requirements for obtaining mining permits than

existed under the 1995 code For example applicants must provide a completed

feasibility study incorporating (among other things) an environmental and social

South African Journal of International Affairs 255

Dow

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impact study a detailed work schedule a plan for supporting local Guinean

businesses and for utilising locals to provide the goods and services required for the

mining project an economic and financial plan and a community development plan

covering training medical facilities social work education road works water supply

and electricity36 Requiring this level of information from the outset may seem overly

cumbersome to mining companies in the long term this level of due diligence and

planning will no doubt pay off in terms of risk identification mitigation planningand increased government and community support for the project Potential project

finance providers will also look more favourably on investing in companies with a

track record of taking environmental and social issues seriously (in view of the risk

analysis this covers as we will discuss in more detail in the next section) thus helping

private sponsors seeking project finance to achieve one of their commercial

objectives leveraging as much debt as possible Overall this level of information

and detail gives a strong signalling effect to stakeholders that an investor is a

responsible long-term partner

The GMC also provides for a process by which government power is subject to

checks and balances these ensure decisions are not subject to one decisionmaker and

are filtered through a number of channels to promote transparency legitimacy and

credibility in the process of awarding mining rights Under Article 18 of the GMC

the Minister of Mines can only sign a mining contract with the consent of the

National Commission for Mines and with the authorisation of the Council of

Ministers Mining contracts will then be submitted to the legal opinion of theSupreme Court and ratified by Parliament

Although mining companies may argue that the permitting process is now more

time-consuming and overly administrative it is worth noting that the long-term

benefits can be immense Mining contracts have regularly been re-opened owing to

civil society opinion that a contract has been unfairly awarded In a worst case

scenario civil society groups may lodge a formal appeal in a competent court against

the awarding of a mining right and a mining company may find itself in the

unenviable position of being locked into lengthy and costly litigation challenging the

legality of the concession contract (which contains the companyrsquos most important

contractual right the right to mine) It would not be uncommon for litigation of this

type to sit in courts for over 50 years especially as many African jurisdictions do not

have functioning fast track commercial courts37 and possess judicial systems which

are inexperienced in handling large-scale commercial claims By requiring companies

to think more deeply about a broad range of issues prior to applying for the licence

and by requiring a wider cross-governmental consultative approach the GMC is

effectively mitigating the risk of the project being derailed later on as a result ofinterested stakeholders uncovering environmental andor social risks In the next

section we will look at the important issue of community rights and whether

companies now have an obligation to obtain a social licence to operate in addition to

the legal right to mine and how this relates to key themes in this paper

Mining companies should note that Article 32 of the GMC has increased the

duration of operating permits to 15 years (up from 10 years in the 1995 code) with the

possibility of several five-year extensions subject to the holder being in compliance

with its obligations In addition article 18 of the GMC prescribes a maximum duration

of 25 years for mining agreements which may subsequently be renewed through 10

year extensions This would align the term concession very well with the long-term

nature of most project finance arrangements By extending the concessions the

256 K Bhatt

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government has also removed the need for companies to frequently renew operating

permits which entails a bureaucratic process that can be can be time-consuming and

costly Furthermore and for obvious reasons lenders prefer the term of the concession

agreement to be fixed as closely as possible to the life of the project it is not goodbusiness sense to lend millions or even billions of dollars to a project that does not

explicitly permit the project company to mine for a number of years as the lenders are

repaid out of the cash generated from the project Clearly this provision will be most

useful for sponsors when trying to attract project financing

Environmental and social issues

The GMC prioritises environmental and social issues As noted above in order toobtain a mining permit an applicant must provide a detailed feasibility study

incorporating (among other things) an environmental and social impact study and

management plan and a community development plan

The GMC further requires mining companies to prevent and minimise negative

environmental and health outcomes of mining activities Mining right holders are

required to prevent andor treat spillages and waste minimise the use of harmful and

hazardous chemical products and prevent water air and soil pollution Neighbouring

Sierra Leone also prioritises environmental health and safety issues seriously in its2009 Mines and Minerals Act38 In the context of environmental protection Sierra

Leone has gone one step further and in 2008 it set up the Environment Protection

Agency which is in the final stages of passing a landmark set of environmental and

social regulations for the mining sector aimed at regulating and minimising the

harmful environmental effects of mining activities in the country39 Sierra Leone is

also producing detailed health and safety regulations for inter alia open pit mining

underground mining waste disposal explosives and blasting dredging activities

reclamation and mine closure Guinea may follow Sierra Leonersquos lead and drafthealth and safety regulations for the mining sector The new mining code in Angola

published by Law No 3111 of 23 September 2011 sets forth environmental

obligations by requiring compliance with environmental impact assessment imposi-

tions and the implementation of environmental protection measures

The GMC specifically requires mining companies to plan for and mitigate

hardship for those forced to move owing to mining activities The GMC requires

companies to provide compensation to displaced persons for loss of income in

accordance with international principles aligned to the World Bank policy objectivesfor involuntary resettlement which include minimising involuntary resettlement

consulting with affected communities and providing adequate compensation where

resettlement occurs40

Mining companies may well be worried by the increased cost of compliance with

a new raft of international environmental and health and safety standards imposed

on the mining sector Another issue is the time it will take for them to comply and the

penalties imposed on them for non-compliance Time and money are often the

salient reasons forwarded by companies in resisting new regulation in this area aswell as a perceived reluctance on the grounds that regulations are somehow going

above and beyond international standards There are a few points worth noting here

Firstly international mining companies operating in developing counties will in all

likelihood already be complying with environmental and social standards in

developed countries in which they operate By arguing against new regulations as

South African Journal of International Affairs 257

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time-consuming and expensive companies send the underlying message that the

citizens of Guinea deserve less protection of human rights than those in more

developed countries

In many African countries governments are simply enacting environmental and

social legislation which has been lacking By lobbying against such legislation mining

companies are signalling that they would prefer no regulation in these areas and thus

have no regard for the environmental and social impact of their mining operations

or that of other companies However there are several more commercial incentives

for prioritising environmental and social issues in mining operations These include

reputational damage the spectre of lengthy court battles and retaining access to

finance especially in view of the Equator Principles discussed below

The commercial rationale for prioritising environmental and social policies

Moving away from ethical considerations the benefits of sound environmental

compliance are also robust from a commercial perspective in both the short and long

term Discussions regarding direct loans to companies operating in these sectors

either in the form of project finance or as corporate facilities take into account the

level of sustainability of the companyrsquos operations and how this can negatively

impact a business Ignoring sustainability risks can also lead to conflicts with

communities who may feel they have been resettled unfairly or inadequately

compensated Potential conflicts with the wider population (including civil society

groups) are as a result more likely causing reputational damage to a mining

company and potential litigation

Delays in the construction and operation of the mine owing to civil unrest strikes

or lengthy court battles arising from poor social or environmental management can

have disastrous effects on contractual arrangements Mining companies may not be

able to commence construction or continue operations owing to stoppages on site

Depending on the contractual arrangements in place delays in construction caused

by such stoppages may result in the mining companyrsquos sponsor having to pay

liquidated damages pursuant to the terms of the construction contract In addition

the sponsor may then have to pay damages under the borrowerrsquos sales contracts if

there are delays in construction leading to the final product not being ready for sale

as per the contractual arrangements The possible scenarios are multifarious Delays

such as these can have a disastrous effect on the economics of the project as in a

project finance deal the sponsor will be largely relying on payments under the sales

contracts to repay the debt A company that fails to prioritise sustainability and the

social aspects of its licence to operate could find itself in a position where it

potentially defaults on debt repayment as per its financing arrangements is unable to

construct the project and is thus liable to pay a substantial damages bill pursuant to

its long-term sales contracts

Mining companies must also take a long-term view when it comes to appreciating

the benefits of integrating sustainable practices into operations Giving full support

to legislation which puts environmental and social considerations into investment

practice makes business sense investing in compliance would reap good results in the

future in terms of mitigating potential defaults caused by sustainability risk and will

generate goodwill with the host government and local communities After all the

mining companies plan to be present in the host state for a number of years and it is

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

South African Journal of International Affairs 259

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

South African Journal of International Affairs 261

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

262 K Bhatt

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

South African Journal of International Affairs 263

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

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people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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price for minerals and encourages transparency in pricing International indexing of

prices is an extremely useful tool in the fight against transfer pricing15 issues between

related companies which is a problem in developing countries African governments

are waking up to the lost revenues caused by transfer pricing arrangements and areentrenching such specific armrsquos length requirements into legislation For example the

Sierra Leone 2009 Mines and Minerals Act requires the sale of all mineral products

obtained in mining operations to take place on an armrsquos length basis16

Similarly the Mineral Development Agreement between the government of

Liberia and Mittal Steel was renegotiated in 2007 One of the biggest problems in the

contract was that the price of iron ore was set by Mittal and all iron ore was sold to

Mittalrsquos affiliates thus encouraging transfer pricing and depriving Liberia of revenue

Under the amended contract the price of iron ore is set under the armrsquos length rulemeaning that it will be based on the international market price of iron ore Given the

lack of transfer pricing legislation in Africa in general it is important that such

provisions are stipulated in legislation

Project finance

The reasons for governments to insist on international prices are fairly clear but why

is it beneficial for mining companies to fix prices in accordance with internationalbenchmarks If a mining company can sell a mineral product to an affiliate at a

discounted rate surely this will procure a short-term financial advantage However

from a long-term perspective the financial arrangement may have a negative impact

on the company This is due to the fact that typically mining companies will turn to

project finance as the preferred method to finance the development construction

and operation of mining projects According to the Financial Times in 2011 the

number of foreign direct investment (FDI) projects in Africa grew by 27 compared

with 2010 with a particularly strong growth in the metals and minerals sectors17 TheUnited Nations Conference on Trade and Development estimated that in 2008 $630

billion in FDI flowed to the Global South According to Thomson Reutersrsquo regional

data approximately $1134 billion went towards project finance developments in the

Global South18

Put simply project finance refers to a non-recourse or limited recourse financing

structure in which debt equity and credit enhancement are combined for the

construction and operation or the refinancing of a particular facility or capital-

intensive industry Under such arrangements lenders base credit approvals on theprojected revenues from the operation of the facility rather than on the general assets

or the credit of the sponsors of the facility and rely on the assets of the facility

including the revenue-producing contracts and other cash flow generated by the

facility as collateral for the debt19

Ensuring that the project is built and properly operational is crucial for lenders as

it is fundamental to the success of the project and the ultimate repayment of the debt

Project finance lenders lend substantial amounts of capital which will be used for the

construction of a mine for example and will not see any repayment of principal andinterest until a project is constructed which can take many years

Notwithstanding the above project finance remains the preferred method of

financing for many private sector sponsors as it achieves a number of corporate

objectives While it is beyond the scope of this article to detail these objectives it is

worth pointing out a few which we will refer to later on in the article Project finance

250 K Bhatt

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enables private sponsors to leverage large amounts of debt without diluting existing

equity and this debt can come from a variety of different sources For example

development finance institutions (DFIs)20 which have investment portfolios for

projects with a high risk and a high developmental effect will be attracted to projectsin emerging markets which have the potential to deliver developmental returns

Commercial banks may not independently invest in projects in politically unstable

countries or those with untested legal systems However the presence of DFIs in the

financing plan will incentivise commercial banks to invest thus increasing the debt

capacity of the project Another major benefit for sponsors is that project finance

allows the sharing of risks involved in a project This is to the advantage of mining

companies when they come to the financing stage of the project A mining company

can spread risks over all of the project participants including the lenders and thegovernment which theoretically also increases the likelihood of success of the project

The process by which banks decide to invest (often referred to as the lsquobankabilityrsquo

analysis) involves an assessment of the financial and legal status of the borrowing

entity21 In a project finance scenario banks will have recourse only to the assets of

the project for repayment of their debt and so a careful analysis of the borrowerrsquos

contractual rights and obligations is paramount A major consideration will be the

pricing of the finished product and any bank with an eye on the future of its

investment will be averse to a situation where the special purpose vehicle borrower isselling its product to a third party at a rate below market value for obvious reasons

a lender will not look kindly on any circumstances which could adversely affect the

repayment profile of the project

Furthermore as financing in mining projects is typically long term where it is

common to see repayment over a 30 year period it would make sense for banks to

ensure pricing is determined in accordance with international standards to minimise

future social discontent over contracts and potential lobbying for renegotiation

which can have a disastrous effect for private sponsors22

Tax exemptions under the GMC

The fiscal and customs benefits afforded to investors depend on the phase of the

mining operation whether prospecting under construction or in full operation

Broadly speaking tax exemptions are more prevalent in the prospecting and

construction phase rather than the operation phase This makes sense from an

investment point of view During the prospecting stage there is uncertainty as to theamount and quality of the ore and during the high-risk construction phase mining

companies will be investing substantial capital costs into the project with no

incoming revenue for a significant period of time It is thus fair that during the

prospecting and construction phases the fiscal provisions are broadly speaking less

onerous

It is worthwhile to take a closer look at a few examples of this During the

prospecting and construction stages companies benefit from VAT exemptions for the

import of materials equipment and spare parts In addition all imported equipmentplant machinery and commercial vehicles listed as fixed assets as well as materials

and spare parts for commercial vehicles have a total exemption from customs duty

during the prospecting and construction stages

Taxes are thus typically ramped up during the operating stage Pursuant to

Article 177 of the GMC companies will be taxed on all expenses incurred for the

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purposes of generating income and will be subject to a customs duty of 6 on all

equipment material plant machinery and commercial vehicles which are to be used

for transforming ore into finished and semi-finished product Furthermore raw

materials and petroleum products necessary for transforming ore to finished productwill also be subject to a 6 customs duty The 2011 GMC applied a rate of 8 for

the import of equipment and raw materials used for the extraction of ore23 but it

appears that the changes to the GMC promulgated on 8 April 2013 have reduced

import tax on operation-related mining equipment from 8 to 65 in a bid to

attract more FDI24

Looking at the tax provisions in more detail illustrates that holistically the tax

regime is not one-sided It is entirely equitable that companies are given tax

exemptions during the more uncertain phases of prospecting and constructionHowever why should such exemptions continue during operations when companies

are making profits There is clearly a strong moral and developmental argument

against this but there is also a commercial rationale The 1995 code was arguably

overly generous in the long tax holidays it provided to investors which for certain

projects ran from the start of commercial operations when the project effectively

would have been generating income

It is important to remember the geopolitical climate in which the 1995 code was

written was a time of state withdrawal increased liberalisation of markets andincreased privatisation Caught up in the tide of neo-liberal economic policy and

seeking to attract much-needed foreign capital and technology African governments

provided attractive tax breaks and incentives when they opened up their natural

resources to inward investment but with little or no attention to the developmental

effects of such policies25 During this period African governments saw economic

stagnation and increased poverty

Times have since changed The current political and economic climate surrounding

natural resource extraction in Africa is strongly punctuated with themes of equitysound natural resource management transparency good governance and civil society

engagement With funding from international non-governmental organisations DFIs

and donors governments and civil society understand the importance of obtaining a

share of natural resource revenues and using them effectively26 By pushing for blanket

tax exemptions for the entire lifetime of a mining project companies are creating

problems for themselves in the long run In the current climate such contracts will likely

be re-opened and renegotiated at some point during the projectrsquos lifespan The more

unfair the terms the worse the reputational impact is likely to be on mining companieswhich sought excessively generous terms This is not good news for a company

planning to operate in a country for up to 30 years Mining companies need to be

mindful that these transactions interplay with governments and communities they are

not like many corporate transactions with no tangible interface with societymining

operations have very real impacts on people and their livelihoods and a negative

impact can translate ultimately into a negative commercial result

Stabilising the fiscal investment climate

What is the problem if a government forces a renegotiation of the fiscal terms of the

concession contract Most mining codes and concession contracts will at the request

of the investor contain a stabilisation clause a contractual device which provides

that the terms of the investment agreement will not be altered unilaterally or

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terminated by the state The aim of the clause is to ensure that future changes in the

legislation of the host state do not vary the terms of the contract on the basis of

which entry was made27 A stabilisation clause may be found in a mining code or a

private investment agreement or both It is intended to immunise the foreigninvestment contract from a range of matters such as taxation environmental

controls and other regulations and even regime change throughout the life of the

project

The GMC guarantees the stabilisation of the tax and customs regime for a period

not exceeding 10 years (for both operating permits and mining concessions) with the

possibility of a one-off extension for a period of five years in return for the payment

of an annual premium by the investor This provides mining companies and their

financiers with much needed long-term fiscal stability The 1995 code did provide alonger stabilisation period of 25 years so mining companies may find this reduction

a disincentive However it is very difficult and even unrealistic to lock a government

into fiscal terms for up to 30 years Governments change and policies change The

reality is that many governments will look to renegotiate terms much earlier than

this Ten years is therefore a far more reasonable and realistic time period and should

signal to investors that the government has actually thought through its policies with

a view to making them practical and workable for the foreseeable future rather than

offering investors the best terms to attract them to a country and then reneging onthem in future

The predictability stability and perceived legitimacy of a fiscal regime are of

paramount importance to investors A regime with slightly higher taxation rates

which has the support of parliament and civil society should be more attractive to

the prudent investor than one which has lower and more enticing taxation rates but is

the subject of local dispute Despite cries by mining companies that the GMC will

deter investment the entry into law and government backing of the GMC may give

investors the predictability and stability they crave attracting investors which have sofar taken the wait-and-see approach when considering investment in Guinea A fairer

fiscal package which provides real returns to government and to society may mean a

larger tax bill for companies in the short term but a more stable investment climate in

the long term which must make sense for long-term extractive industry financing

Increased equity participation

Article 150 of the GMC gives the state immediately upon the issuance of a miningtitle a free 15 stake in the share capital of the title holder with the option to

purchase an additional 20 for all minerals bringing the total share to 35 This

right applies to high-value minerals such as bauxite iron ore uranium gold and

diamonds Under Article 167 of the 1995 code the state had a 15 share in the

capital of companies engaged in the mining of precious stones with high-value

commodities like iron ore and bauxite excluded Interestingly under the GMC it will

be possible in certain circumstances to trade off a proportion of the statersquos equity

entitlement with an increase in taxation rates28

Mining companies argue that increased state participation will cut their revenues

without reducing capital outlay Access to a 35 interest is without doubt the highest

percentage noted in an African mining code On a comparative basis the 2000

Minerals and Mining Law of Liberia permits the government access to a free equity

interest in certain large scale lsquoClass Arsquo mining projects of anywhere between 10 and

South African Journal of International Affairs 253

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15 of the outstanding share capital of the mining company Section 162 of the

Sierra Leone Mines and Minerals Act 2009 permits the government of Sierra Leone

to participate in any large-scale mining operations on terms to be agreed upon

between the holder of a large-scale mining licence and the government Even thougha percentage amount is not specified in Sierra Leone there is an explicit expectation

that governments have the right to take an equity stake in mining projects The

Angolan government has the right to at least a 10 participation in the share capital

of the concessionaire and the statersquos share will increase as the project becomes more

profitable29 In theory the Angolan governmentrsquos equity share could increase to

levels comparable with those of Guinea

Clearly increased state participation is a growing trend so why is it important

Equity gives the state a share in the distributed profits of the special purpose projectcompany after its cash needs are met It also gives governments a degree of control

over a project In the context of a 25-year fully operational high-grade iron ore mine

distributable profits can be substantial so one can appreciate that mining companies

would not choose to give away a greater proportion of their profits Equally

governments must realise that these natural resources are finite national assets from

which maximum return should be extracted for societyrsquos benefit The balance must

be struck so that the governmentrsquos equity stake in conjunction with other provisions

in an investment agreement does not make the project uneconomic for commercialinvestors Indeed it is important to look at the entire taxation regime to see if it is

holistically well-designed and if the sum total of the regime strikes a balance between

giving investors the incentives to explore for and develop resources and ensuring that

the state as owner of those resources becomes richer than it was before extraction

Research by the Frasier Institute and the World Bank

With a view to measuring the impact of competitive markets and governmentintervention on the welfare of individuals each year the Frasier Institute30 conducts

an annual survey of metal mining and exploration companies to assess among other

questions how mineral endowments and public policy factors such as taxation and

regulation affect exploration investment Survey results represent the opinions of

executives and exploration managers in mining and mining consulting companies

operating around the world The 20112012 survey includes data on 93 jurisdictions

around the world including Guinea under the 2011 GMC31

The survey covers 17 policy-related factors that contribute to the ability ofjurisdictions to attract exploration investment as well as the overall attractiveness of a

jurisdiction under current and best practice Some of these policy-related factors

include the countryrsquos legal regime taxation regime level of political stability and

environmental regulations Mining companies are asked to rate a jurisdiction on the

17 policy-related factors on a scale of one to five with one being a policy factor which

encourages exploration investment two being a policy factor which is not a deterrent

to investment three being a policy factor which is a mild deterrent four being a

factor which is a strong deterrent and a score of five illustrating that a companywould not pursue exploration investment in this region because of this factor32

It is worth looking at some of the policy factors for Guinea which are directly

relevant to this article in order to determine whether the Frasier Institutersquos research

can provide evidence for the assertion that mining companies will cease operating in

Guinea owing to the GMC According to the study 50 of mining companies said

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that current law and regulation in Guinea was not a deterrent to investment no

companies voted in category five For the category of lsquopolicymineral potential

assuming no land use restrictions in place and assuming industry lsquolsquobest practicersquorsquo rsquo

53 of mining companies voted in category one with no votes placed in category fiveIn relation to the taxation regime (which includes personal corporate payroll

capital and other taxes and complexity of tax compliance) 35 of mining

companies voted that the tax regime was not a deterrent to investment and only

13 voting in category five For the category lsquouncertainty concerning environmental

regulationsrsquo 32 of mining companies voted in categories one and two with the

remaining amounts shared equally at 12 between categories three to five The fact

that 15 out of 17 respondents voted that Guinea has the least favourable policies

towards mining overall is not borne out by the exploration budgets which aregrowing So the picture is not entirely clear However in general when asked to rate

the importance of mineral potential vs policy factors 59 responded that mineral

potential was more important than policy factors33 Tied to mineral potential of

course is the price of those minerals in any given period and as has often been said

the answer to most things lies in lsquofollowing the moneyrsquo

Commercial decisions on whether and how much to invest will revolve around

the expected direction of movement in commodity prices Although the Frasier

Institutersquos research found less optimism among mining companies about commodityprices than in the recent past the research notes that the decline should not be

overstated34 Averaging across the minerals only 144 of mining companies expect

prices to decline while 49 expect prices to increase by 10 or less (roughly at the

rate of inflation) over the next two years One-third of mining companies expect

increases of 2050 while 4 expect increases over 50 Price projections for gold

and silver seem to be the most positive which is good news for Guinea given its vast

reserves of these metals Fifty-one per cent of mining companies believe that gold

prices will increase by more than 50 over the next two years with gold assigned thelargest proportion of each companyrsquos budget by far at 47

The World Bank35 notes that historically metal prices decreased in 2012 but are

expected to increase marginally in 2013 It notes that aluminium prices fell below

$2000 per ton in the third quarter of 2012 near to their pre-2005 levels Prices

nevertheless are now unlikely to fall much further and the World Bank notes that

aluminium prices are expected to increase almost 3 in 2013 and remain at that level

for the two subsequent years As bauxite is the raw material for aluminium Guinea is

well-positioned in this regardThere will be a tipping point of course where the effects of increasingly extreme

and onerous government policies will override expected profits from surging

commodity prices and may over time deter companies from investing regardless

of the productive potential of a mine However outside of these exceptions (of which

the GMC is certainly not an example) the research from the Frasier Institute shows

that mineral potential and economic potential and not fiscal policy appear to be the

determining factors for companies when making investment decisions

Permitting requirements

The GMC introduces more stringent requirements for obtaining mining permits than

existed under the 1995 code For example applicants must provide a completed

feasibility study incorporating (among other things) an environmental and social

South African Journal of International Affairs 255

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impact study a detailed work schedule a plan for supporting local Guinean

businesses and for utilising locals to provide the goods and services required for the

mining project an economic and financial plan and a community development plan

covering training medical facilities social work education road works water supply

and electricity36 Requiring this level of information from the outset may seem overly

cumbersome to mining companies in the long term this level of due diligence and

planning will no doubt pay off in terms of risk identification mitigation planningand increased government and community support for the project Potential project

finance providers will also look more favourably on investing in companies with a

track record of taking environmental and social issues seriously (in view of the risk

analysis this covers as we will discuss in more detail in the next section) thus helping

private sponsors seeking project finance to achieve one of their commercial

objectives leveraging as much debt as possible Overall this level of information

and detail gives a strong signalling effect to stakeholders that an investor is a

responsible long-term partner

The GMC also provides for a process by which government power is subject to

checks and balances these ensure decisions are not subject to one decisionmaker and

are filtered through a number of channels to promote transparency legitimacy and

credibility in the process of awarding mining rights Under Article 18 of the GMC

the Minister of Mines can only sign a mining contract with the consent of the

National Commission for Mines and with the authorisation of the Council of

Ministers Mining contracts will then be submitted to the legal opinion of theSupreme Court and ratified by Parliament

Although mining companies may argue that the permitting process is now more

time-consuming and overly administrative it is worth noting that the long-term

benefits can be immense Mining contracts have regularly been re-opened owing to

civil society opinion that a contract has been unfairly awarded In a worst case

scenario civil society groups may lodge a formal appeal in a competent court against

the awarding of a mining right and a mining company may find itself in the

unenviable position of being locked into lengthy and costly litigation challenging the

legality of the concession contract (which contains the companyrsquos most important

contractual right the right to mine) It would not be uncommon for litigation of this

type to sit in courts for over 50 years especially as many African jurisdictions do not

have functioning fast track commercial courts37 and possess judicial systems which

are inexperienced in handling large-scale commercial claims By requiring companies

to think more deeply about a broad range of issues prior to applying for the licence

and by requiring a wider cross-governmental consultative approach the GMC is

effectively mitigating the risk of the project being derailed later on as a result ofinterested stakeholders uncovering environmental andor social risks In the next

section we will look at the important issue of community rights and whether

companies now have an obligation to obtain a social licence to operate in addition to

the legal right to mine and how this relates to key themes in this paper

Mining companies should note that Article 32 of the GMC has increased the

duration of operating permits to 15 years (up from 10 years in the 1995 code) with the

possibility of several five-year extensions subject to the holder being in compliance

with its obligations In addition article 18 of the GMC prescribes a maximum duration

of 25 years for mining agreements which may subsequently be renewed through 10

year extensions This would align the term concession very well with the long-term

nature of most project finance arrangements By extending the concessions the

256 K Bhatt

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government has also removed the need for companies to frequently renew operating

permits which entails a bureaucratic process that can be can be time-consuming and

costly Furthermore and for obvious reasons lenders prefer the term of the concession

agreement to be fixed as closely as possible to the life of the project it is not goodbusiness sense to lend millions or even billions of dollars to a project that does not

explicitly permit the project company to mine for a number of years as the lenders are

repaid out of the cash generated from the project Clearly this provision will be most

useful for sponsors when trying to attract project financing

Environmental and social issues

The GMC prioritises environmental and social issues As noted above in order toobtain a mining permit an applicant must provide a detailed feasibility study

incorporating (among other things) an environmental and social impact study and

management plan and a community development plan

The GMC further requires mining companies to prevent and minimise negative

environmental and health outcomes of mining activities Mining right holders are

required to prevent andor treat spillages and waste minimise the use of harmful and

hazardous chemical products and prevent water air and soil pollution Neighbouring

Sierra Leone also prioritises environmental health and safety issues seriously in its2009 Mines and Minerals Act38 In the context of environmental protection Sierra

Leone has gone one step further and in 2008 it set up the Environment Protection

Agency which is in the final stages of passing a landmark set of environmental and

social regulations for the mining sector aimed at regulating and minimising the

harmful environmental effects of mining activities in the country39 Sierra Leone is

also producing detailed health and safety regulations for inter alia open pit mining

underground mining waste disposal explosives and blasting dredging activities

reclamation and mine closure Guinea may follow Sierra Leonersquos lead and drafthealth and safety regulations for the mining sector The new mining code in Angola

published by Law No 3111 of 23 September 2011 sets forth environmental

obligations by requiring compliance with environmental impact assessment imposi-

tions and the implementation of environmental protection measures

The GMC specifically requires mining companies to plan for and mitigate

hardship for those forced to move owing to mining activities The GMC requires

companies to provide compensation to displaced persons for loss of income in

accordance with international principles aligned to the World Bank policy objectivesfor involuntary resettlement which include minimising involuntary resettlement

consulting with affected communities and providing adequate compensation where

resettlement occurs40

Mining companies may well be worried by the increased cost of compliance with

a new raft of international environmental and health and safety standards imposed

on the mining sector Another issue is the time it will take for them to comply and the

penalties imposed on them for non-compliance Time and money are often the

salient reasons forwarded by companies in resisting new regulation in this area aswell as a perceived reluctance on the grounds that regulations are somehow going

above and beyond international standards There are a few points worth noting here

Firstly international mining companies operating in developing counties will in all

likelihood already be complying with environmental and social standards in

developed countries in which they operate By arguing against new regulations as

South African Journal of International Affairs 257

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time-consuming and expensive companies send the underlying message that the

citizens of Guinea deserve less protection of human rights than those in more

developed countries

In many African countries governments are simply enacting environmental and

social legislation which has been lacking By lobbying against such legislation mining

companies are signalling that they would prefer no regulation in these areas and thus

have no regard for the environmental and social impact of their mining operations

or that of other companies However there are several more commercial incentives

for prioritising environmental and social issues in mining operations These include

reputational damage the spectre of lengthy court battles and retaining access to

finance especially in view of the Equator Principles discussed below

The commercial rationale for prioritising environmental and social policies

Moving away from ethical considerations the benefits of sound environmental

compliance are also robust from a commercial perspective in both the short and long

term Discussions regarding direct loans to companies operating in these sectors

either in the form of project finance or as corporate facilities take into account the

level of sustainability of the companyrsquos operations and how this can negatively

impact a business Ignoring sustainability risks can also lead to conflicts with

communities who may feel they have been resettled unfairly or inadequately

compensated Potential conflicts with the wider population (including civil society

groups) are as a result more likely causing reputational damage to a mining

company and potential litigation

Delays in the construction and operation of the mine owing to civil unrest strikes

or lengthy court battles arising from poor social or environmental management can

have disastrous effects on contractual arrangements Mining companies may not be

able to commence construction or continue operations owing to stoppages on site

Depending on the contractual arrangements in place delays in construction caused

by such stoppages may result in the mining companyrsquos sponsor having to pay

liquidated damages pursuant to the terms of the construction contract In addition

the sponsor may then have to pay damages under the borrowerrsquos sales contracts if

there are delays in construction leading to the final product not being ready for sale

as per the contractual arrangements The possible scenarios are multifarious Delays

such as these can have a disastrous effect on the economics of the project as in a

project finance deal the sponsor will be largely relying on payments under the sales

contracts to repay the debt A company that fails to prioritise sustainability and the

social aspects of its licence to operate could find itself in a position where it

potentially defaults on debt repayment as per its financing arrangements is unable to

construct the project and is thus liable to pay a substantial damages bill pursuant to

its long-term sales contracts

Mining companies must also take a long-term view when it comes to appreciating

the benefits of integrating sustainable practices into operations Giving full support

to legislation which puts environmental and social considerations into investment

practice makes business sense investing in compliance would reap good results in the

future in terms of mitigating potential defaults caused by sustainability risk and will

generate goodwill with the host government and local communities After all the

mining companies plan to be present in the host state for a number of years and it is

258 K Bhatt

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

South African Journal of International Affairs 259

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

260 K Bhatt

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

South African Journal of International Affairs 261

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

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people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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enables private sponsors to leverage large amounts of debt without diluting existing

equity and this debt can come from a variety of different sources For example

development finance institutions (DFIs)20 which have investment portfolios for

projects with a high risk and a high developmental effect will be attracted to projectsin emerging markets which have the potential to deliver developmental returns

Commercial banks may not independently invest in projects in politically unstable

countries or those with untested legal systems However the presence of DFIs in the

financing plan will incentivise commercial banks to invest thus increasing the debt

capacity of the project Another major benefit for sponsors is that project finance

allows the sharing of risks involved in a project This is to the advantage of mining

companies when they come to the financing stage of the project A mining company

can spread risks over all of the project participants including the lenders and thegovernment which theoretically also increases the likelihood of success of the project

The process by which banks decide to invest (often referred to as the lsquobankabilityrsquo

analysis) involves an assessment of the financial and legal status of the borrowing

entity21 In a project finance scenario banks will have recourse only to the assets of

the project for repayment of their debt and so a careful analysis of the borrowerrsquos

contractual rights and obligations is paramount A major consideration will be the

pricing of the finished product and any bank with an eye on the future of its

investment will be averse to a situation where the special purpose vehicle borrower isselling its product to a third party at a rate below market value for obvious reasons

a lender will not look kindly on any circumstances which could adversely affect the

repayment profile of the project

Furthermore as financing in mining projects is typically long term where it is

common to see repayment over a 30 year period it would make sense for banks to

ensure pricing is determined in accordance with international standards to minimise

future social discontent over contracts and potential lobbying for renegotiation

which can have a disastrous effect for private sponsors22

Tax exemptions under the GMC

The fiscal and customs benefits afforded to investors depend on the phase of the

mining operation whether prospecting under construction or in full operation

Broadly speaking tax exemptions are more prevalent in the prospecting and

construction phase rather than the operation phase This makes sense from an

investment point of view During the prospecting stage there is uncertainty as to theamount and quality of the ore and during the high-risk construction phase mining

companies will be investing substantial capital costs into the project with no

incoming revenue for a significant period of time It is thus fair that during the

prospecting and construction phases the fiscal provisions are broadly speaking less

onerous

It is worthwhile to take a closer look at a few examples of this During the

prospecting and construction stages companies benefit from VAT exemptions for the

import of materials equipment and spare parts In addition all imported equipmentplant machinery and commercial vehicles listed as fixed assets as well as materials

and spare parts for commercial vehicles have a total exemption from customs duty

during the prospecting and construction stages

Taxes are thus typically ramped up during the operating stage Pursuant to

Article 177 of the GMC companies will be taxed on all expenses incurred for the

South African Journal of International Affairs 251

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purposes of generating income and will be subject to a customs duty of 6 on all

equipment material plant machinery and commercial vehicles which are to be used

for transforming ore into finished and semi-finished product Furthermore raw

materials and petroleum products necessary for transforming ore to finished productwill also be subject to a 6 customs duty The 2011 GMC applied a rate of 8 for

the import of equipment and raw materials used for the extraction of ore23 but it

appears that the changes to the GMC promulgated on 8 April 2013 have reduced

import tax on operation-related mining equipment from 8 to 65 in a bid to

attract more FDI24

Looking at the tax provisions in more detail illustrates that holistically the tax

regime is not one-sided It is entirely equitable that companies are given tax

exemptions during the more uncertain phases of prospecting and constructionHowever why should such exemptions continue during operations when companies

are making profits There is clearly a strong moral and developmental argument

against this but there is also a commercial rationale The 1995 code was arguably

overly generous in the long tax holidays it provided to investors which for certain

projects ran from the start of commercial operations when the project effectively

would have been generating income

It is important to remember the geopolitical climate in which the 1995 code was

written was a time of state withdrawal increased liberalisation of markets andincreased privatisation Caught up in the tide of neo-liberal economic policy and

seeking to attract much-needed foreign capital and technology African governments

provided attractive tax breaks and incentives when they opened up their natural

resources to inward investment but with little or no attention to the developmental

effects of such policies25 During this period African governments saw economic

stagnation and increased poverty

Times have since changed The current political and economic climate surrounding

natural resource extraction in Africa is strongly punctuated with themes of equitysound natural resource management transparency good governance and civil society

engagement With funding from international non-governmental organisations DFIs

and donors governments and civil society understand the importance of obtaining a

share of natural resource revenues and using them effectively26 By pushing for blanket

tax exemptions for the entire lifetime of a mining project companies are creating

problems for themselves in the long run In the current climate such contracts will likely

be re-opened and renegotiated at some point during the projectrsquos lifespan The more

unfair the terms the worse the reputational impact is likely to be on mining companieswhich sought excessively generous terms This is not good news for a company

planning to operate in a country for up to 30 years Mining companies need to be

mindful that these transactions interplay with governments and communities they are

not like many corporate transactions with no tangible interface with societymining

operations have very real impacts on people and their livelihoods and a negative

impact can translate ultimately into a negative commercial result

Stabilising the fiscal investment climate

What is the problem if a government forces a renegotiation of the fiscal terms of the

concession contract Most mining codes and concession contracts will at the request

of the investor contain a stabilisation clause a contractual device which provides

that the terms of the investment agreement will not be altered unilaterally or

252 K Bhatt

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terminated by the state The aim of the clause is to ensure that future changes in the

legislation of the host state do not vary the terms of the contract on the basis of

which entry was made27 A stabilisation clause may be found in a mining code or a

private investment agreement or both It is intended to immunise the foreigninvestment contract from a range of matters such as taxation environmental

controls and other regulations and even regime change throughout the life of the

project

The GMC guarantees the stabilisation of the tax and customs regime for a period

not exceeding 10 years (for both operating permits and mining concessions) with the

possibility of a one-off extension for a period of five years in return for the payment

of an annual premium by the investor This provides mining companies and their

financiers with much needed long-term fiscal stability The 1995 code did provide alonger stabilisation period of 25 years so mining companies may find this reduction

a disincentive However it is very difficult and even unrealistic to lock a government

into fiscal terms for up to 30 years Governments change and policies change The

reality is that many governments will look to renegotiate terms much earlier than

this Ten years is therefore a far more reasonable and realistic time period and should

signal to investors that the government has actually thought through its policies with

a view to making them practical and workable for the foreseeable future rather than

offering investors the best terms to attract them to a country and then reneging onthem in future

The predictability stability and perceived legitimacy of a fiscal regime are of

paramount importance to investors A regime with slightly higher taxation rates

which has the support of parliament and civil society should be more attractive to

the prudent investor than one which has lower and more enticing taxation rates but is

the subject of local dispute Despite cries by mining companies that the GMC will

deter investment the entry into law and government backing of the GMC may give

investors the predictability and stability they crave attracting investors which have sofar taken the wait-and-see approach when considering investment in Guinea A fairer

fiscal package which provides real returns to government and to society may mean a

larger tax bill for companies in the short term but a more stable investment climate in

the long term which must make sense for long-term extractive industry financing

Increased equity participation

Article 150 of the GMC gives the state immediately upon the issuance of a miningtitle a free 15 stake in the share capital of the title holder with the option to

purchase an additional 20 for all minerals bringing the total share to 35 This

right applies to high-value minerals such as bauxite iron ore uranium gold and

diamonds Under Article 167 of the 1995 code the state had a 15 share in the

capital of companies engaged in the mining of precious stones with high-value

commodities like iron ore and bauxite excluded Interestingly under the GMC it will

be possible in certain circumstances to trade off a proportion of the statersquos equity

entitlement with an increase in taxation rates28

Mining companies argue that increased state participation will cut their revenues

without reducing capital outlay Access to a 35 interest is without doubt the highest

percentage noted in an African mining code On a comparative basis the 2000

Minerals and Mining Law of Liberia permits the government access to a free equity

interest in certain large scale lsquoClass Arsquo mining projects of anywhere between 10 and

South African Journal of International Affairs 253

Dow

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15 of the outstanding share capital of the mining company Section 162 of the

Sierra Leone Mines and Minerals Act 2009 permits the government of Sierra Leone

to participate in any large-scale mining operations on terms to be agreed upon

between the holder of a large-scale mining licence and the government Even thougha percentage amount is not specified in Sierra Leone there is an explicit expectation

that governments have the right to take an equity stake in mining projects The

Angolan government has the right to at least a 10 participation in the share capital

of the concessionaire and the statersquos share will increase as the project becomes more

profitable29 In theory the Angolan governmentrsquos equity share could increase to

levels comparable with those of Guinea

Clearly increased state participation is a growing trend so why is it important

Equity gives the state a share in the distributed profits of the special purpose projectcompany after its cash needs are met It also gives governments a degree of control

over a project In the context of a 25-year fully operational high-grade iron ore mine

distributable profits can be substantial so one can appreciate that mining companies

would not choose to give away a greater proportion of their profits Equally

governments must realise that these natural resources are finite national assets from

which maximum return should be extracted for societyrsquos benefit The balance must

be struck so that the governmentrsquos equity stake in conjunction with other provisions

in an investment agreement does not make the project uneconomic for commercialinvestors Indeed it is important to look at the entire taxation regime to see if it is

holistically well-designed and if the sum total of the regime strikes a balance between

giving investors the incentives to explore for and develop resources and ensuring that

the state as owner of those resources becomes richer than it was before extraction

Research by the Frasier Institute and the World Bank

With a view to measuring the impact of competitive markets and governmentintervention on the welfare of individuals each year the Frasier Institute30 conducts

an annual survey of metal mining and exploration companies to assess among other

questions how mineral endowments and public policy factors such as taxation and

regulation affect exploration investment Survey results represent the opinions of

executives and exploration managers in mining and mining consulting companies

operating around the world The 20112012 survey includes data on 93 jurisdictions

around the world including Guinea under the 2011 GMC31

The survey covers 17 policy-related factors that contribute to the ability ofjurisdictions to attract exploration investment as well as the overall attractiveness of a

jurisdiction under current and best practice Some of these policy-related factors

include the countryrsquos legal regime taxation regime level of political stability and

environmental regulations Mining companies are asked to rate a jurisdiction on the

17 policy-related factors on a scale of one to five with one being a policy factor which

encourages exploration investment two being a policy factor which is not a deterrent

to investment three being a policy factor which is a mild deterrent four being a

factor which is a strong deterrent and a score of five illustrating that a companywould not pursue exploration investment in this region because of this factor32

It is worth looking at some of the policy factors for Guinea which are directly

relevant to this article in order to determine whether the Frasier Institutersquos research

can provide evidence for the assertion that mining companies will cease operating in

Guinea owing to the GMC According to the study 50 of mining companies said

254 K Bhatt

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that current law and regulation in Guinea was not a deterrent to investment no

companies voted in category five For the category of lsquopolicymineral potential

assuming no land use restrictions in place and assuming industry lsquolsquobest practicersquorsquo rsquo

53 of mining companies voted in category one with no votes placed in category fiveIn relation to the taxation regime (which includes personal corporate payroll

capital and other taxes and complexity of tax compliance) 35 of mining

companies voted that the tax regime was not a deterrent to investment and only

13 voting in category five For the category lsquouncertainty concerning environmental

regulationsrsquo 32 of mining companies voted in categories one and two with the

remaining amounts shared equally at 12 between categories three to five The fact

that 15 out of 17 respondents voted that Guinea has the least favourable policies

towards mining overall is not borne out by the exploration budgets which aregrowing So the picture is not entirely clear However in general when asked to rate

the importance of mineral potential vs policy factors 59 responded that mineral

potential was more important than policy factors33 Tied to mineral potential of

course is the price of those minerals in any given period and as has often been said

the answer to most things lies in lsquofollowing the moneyrsquo

Commercial decisions on whether and how much to invest will revolve around

the expected direction of movement in commodity prices Although the Frasier

Institutersquos research found less optimism among mining companies about commodityprices than in the recent past the research notes that the decline should not be

overstated34 Averaging across the minerals only 144 of mining companies expect

prices to decline while 49 expect prices to increase by 10 or less (roughly at the

rate of inflation) over the next two years One-third of mining companies expect

increases of 2050 while 4 expect increases over 50 Price projections for gold

and silver seem to be the most positive which is good news for Guinea given its vast

reserves of these metals Fifty-one per cent of mining companies believe that gold

prices will increase by more than 50 over the next two years with gold assigned thelargest proportion of each companyrsquos budget by far at 47

The World Bank35 notes that historically metal prices decreased in 2012 but are

expected to increase marginally in 2013 It notes that aluminium prices fell below

$2000 per ton in the third quarter of 2012 near to their pre-2005 levels Prices

nevertheless are now unlikely to fall much further and the World Bank notes that

aluminium prices are expected to increase almost 3 in 2013 and remain at that level

for the two subsequent years As bauxite is the raw material for aluminium Guinea is

well-positioned in this regardThere will be a tipping point of course where the effects of increasingly extreme

and onerous government policies will override expected profits from surging

commodity prices and may over time deter companies from investing regardless

of the productive potential of a mine However outside of these exceptions (of which

the GMC is certainly not an example) the research from the Frasier Institute shows

that mineral potential and economic potential and not fiscal policy appear to be the

determining factors for companies when making investment decisions

Permitting requirements

The GMC introduces more stringent requirements for obtaining mining permits than

existed under the 1995 code For example applicants must provide a completed

feasibility study incorporating (among other things) an environmental and social

South African Journal of International Affairs 255

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impact study a detailed work schedule a plan for supporting local Guinean

businesses and for utilising locals to provide the goods and services required for the

mining project an economic and financial plan and a community development plan

covering training medical facilities social work education road works water supply

and electricity36 Requiring this level of information from the outset may seem overly

cumbersome to mining companies in the long term this level of due diligence and

planning will no doubt pay off in terms of risk identification mitigation planningand increased government and community support for the project Potential project

finance providers will also look more favourably on investing in companies with a

track record of taking environmental and social issues seriously (in view of the risk

analysis this covers as we will discuss in more detail in the next section) thus helping

private sponsors seeking project finance to achieve one of their commercial

objectives leveraging as much debt as possible Overall this level of information

and detail gives a strong signalling effect to stakeholders that an investor is a

responsible long-term partner

The GMC also provides for a process by which government power is subject to

checks and balances these ensure decisions are not subject to one decisionmaker and

are filtered through a number of channels to promote transparency legitimacy and

credibility in the process of awarding mining rights Under Article 18 of the GMC

the Minister of Mines can only sign a mining contract with the consent of the

National Commission for Mines and with the authorisation of the Council of

Ministers Mining contracts will then be submitted to the legal opinion of theSupreme Court and ratified by Parliament

Although mining companies may argue that the permitting process is now more

time-consuming and overly administrative it is worth noting that the long-term

benefits can be immense Mining contracts have regularly been re-opened owing to

civil society opinion that a contract has been unfairly awarded In a worst case

scenario civil society groups may lodge a formal appeal in a competent court against

the awarding of a mining right and a mining company may find itself in the

unenviable position of being locked into lengthy and costly litigation challenging the

legality of the concession contract (which contains the companyrsquos most important

contractual right the right to mine) It would not be uncommon for litigation of this

type to sit in courts for over 50 years especially as many African jurisdictions do not

have functioning fast track commercial courts37 and possess judicial systems which

are inexperienced in handling large-scale commercial claims By requiring companies

to think more deeply about a broad range of issues prior to applying for the licence

and by requiring a wider cross-governmental consultative approach the GMC is

effectively mitigating the risk of the project being derailed later on as a result ofinterested stakeholders uncovering environmental andor social risks In the next

section we will look at the important issue of community rights and whether

companies now have an obligation to obtain a social licence to operate in addition to

the legal right to mine and how this relates to key themes in this paper

Mining companies should note that Article 32 of the GMC has increased the

duration of operating permits to 15 years (up from 10 years in the 1995 code) with the

possibility of several five-year extensions subject to the holder being in compliance

with its obligations In addition article 18 of the GMC prescribes a maximum duration

of 25 years for mining agreements which may subsequently be renewed through 10

year extensions This would align the term concession very well with the long-term

nature of most project finance arrangements By extending the concessions the

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government has also removed the need for companies to frequently renew operating

permits which entails a bureaucratic process that can be can be time-consuming and

costly Furthermore and for obvious reasons lenders prefer the term of the concession

agreement to be fixed as closely as possible to the life of the project it is not goodbusiness sense to lend millions or even billions of dollars to a project that does not

explicitly permit the project company to mine for a number of years as the lenders are

repaid out of the cash generated from the project Clearly this provision will be most

useful for sponsors when trying to attract project financing

Environmental and social issues

The GMC prioritises environmental and social issues As noted above in order toobtain a mining permit an applicant must provide a detailed feasibility study

incorporating (among other things) an environmental and social impact study and

management plan and a community development plan

The GMC further requires mining companies to prevent and minimise negative

environmental and health outcomes of mining activities Mining right holders are

required to prevent andor treat spillages and waste minimise the use of harmful and

hazardous chemical products and prevent water air and soil pollution Neighbouring

Sierra Leone also prioritises environmental health and safety issues seriously in its2009 Mines and Minerals Act38 In the context of environmental protection Sierra

Leone has gone one step further and in 2008 it set up the Environment Protection

Agency which is in the final stages of passing a landmark set of environmental and

social regulations for the mining sector aimed at regulating and minimising the

harmful environmental effects of mining activities in the country39 Sierra Leone is

also producing detailed health and safety regulations for inter alia open pit mining

underground mining waste disposal explosives and blasting dredging activities

reclamation and mine closure Guinea may follow Sierra Leonersquos lead and drafthealth and safety regulations for the mining sector The new mining code in Angola

published by Law No 3111 of 23 September 2011 sets forth environmental

obligations by requiring compliance with environmental impact assessment imposi-

tions and the implementation of environmental protection measures

The GMC specifically requires mining companies to plan for and mitigate

hardship for those forced to move owing to mining activities The GMC requires

companies to provide compensation to displaced persons for loss of income in

accordance with international principles aligned to the World Bank policy objectivesfor involuntary resettlement which include minimising involuntary resettlement

consulting with affected communities and providing adequate compensation where

resettlement occurs40

Mining companies may well be worried by the increased cost of compliance with

a new raft of international environmental and health and safety standards imposed

on the mining sector Another issue is the time it will take for them to comply and the

penalties imposed on them for non-compliance Time and money are often the

salient reasons forwarded by companies in resisting new regulation in this area aswell as a perceived reluctance on the grounds that regulations are somehow going

above and beyond international standards There are a few points worth noting here

Firstly international mining companies operating in developing counties will in all

likelihood already be complying with environmental and social standards in

developed countries in which they operate By arguing against new regulations as

South African Journal of International Affairs 257

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time-consuming and expensive companies send the underlying message that the

citizens of Guinea deserve less protection of human rights than those in more

developed countries

In many African countries governments are simply enacting environmental and

social legislation which has been lacking By lobbying against such legislation mining

companies are signalling that they would prefer no regulation in these areas and thus

have no regard for the environmental and social impact of their mining operations

or that of other companies However there are several more commercial incentives

for prioritising environmental and social issues in mining operations These include

reputational damage the spectre of lengthy court battles and retaining access to

finance especially in view of the Equator Principles discussed below

The commercial rationale for prioritising environmental and social policies

Moving away from ethical considerations the benefits of sound environmental

compliance are also robust from a commercial perspective in both the short and long

term Discussions regarding direct loans to companies operating in these sectors

either in the form of project finance or as corporate facilities take into account the

level of sustainability of the companyrsquos operations and how this can negatively

impact a business Ignoring sustainability risks can also lead to conflicts with

communities who may feel they have been resettled unfairly or inadequately

compensated Potential conflicts with the wider population (including civil society

groups) are as a result more likely causing reputational damage to a mining

company and potential litigation

Delays in the construction and operation of the mine owing to civil unrest strikes

or lengthy court battles arising from poor social or environmental management can

have disastrous effects on contractual arrangements Mining companies may not be

able to commence construction or continue operations owing to stoppages on site

Depending on the contractual arrangements in place delays in construction caused

by such stoppages may result in the mining companyrsquos sponsor having to pay

liquidated damages pursuant to the terms of the construction contract In addition

the sponsor may then have to pay damages under the borrowerrsquos sales contracts if

there are delays in construction leading to the final product not being ready for sale

as per the contractual arrangements The possible scenarios are multifarious Delays

such as these can have a disastrous effect on the economics of the project as in a

project finance deal the sponsor will be largely relying on payments under the sales

contracts to repay the debt A company that fails to prioritise sustainability and the

social aspects of its licence to operate could find itself in a position where it

potentially defaults on debt repayment as per its financing arrangements is unable to

construct the project and is thus liable to pay a substantial damages bill pursuant to

its long-term sales contracts

Mining companies must also take a long-term view when it comes to appreciating

the benefits of integrating sustainable practices into operations Giving full support

to legislation which puts environmental and social considerations into investment

practice makes business sense investing in compliance would reap good results in the

future in terms of mitigating potential defaults caused by sustainability risk and will

generate goodwill with the host government and local communities After all the

mining companies plan to be present in the host state for a number of years and it is

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

South African Journal of International Affairs 259

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

South African Journal of International Affairs 261

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

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people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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purposes of generating income and will be subject to a customs duty of 6 on all

equipment material plant machinery and commercial vehicles which are to be used

for transforming ore into finished and semi-finished product Furthermore raw

materials and petroleum products necessary for transforming ore to finished productwill also be subject to a 6 customs duty The 2011 GMC applied a rate of 8 for

the import of equipment and raw materials used for the extraction of ore23 but it

appears that the changes to the GMC promulgated on 8 April 2013 have reduced

import tax on operation-related mining equipment from 8 to 65 in a bid to

attract more FDI24

Looking at the tax provisions in more detail illustrates that holistically the tax

regime is not one-sided It is entirely equitable that companies are given tax

exemptions during the more uncertain phases of prospecting and constructionHowever why should such exemptions continue during operations when companies

are making profits There is clearly a strong moral and developmental argument

against this but there is also a commercial rationale The 1995 code was arguably

overly generous in the long tax holidays it provided to investors which for certain

projects ran from the start of commercial operations when the project effectively

would have been generating income

It is important to remember the geopolitical climate in which the 1995 code was

written was a time of state withdrawal increased liberalisation of markets andincreased privatisation Caught up in the tide of neo-liberal economic policy and

seeking to attract much-needed foreign capital and technology African governments

provided attractive tax breaks and incentives when they opened up their natural

resources to inward investment but with little or no attention to the developmental

effects of such policies25 During this period African governments saw economic

stagnation and increased poverty

Times have since changed The current political and economic climate surrounding

natural resource extraction in Africa is strongly punctuated with themes of equitysound natural resource management transparency good governance and civil society

engagement With funding from international non-governmental organisations DFIs

and donors governments and civil society understand the importance of obtaining a

share of natural resource revenues and using them effectively26 By pushing for blanket

tax exemptions for the entire lifetime of a mining project companies are creating

problems for themselves in the long run In the current climate such contracts will likely

be re-opened and renegotiated at some point during the projectrsquos lifespan The more

unfair the terms the worse the reputational impact is likely to be on mining companieswhich sought excessively generous terms This is not good news for a company

planning to operate in a country for up to 30 years Mining companies need to be

mindful that these transactions interplay with governments and communities they are

not like many corporate transactions with no tangible interface with societymining

operations have very real impacts on people and their livelihoods and a negative

impact can translate ultimately into a negative commercial result

Stabilising the fiscal investment climate

What is the problem if a government forces a renegotiation of the fiscal terms of the

concession contract Most mining codes and concession contracts will at the request

of the investor contain a stabilisation clause a contractual device which provides

that the terms of the investment agreement will not be altered unilaterally or

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terminated by the state The aim of the clause is to ensure that future changes in the

legislation of the host state do not vary the terms of the contract on the basis of

which entry was made27 A stabilisation clause may be found in a mining code or a

private investment agreement or both It is intended to immunise the foreigninvestment contract from a range of matters such as taxation environmental

controls and other regulations and even regime change throughout the life of the

project

The GMC guarantees the stabilisation of the tax and customs regime for a period

not exceeding 10 years (for both operating permits and mining concessions) with the

possibility of a one-off extension for a period of five years in return for the payment

of an annual premium by the investor This provides mining companies and their

financiers with much needed long-term fiscal stability The 1995 code did provide alonger stabilisation period of 25 years so mining companies may find this reduction

a disincentive However it is very difficult and even unrealistic to lock a government

into fiscal terms for up to 30 years Governments change and policies change The

reality is that many governments will look to renegotiate terms much earlier than

this Ten years is therefore a far more reasonable and realistic time period and should

signal to investors that the government has actually thought through its policies with

a view to making them practical and workable for the foreseeable future rather than

offering investors the best terms to attract them to a country and then reneging onthem in future

The predictability stability and perceived legitimacy of a fiscal regime are of

paramount importance to investors A regime with slightly higher taxation rates

which has the support of parliament and civil society should be more attractive to

the prudent investor than one which has lower and more enticing taxation rates but is

the subject of local dispute Despite cries by mining companies that the GMC will

deter investment the entry into law and government backing of the GMC may give

investors the predictability and stability they crave attracting investors which have sofar taken the wait-and-see approach when considering investment in Guinea A fairer

fiscal package which provides real returns to government and to society may mean a

larger tax bill for companies in the short term but a more stable investment climate in

the long term which must make sense for long-term extractive industry financing

Increased equity participation

Article 150 of the GMC gives the state immediately upon the issuance of a miningtitle a free 15 stake in the share capital of the title holder with the option to

purchase an additional 20 for all minerals bringing the total share to 35 This

right applies to high-value minerals such as bauxite iron ore uranium gold and

diamonds Under Article 167 of the 1995 code the state had a 15 share in the

capital of companies engaged in the mining of precious stones with high-value

commodities like iron ore and bauxite excluded Interestingly under the GMC it will

be possible in certain circumstances to trade off a proportion of the statersquos equity

entitlement with an increase in taxation rates28

Mining companies argue that increased state participation will cut their revenues

without reducing capital outlay Access to a 35 interest is without doubt the highest

percentage noted in an African mining code On a comparative basis the 2000

Minerals and Mining Law of Liberia permits the government access to a free equity

interest in certain large scale lsquoClass Arsquo mining projects of anywhere between 10 and

South African Journal of International Affairs 253

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15 of the outstanding share capital of the mining company Section 162 of the

Sierra Leone Mines and Minerals Act 2009 permits the government of Sierra Leone

to participate in any large-scale mining operations on terms to be agreed upon

between the holder of a large-scale mining licence and the government Even thougha percentage amount is not specified in Sierra Leone there is an explicit expectation

that governments have the right to take an equity stake in mining projects The

Angolan government has the right to at least a 10 participation in the share capital

of the concessionaire and the statersquos share will increase as the project becomes more

profitable29 In theory the Angolan governmentrsquos equity share could increase to

levels comparable with those of Guinea

Clearly increased state participation is a growing trend so why is it important

Equity gives the state a share in the distributed profits of the special purpose projectcompany after its cash needs are met It also gives governments a degree of control

over a project In the context of a 25-year fully operational high-grade iron ore mine

distributable profits can be substantial so one can appreciate that mining companies

would not choose to give away a greater proportion of their profits Equally

governments must realise that these natural resources are finite national assets from

which maximum return should be extracted for societyrsquos benefit The balance must

be struck so that the governmentrsquos equity stake in conjunction with other provisions

in an investment agreement does not make the project uneconomic for commercialinvestors Indeed it is important to look at the entire taxation regime to see if it is

holistically well-designed and if the sum total of the regime strikes a balance between

giving investors the incentives to explore for and develop resources and ensuring that

the state as owner of those resources becomes richer than it was before extraction

Research by the Frasier Institute and the World Bank

With a view to measuring the impact of competitive markets and governmentintervention on the welfare of individuals each year the Frasier Institute30 conducts

an annual survey of metal mining and exploration companies to assess among other

questions how mineral endowments and public policy factors such as taxation and

regulation affect exploration investment Survey results represent the opinions of

executives and exploration managers in mining and mining consulting companies

operating around the world The 20112012 survey includes data on 93 jurisdictions

around the world including Guinea under the 2011 GMC31

The survey covers 17 policy-related factors that contribute to the ability ofjurisdictions to attract exploration investment as well as the overall attractiveness of a

jurisdiction under current and best practice Some of these policy-related factors

include the countryrsquos legal regime taxation regime level of political stability and

environmental regulations Mining companies are asked to rate a jurisdiction on the

17 policy-related factors on a scale of one to five with one being a policy factor which

encourages exploration investment two being a policy factor which is not a deterrent

to investment three being a policy factor which is a mild deterrent four being a

factor which is a strong deterrent and a score of five illustrating that a companywould not pursue exploration investment in this region because of this factor32

It is worth looking at some of the policy factors for Guinea which are directly

relevant to this article in order to determine whether the Frasier Institutersquos research

can provide evidence for the assertion that mining companies will cease operating in

Guinea owing to the GMC According to the study 50 of mining companies said

254 K Bhatt

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that current law and regulation in Guinea was not a deterrent to investment no

companies voted in category five For the category of lsquopolicymineral potential

assuming no land use restrictions in place and assuming industry lsquolsquobest practicersquorsquo rsquo

53 of mining companies voted in category one with no votes placed in category fiveIn relation to the taxation regime (which includes personal corporate payroll

capital and other taxes and complexity of tax compliance) 35 of mining

companies voted that the tax regime was not a deterrent to investment and only

13 voting in category five For the category lsquouncertainty concerning environmental

regulationsrsquo 32 of mining companies voted in categories one and two with the

remaining amounts shared equally at 12 between categories three to five The fact

that 15 out of 17 respondents voted that Guinea has the least favourable policies

towards mining overall is not borne out by the exploration budgets which aregrowing So the picture is not entirely clear However in general when asked to rate

the importance of mineral potential vs policy factors 59 responded that mineral

potential was more important than policy factors33 Tied to mineral potential of

course is the price of those minerals in any given period and as has often been said

the answer to most things lies in lsquofollowing the moneyrsquo

Commercial decisions on whether and how much to invest will revolve around

the expected direction of movement in commodity prices Although the Frasier

Institutersquos research found less optimism among mining companies about commodityprices than in the recent past the research notes that the decline should not be

overstated34 Averaging across the minerals only 144 of mining companies expect

prices to decline while 49 expect prices to increase by 10 or less (roughly at the

rate of inflation) over the next two years One-third of mining companies expect

increases of 2050 while 4 expect increases over 50 Price projections for gold

and silver seem to be the most positive which is good news for Guinea given its vast

reserves of these metals Fifty-one per cent of mining companies believe that gold

prices will increase by more than 50 over the next two years with gold assigned thelargest proportion of each companyrsquos budget by far at 47

The World Bank35 notes that historically metal prices decreased in 2012 but are

expected to increase marginally in 2013 It notes that aluminium prices fell below

$2000 per ton in the third quarter of 2012 near to their pre-2005 levels Prices

nevertheless are now unlikely to fall much further and the World Bank notes that

aluminium prices are expected to increase almost 3 in 2013 and remain at that level

for the two subsequent years As bauxite is the raw material for aluminium Guinea is

well-positioned in this regardThere will be a tipping point of course where the effects of increasingly extreme

and onerous government policies will override expected profits from surging

commodity prices and may over time deter companies from investing regardless

of the productive potential of a mine However outside of these exceptions (of which

the GMC is certainly not an example) the research from the Frasier Institute shows

that mineral potential and economic potential and not fiscal policy appear to be the

determining factors for companies when making investment decisions

Permitting requirements

The GMC introduces more stringent requirements for obtaining mining permits than

existed under the 1995 code For example applicants must provide a completed

feasibility study incorporating (among other things) an environmental and social

South African Journal of International Affairs 255

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impact study a detailed work schedule a plan for supporting local Guinean

businesses and for utilising locals to provide the goods and services required for the

mining project an economic and financial plan and a community development plan

covering training medical facilities social work education road works water supply

and electricity36 Requiring this level of information from the outset may seem overly

cumbersome to mining companies in the long term this level of due diligence and

planning will no doubt pay off in terms of risk identification mitigation planningand increased government and community support for the project Potential project

finance providers will also look more favourably on investing in companies with a

track record of taking environmental and social issues seriously (in view of the risk

analysis this covers as we will discuss in more detail in the next section) thus helping

private sponsors seeking project finance to achieve one of their commercial

objectives leveraging as much debt as possible Overall this level of information

and detail gives a strong signalling effect to stakeholders that an investor is a

responsible long-term partner

The GMC also provides for a process by which government power is subject to

checks and balances these ensure decisions are not subject to one decisionmaker and

are filtered through a number of channels to promote transparency legitimacy and

credibility in the process of awarding mining rights Under Article 18 of the GMC

the Minister of Mines can only sign a mining contract with the consent of the

National Commission for Mines and with the authorisation of the Council of

Ministers Mining contracts will then be submitted to the legal opinion of theSupreme Court and ratified by Parliament

Although mining companies may argue that the permitting process is now more

time-consuming and overly administrative it is worth noting that the long-term

benefits can be immense Mining contracts have regularly been re-opened owing to

civil society opinion that a contract has been unfairly awarded In a worst case

scenario civil society groups may lodge a formal appeal in a competent court against

the awarding of a mining right and a mining company may find itself in the

unenviable position of being locked into lengthy and costly litigation challenging the

legality of the concession contract (which contains the companyrsquos most important

contractual right the right to mine) It would not be uncommon for litigation of this

type to sit in courts for over 50 years especially as many African jurisdictions do not

have functioning fast track commercial courts37 and possess judicial systems which

are inexperienced in handling large-scale commercial claims By requiring companies

to think more deeply about a broad range of issues prior to applying for the licence

and by requiring a wider cross-governmental consultative approach the GMC is

effectively mitigating the risk of the project being derailed later on as a result ofinterested stakeholders uncovering environmental andor social risks In the next

section we will look at the important issue of community rights and whether

companies now have an obligation to obtain a social licence to operate in addition to

the legal right to mine and how this relates to key themes in this paper

Mining companies should note that Article 32 of the GMC has increased the

duration of operating permits to 15 years (up from 10 years in the 1995 code) with the

possibility of several five-year extensions subject to the holder being in compliance

with its obligations In addition article 18 of the GMC prescribes a maximum duration

of 25 years for mining agreements which may subsequently be renewed through 10

year extensions This would align the term concession very well with the long-term

nature of most project finance arrangements By extending the concessions the

256 K Bhatt

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government has also removed the need for companies to frequently renew operating

permits which entails a bureaucratic process that can be can be time-consuming and

costly Furthermore and for obvious reasons lenders prefer the term of the concession

agreement to be fixed as closely as possible to the life of the project it is not goodbusiness sense to lend millions or even billions of dollars to a project that does not

explicitly permit the project company to mine for a number of years as the lenders are

repaid out of the cash generated from the project Clearly this provision will be most

useful for sponsors when trying to attract project financing

Environmental and social issues

The GMC prioritises environmental and social issues As noted above in order toobtain a mining permit an applicant must provide a detailed feasibility study

incorporating (among other things) an environmental and social impact study and

management plan and a community development plan

The GMC further requires mining companies to prevent and minimise negative

environmental and health outcomes of mining activities Mining right holders are

required to prevent andor treat spillages and waste minimise the use of harmful and

hazardous chemical products and prevent water air and soil pollution Neighbouring

Sierra Leone also prioritises environmental health and safety issues seriously in its2009 Mines and Minerals Act38 In the context of environmental protection Sierra

Leone has gone one step further and in 2008 it set up the Environment Protection

Agency which is in the final stages of passing a landmark set of environmental and

social regulations for the mining sector aimed at regulating and minimising the

harmful environmental effects of mining activities in the country39 Sierra Leone is

also producing detailed health and safety regulations for inter alia open pit mining

underground mining waste disposal explosives and blasting dredging activities

reclamation and mine closure Guinea may follow Sierra Leonersquos lead and drafthealth and safety regulations for the mining sector The new mining code in Angola

published by Law No 3111 of 23 September 2011 sets forth environmental

obligations by requiring compliance with environmental impact assessment imposi-

tions and the implementation of environmental protection measures

The GMC specifically requires mining companies to plan for and mitigate

hardship for those forced to move owing to mining activities The GMC requires

companies to provide compensation to displaced persons for loss of income in

accordance with international principles aligned to the World Bank policy objectivesfor involuntary resettlement which include minimising involuntary resettlement

consulting with affected communities and providing adequate compensation where

resettlement occurs40

Mining companies may well be worried by the increased cost of compliance with

a new raft of international environmental and health and safety standards imposed

on the mining sector Another issue is the time it will take for them to comply and the

penalties imposed on them for non-compliance Time and money are often the

salient reasons forwarded by companies in resisting new regulation in this area aswell as a perceived reluctance on the grounds that regulations are somehow going

above and beyond international standards There are a few points worth noting here

Firstly international mining companies operating in developing counties will in all

likelihood already be complying with environmental and social standards in

developed countries in which they operate By arguing against new regulations as

South African Journal of International Affairs 257

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time-consuming and expensive companies send the underlying message that the

citizens of Guinea deserve less protection of human rights than those in more

developed countries

In many African countries governments are simply enacting environmental and

social legislation which has been lacking By lobbying against such legislation mining

companies are signalling that they would prefer no regulation in these areas and thus

have no regard for the environmental and social impact of their mining operations

or that of other companies However there are several more commercial incentives

for prioritising environmental and social issues in mining operations These include

reputational damage the spectre of lengthy court battles and retaining access to

finance especially in view of the Equator Principles discussed below

The commercial rationale for prioritising environmental and social policies

Moving away from ethical considerations the benefits of sound environmental

compliance are also robust from a commercial perspective in both the short and long

term Discussions regarding direct loans to companies operating in these sectors

either in the form of project finance or as corporate facilities take into account the

level of sustainability of the companyrsquos operations and how this can negatively

impact a business Ignoring sustainability risks can also lead to conflicts with

communities who may feel they have been resettled unfairly or inadequately

compensated Potential conflicts with the wider population (including civil society

groups) are as a result more likely causing reputational damage to a mining

company and potential litigation

Delays in the construction and operation of the mine owing to civil unrest strikes

or lengthy court battles arising from poor social or environmental management can

have disastrous effects on contractual arrangements Mining companies may not be

able to commence construction or continue operations owing to stoppages on site

Depending on the contractual arrangements in place delays in construction caused

by such stoppages may result in the mining companyrsquos sponsor having to pay

liquidated damages pursuant to the terms of the construction contract In addition

the sponsor may then have to pay damages under the borrowerrsquos sales contracts if

there are delays in construction leading to the final product not being ready for sale

as per the contractual arrangements The possible scenarios are multifarious Delays

such as these can have a disastrous effect on the economics of the project as in a

project finance deal the sponsor will be largely relying on payments under the sales

contracts to repay the debt A company that fails to prioritise sustainability and the

social aspects of its licence to operate could find itself in a position where it

potentially defaults on debt repayment as per its financing arrangements is unable to

construct the project and is thus liable to pay a substantial damages bill pursuant to

its long-term sales contracts

Mining companies must also take a long-term view when it comes to appreciating

the benefits of integrating sustainable practices into operations Giving full support

to legislation which puts environmental and social considerations into investment

practice makes business sense investing in compliance would reap good results in the

future in terms of mitigating potential defaults caused by sustainability risk and will

generate goodwill with the host government and local communities After all the

mining companies plan to be present in the host state for a number of years and it is

258 K Bhatt

Dow

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

260 K Bhatt

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

South African Journal of International Affairs 261

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

262 K Bhatt

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

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people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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terminated by the state The aim of the clause is to ensure that future changes in the

legislation of the host state do not vary the terms of the contract on the basis of

which entry was made27 A stabilisation clause may be found in a mining code or a

private investment agreement or both It is intended to immunise the foreigninvestment contract from a range of matters such as taxation environmental

controls and other regulations and even regime change throughout the life of the

project

The GMC guarantees the stabilisation of the tax and customs regime for a period

not exceeding 10 years (for both operating permits and mining concessions) with the

possibility of a one-off extension for a period of five years in return for the payment

of an annual premium by the investor This provides mining companies and their

financiers with much needed long-term fiscal stability The 1995 code did provide alonger stabilisation period of 25 years so mining companies may find this reduction

a disincentive However it is very difficult and even unrealistic to lock a government

into fiscal terms for up to 30 years Governments change and policies change The

reality is that many governments will look to renegotiate terms much earlier than

this Ten years is therefore a far more reasonable and realistic time period and should

signal to investors that the government has actually thought through its policies with

a view to making them practical and workable for the foreseeable future rather than

offering investors the best terms to attract them to a country and then reneging onthem in future

The predictability stability and perceived legitimacy of a fiscal regime are of

paramount importance to investors A regime with slightly higher taxation rates

which has the support of parliament and civil society should be more attractive to

the prudent investor than one which has lower and more enticing taxation rates but is

the subject of local dispute Despite cries by mining companies that the GMC will

deter investment the entry into law and government backing of the GMC may give

investors the predictability and stability they crave attracting investors which have sofar taken the wait-and-see approach when considering investment in Guinea A fairer

fiscal package which provides real returns to government and to society may mean a

larger tax bill for companies in the short term but a more stable investment climate in

the long term which must make sense for long-term extractive industry financing

Increased equity participation

Article 150 of the GMC gives the state immediately upon the issuance of a miningtitle a free 15 stake in the share capital of the title holder with the option to

purchase an additional 20 for all minerals bringing the total share to 35 This

right applies to high-value minerals such as bauxite iron ore uranium gold and

diamonds Under Article 167 of the 1995 code the state had a 15 share in the

capital of companies engaged in the mining of precious stones with high-value

commodities like iron ore and bauxite excluded Interestingly under the GMC it will

be possible in certain circumstances to trade off a proportion of the statersquos equity

entitlement with an increase in taxation rates28

Mining companies argue that increased state participation will cut their revenues

without reducing capital outlay Access to a 35 interest is without doubt the highest

percentage noted in an African mining code On a comparative basis the 2000

Minerals and Mining Law of Liberia permits the government access to a free equity

interest in certain large scale lsquoClass Arsquo mining projects of anywhere between 10 and

South African Journal of International Affairs 253

Dow

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15 of the outstanding share capital of the mining company Section 162 of the

Sierra Leone Mines and Minerals Act 2009 permits the government of Sierra Leone

to participate in any large-scale mining operations on terms to be agreed upon

between the holder of a large-scale mining licence and the government Even thougha percentage amount is not specified in Sierra Leone there is an explicit expectation

that governments have the right to take an equity stake in mining projects The

Angolan government has the right to at least a 10 participation in the share capital

of the concessionaire and the statersquos share will increase as the project becomes more

profitable29 In theory the Angolan governmentrsquos equity share could increase to

levels comparable with those of Guinea

Clearly increased state participation is a growing trend so why is it important

Equity gives the state a share in the distributed profits of the special purpose projectcompany after its cash needs are met It also gives governments a degree of control

over a project In the context of a 25-year fully operational high-grade iron ore mine

distributable profits can be substantial so one can appreciate that mining companies

would not choose to give away a greater proportion of their profits Equally

governments must realise that these natural resources are finite national assets from

which maximum return should be extracted for societyrsquos benefit The balance must

be struck so that the governmentrsquos equity stake in conjunction with other provisions

in an investment agreement does not make the project uneconomic for commercialinvestors Indeed it is important to look at the entire taxation regime to see if it is

holistically well-designed and if the sum total of the regime strikes a balance between

giving investors the incentives to explore for and develop resources and ensuring that

the state as owner of those resources becomes richer than it was before extraction

Research by the Frasier Institute and the World Bank

With a view to measuring the impact of competitive markets and governmentintervention on the welfare of individuals each year the Frasier Institute30 conducts

an annual survey of metal mining and exploration companies to assess among other

questions how mineral endowments and public policy factors such as taxation and

regulation affect exploration investment Survey results represent the opinions of

executives and exploration managers in mining and mining consulting companies

operating around the world The 20112012 survey includes data on 93 jurisdictions

around the world including Guinea under the 2011 GMC31

The survey covers 17 policy-related factors that contribute to the ability ofjurisdictions to attract exploration investment as well as the overall attractiveness of a

jurisdiction under current and best practice Some of these policy-related factors

include the countryrsquos legal regime taxation regime level of political stability and

environmental regulations Mining companies are asked to rate a jurisdiction on the

17 policy-related factors on a scale of one to five with one being a policy factor which

encourages exploration investment two being a policy factor which is not a deterrent

to investment three being a policy factor which is a mild deterrent four being a

factor which is a strong deterrent and a score of five illustrating that a companywould not pursue exploration investment in this region because of this factor32

It is worth looking at some of the policy factors for Guinea which are directly

relevant to this article in order to determine whether the Frasier Institutersquos research

can provide evidence for the assertion that mining companies will cease operating in

Guinea owing to the GMC According to the study 50 of mining companies said

254 K Bhatt

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that current law and regulation in Guinea was not a deterrent to investment no

companies voted in category five For the category of lsquopolicymineral potential

assuming no land use restrictions in place and assuming industry lsquolsquobest practicersquorsquo rsquo

53 of mining companies voted in category one with no votes placed in category fiveIn relation to the taxation regime (which includes personal corporate payroll

capital and other taxes and complexity of tax compliance) 35 of mining

companies voted that the tax regime was not a deterrent to investment and only

13 voting in category five For the category lsquouncertainty concerning environmental

regulationsrsquo 32 of mining companies voted in categories one and two with the

remaining amounts shared equally at 12 between categories three to five The fact

that 15 out of 17 respondents voted that Guinea has the least favourable policies

towards mining overall is not borne out by the exploration budgets which aregrowing So the picture is not entirely clear However in general when asked to rate

the importance of mineral potential vs policy factors 59 responded that mineral

potential was more important than policy factors33 Tied to mineral potential of

course is the price of those minerals in any given period and as has often been said

the answer to most things lies in lsquofollowing the moneyrsquo

Commercial decisions on whether and how much to invest will revolve around

the expected direction of movement in commodity prices Although the Frasier

Institutersquos research found less optimism among mining companies about commodityprices than in the recent past the research notes that the decline should not be

overstated34 Averaging across the minerals only 144 of mining companies expect

prices to decline while 49 expect prices to increase by 10 or less (roughly at the

rate of inflation) over the next two years One-third of mining companies expect

increases of 2050 while 4 expect increases over 50 Price projections for gold

and silver seem to be the most positive which is good news for Guinea given its vast

reserves of these metals Fifty-one per cent of mining companies believe that gold

prices will increase by more than 50 over the next two years with gold assigned thelargest proportion of each companyrsquos budget by far at 47

The World Bank35 notes that historically metal prices decreased in 2012 but are

expected to increase marginally in 2013 It notes that aluminium prices fell below

$2000 per ton in the third quarter of 2012 near to their pre-2005 levels Prices

nevertheless are now unlikely to fall much further and the World Bank notes that

aluminium prices are expected to increase almost 3 in 2013 and remain at that level

for the two subsequent years As bauxite is the raw material for aluminium Guinea is

well-positioned in this regardThere will be a tipping point of course where the effects of increasingly extreme

and onerous government policies will override expected profits from surging

commodity prices and may over time deter companies from investing regardless

of the productive potential of a mine However outside of these exceptions (of which

the GMC is certainly not an example) the research from the Frasier Institute shows

that mineral potential and economic potential and not fiscal policy appear to be the

determining factors for companies when making investment decisions

Permitting requirements

The GMC introduces more stringent requirements for obtaining mining permits than

existed under the 1995 code For example applicants must provide a completed

feasibility study incorporating (among other things) an environmental and social

South African Journal of International Affairs 255

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impact study a detailed work schedule a plan for supporting local Guinean

businesses and for utilising locals to provide the goods and services required for the

mining project an economic and financial plan and a community development plan

covering training medical facilities social work education road works water supply

and electricity36 Requiring this level of information from the outset may seem overly

cumbersome to mining companies in the long term this level of due diligence and

planning will no doubt pay off in terms of risk identification mitigation planningand increased government and community support for the project Potential project

finance providers will also look more favourably on investing in companies with a

track record of taking environmental and social issues seriously (in view of the risk

analysis this covers as we will discuss in more detail in the next section) thus helping

private sponsors seeking project finance to achieve one of their commercial

objectives leveraging as much debt as possible Overall this level of information

and detail gives a strong signalling effect to stakeholders that an investor is a

responsible long-term partner

The GMC also provides for a process by which government power is subject to

checks and balances these ensure decisions are not subject to one decisionmaker and

are filtered through a number of channels to promote transparency legitimacy and

credibility in the process of awarding mining rights Under Article 18 of the GMC

the Minister of Mines can only sign a mining contract with the consent of the

National Commission for Mines and with the authorisation of the Council of

Ministers Mining contracts will then be submitted to the legal opinion of theSupreme Court and ratified by Parliament

Although mining companies may argue that the permitting process is now more

time-consuming and overly administrative it is worth noting that the long-term

benefits can be immense Mining contracts have regularly been re-opened owing to

civil society opinion that a contract has been unfairly awarded In a worst case

scenario civil society groups may lodge a formal appeal in a competent court against

the awarding of a mining right and a mining company may find itself in the

unenviable position of being locked into lengthy and costly litigation challenging the

legality of the concession contract (which contains the companyrsquos most important

contractual right the right to mine) It would not be uncommon for litigation of this

type to sit in courts for over 50 years especially as many African jurisdictions do not

have functioning fast track commercial courts37 and possess judicial systems which

are inexperienced in handling large-scale commercial claims By requiring companies

to think more deeply about a broad range of issues prior to applying for the licence

and by requiring a wider cross-governmental consultative approach the GMC is

effectively mitigating the risk of the project being derailed later on as a result ofinterested stakeholders uncovering environmental andor social risks In the next

section we will look at the important issue of community rights and whether

companies now have an obligation to obtain a social licence to operate in addition to

the legal right to mine and how this relates to key themes in this paper

Mining companies should note that Article 32 of the GMC has increased the

duration of operating permits to 15 years (up from 10 years in the 1995 code) with the

possibility of several five-year extensions subject to the holder being in compliance

with its obligations In addition article 18 of the GMC prescribes a maximum duration

of 25 years for mining agreements which may subsequently be renewed through 10

year extensions This would align the term concession very well with the long-term

nature of most project finance arrangements By extending the concessions the

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government has also removed the need for companies to frequently renew operating

permits which entails a bureaucratic process that can be can be time-consuming and

costly Furthermore and for obvious reasons lenders prefer the term of the concession

agreement to be fixed as closely as possible to the life of the project it is not goodbusiness sense to lend millions or even billions of dollars to a project that does not

explicitly permit the project company to mine for a number of years as the lenders are

repaid out of the cash generated from the project Clearly this provision will be most

useful for sponsors when trying to attract project financing

Environmental and social issues

The GMC prioritises environmental and social issues As noted above in order toobtain a mining permit an applicant must provide a detailed feasibility study

incorporating (among other things) an environmental and social impact study and

management plan and a community development plan

The GMC further requires mining companies to prevent and minimise negative

environmental and health outcomes of mining activities Mining right holders are

required to prevent andor treat spillages and waste minimise the use of harmful and

hazardous chemical products and prevent water air and soil pollution Neighbouring

Sierra Leone also prioritises environmental health and safety issues seriously in its2009 Mines and Minerals Act38 In the context of environmental protection Sierra

Leone has gone one step further and in 2008 it set up the Environment Protection

Agency which is in the final stages of passing a landmark set of environmental and

social regulations for the mining sector aimed at regulating and minimising the

harmful environmental effects of mining activities in the country39 Sierra Leone is

also producing detailed health and safety regulations for inter alia open pit mining

underground mining waste disposal explosives and blasting dredging activities

reclamation and mine closure Guinea may follow Sierra Leonersquos lead and drafthealth and safety regulations for the mining sector The new mining code in Angola

published by Law No 3111 of 23 September 2011 sets forth environmental

obligations by requiring compliance with environmental impact assessment imposi-

tions and the implementation of environmental protection measures

The GMC specifically requires mining companies to plan for and mitigate

hardship for those forced to move owing to mining activities The GMC requires

companies to provide compensation to displaced persons for loss of income in

accordance with international principles aligned to the World Bank policy objectivesfor involuntary resettlement which include minimising involuntary resettlement

consulting with affected communities and providing adequate compensation where

resettlement occurs40

Mining companies may well be worried by the increased cost of compliance with

a new raft of international environmental and health and safety standards imposed

on the mining sector Another issue is the time it will take for them to comply and the

penalties imposed on them for non-compliance Time and money are often the

salient reasons forwarded by companies in resisting new regulation in this area aswell as a perceived reluctance on the grounds that regulations are somehow going

above and beyond international standards There are a few points worth noting here

Firstly international mining companies operating in developing counties will in all

likelihood already be complying with environmental and social standards in

developed countries in which they operate By arguing against new regulations as

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time-consuming and expensive companies send the underlying message that the

citizens of Guinea deserve less protection of human rights than those in more

developed countries

In many African countries governments are simply enacting environmental and

social legislation which has been lacking By lobbying against such legislation mining

companies are signalling that they would prefer no regulation in these areas and thus

have no regard for the environmental and social impact of their mining operations

or that of other companies However there are several more commercial incentives

for prioritising environmental and social issues in mining operations These include

reputational damage the spectre of lengthy court battles and retaining access to

finance especially in view of the Equator Principles discussed below

The commercial rationale for prioritising environmental and social policies

Moving away from ethical considerations the benefits of sound environmental

compliance are also robust from a commercial perspective in both the short and long

term Discussions regarding direct loans to companies operating in these sectors

either in the form of project finance or as corporate facilities take into account the

level of sustainability of the companyrsquos operations and how this can negatively

impact a business Ignoring sustainability risks can also lead to conflicts with

communities who may feel they have been resettled unfairly or inadequately

compensated Potential conflicts with the wider population (including civil society

groups) are as a result more likely causing reputational damage to a mining

company and potential litigation

Delays in the construction and operation of the mine owing to civil unrest strikes

or lengthy court battles arising from poor social or environmental management can

have disastrous effects on contractual arrangements Mining companies may not be

able to commence construction or continue operations owing to stoppages on site

Depending on the contractual arrangements in place delays in construction caused

by such stoppages may result in the mining companyrsquos sponsor having to pay

liquidated damages pursuant to the terms of the construction contract In addition

the sponsor may then have to pay damages under the borrowerrsquos sales contracts if

there are delays in construction leading to the final product not being ready for sale

as per the contractual arrangements The possible scenarios are multifarious Delays

such as these can have a disastrous effect on the economics of the project as in a

project finance deal the sponsor will be largely relying on payments under the sales

contracts to repay the debt A company that fails to prioritise sustainability and the

social aspects of its licence to operate could find itself in a position where it

potentially defaults on debt repayment as per its financing arrangements is unable to

construct the project and is thus liable to pay a substantial damages bill pursuant to

its long-term sales contracts

Mining companies must also take a long-term view when it comes to appreciating

the benefits of integrating sustainable practices into operations Giving full support

to legislation which puts environmental and social considerations into investment

practice makes business sense investing in compliance would reap good results in the

future in terms of mitigating potential defaults caused by sustainability risk and will

generate goodwill with the host government and local communities After all the

mining companies plan to be present in the host state for a number of years and it is

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

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people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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15 of the outstanding share capital of the mining company Section 162 of the

Sierra Leone Mines and Minerals Act 2009 permits the government of Sierra Leone

to participate in any large-scale mining operations on terms to be agreed upon

between the holder of a large-scale mining licence and the government Even thougha percentage amount is not specified in Sierra Leone there is an explicit expectation

that governments have the right to take an equity stake in mining projects The

Angolan government has the right to at least a 10 participation in the share capital

of the concessionaire and the statersquos share will increase as the project becomes more

profitable29 In theory the Angolan governmentrsquos equity share could increase to

levels comparable with those of Guinea

Clearly increased state participation is a growing trend so why is it important

Equity gives the state a share in the distributed profits of the special purpose projectcompany after its cash needs are met It also gives governments a degree of control

over a project In the context of a 25-year fully operational high-grade iron ore mine

distributable profits can be substantial so one can appreciate that mining companies

would not choose to give away a greater proportion of their profits Equally

governments must realise that these natural resources are finite national assets from

which maximum return should be extracted for societyrsquos benefit The balance must

be struck so that the governmentrsquos equity stake in conjunction with other provisions

in an investment agreement does not make the project uneconomic for commercialinvestors Indeed it is important to look at the entire taxation regime to see if it is

holistically well-designed and if the sum total of the regime strikes a balance between

giving investors the incentives to explore for and develop resources and ensuring that

the state as owner of those resources becomes richer than it was before extraction

Research by the Frasier Institute and the World Bank

With a view to measuring the impact of competitive markets and governmentintervention on the welfare of individuals each year the Frasier Institute30 conducts

an annual survey of metal mining and exploration companies to assess among other

questions how mineral endowments and public policy factors such as taxation and

regulation affect exploration investment Survey results represent the opinions of

executives and exploration managers in mining and mining consulting companies

operating around the world The 20112012 survey includes data on 93 jurisdictions

around the world including Guinea under the 2011 GMC31

The survey covers 17 policy-related factors that contribute to the ability ofjurisdictions to attract exploration investment as well as the overall attractiveness of a

jurisdiction under current and best practice Some of these policy-related factors

include the countryrsquos legal regime taxation regime level of political stability and

environmental regulations Mining companies are asked to rate a jurisdiction on the

17 policy-related factors on a scale of one to five with one being a policy factor which

encourages exploration investment two being a policy factor which is not a deterrent

to investment three being a policy factor which is a mild deterrent four being a

factor which is a strong deterrent and a score of five illustrating that a companywould not pursue exploration investment in this region because of this factor32

It is worth looking at some of the policy factors for Guinea which are directly

relevant to this article in order to determine whether the Frasier Institutersquos research

can provide evidence for the assertion that mining companies will cease operating in

Guinea owing to the GMC According to the study 50 of mining companies said

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that current law and regulation in Guinea was not a deterrent to investment no

companies voted in category five For the category of lsquopolicymineral potential

assuming no land use restrictions in place and assuming industry lsquolsquobest practicersquorsquo rsquo

53 of mining companies voted in category one with no votes placed in category fiveIn relation to the taxation regime (which includes personal corporate payroll

capital and other taxes and complexity of tax compliance) 35 of mining

companies voted that the tax regime was not a deterrent to investment and only

13 voting in category five For the category lsquouncertainty concerning environmental

regulationsrsquo 32 of mining companies voted in categories one and two with the

remaining amounts shared equally at 12 between categories three to five The fact

that 15 out of 17 respondents voted that Guinea has the least favourable policies

towards mining overall is not borne out by the exploration budgets which aregrowing So the picture is not entirely clear However in general when asked to rate

the importance of mineral potential vs policy factors 59 responded that mineral

potential was more important than policy factors33 Tied to mineral potential of

course is the price of those minerals in any given period and as has often been said

the answer to most things lies in lsquofollowing the moneyrsquo

Commercial decisions on whether and how much to invest will revolve around

the expected direction of movement in commodity prices Although the Frasier

Institutersquos research found less optimism among mining companies about commodityprices than in the recent past the research notes that the decline should not be

overstated34 Averaging across the minerals only 144 of mining companies expect

prices to decline while 49 expect prices to increase by 10 or less (roughly at the

rate of inflation) over the next two years One-third of mining companies expect

increases of 2050 while 4 expect increases over 50 Price projections for gold

and silver seem to be the most positive which is good news for Guinea given its vast

reserves of these metals Fifty-one per cent of mining companies believe that gold

prices will increase by more than 50 over the next two years with gold assigned thelargest proportion of each companyrsquos budget by far at 47

The World Bank35 notes that historically metal prices decreased in 2012 but are

expected to increase marginally in 2013 It notes that aluminium prices fell below

$2000 per ton in the third quarter of 2012 near to their pre-2005 levels Prices

nevertheless are now unlikely to fall much further and the World Bank notes that

aluminium prices are expected to increase almost 3 in 2013 and remain at that level

for the two subsequent years As bauxite is the raw material for aluminium Guinea is

well-positioned in this regardThere will be a tipping point of course where the effects of increasingly extreme

and onerous government policies will override expected profits from surging

commodity prices and may over time deter companies from investing regardless

of the productive potential of a mine However outside of these exceptions (of which

the GMC is certainly not an example) the research from the Frasier Institute shows

that mineral potential and economic potential and not fiscal policy appear to be the

determining factors for companies when making investment decisions

Permitting requirements

The GMC introduces more stringent requirements for obtaining mining permits than

existed under the 1995 code For example applicants must provide a completed

feasibility study incorporating (among other things) an environmental and social

South African Journal of International Affairs 255

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impact study a detailed work schedule a plan for supporting local Guinean

businesses and for utilising locals to provide the goods and services required for the

mining project an economic and financial plan and a community development plan

covering training medical facilities social work education road works water supply

and electricity36 Requiring this level of information from the outset may seem overly

cumbersome to mining companies in the long term this level of due diligence and

planning will no doubt pay off in terms of risk identification mitigation planningand increased government and community support for the project Potential project

finance providers will also look more favourably on investing in companies with a

track record of taking environmental and social issues seriously (in view of the risk

analysis this covers as we will discuss in more detail in the next section) thus helping

private sponsors seeking project finance to achieve one of their commercial

objectives leveraging as much debt as possible Overall this level of information

and detail gives a strong signalling effect to stakeholders that an investor is a

responsible long-term partner

The GMC also provides for a process by which government power is subject to

checks and balances these ensure decisions are not subject to one decisionmaker and

are filtered through a number of channels to promote transparency legitimacy and

credibility in the process of awarding mining rights Under Article 18 of the GMC

the Minister of Mines can only sign a mining contract with the consent of the

National Commission for Mines and with the authorisation of the Council of

Ministers Mining contracts will then be submitted to the legal opinion of theSupreme Court and ratified by Parliament

Although mining companies may argue that the permitting process is now more

time-consuming and overly administrative it is worth noting that the long-term

benefits can be immense Mining contracts have regularly been re-opened owing to

civil society opinion that a contract has been unfairly awarded In a worst case

scenario civil society groups may lodge a formal appeal in a competent court against

the awarding of a mining right and a mining company may find itself in the

unenviable position of being locked into lengthy and costly litigation challenging the

legality of the concession contract (which contains the companyrsquos most important

contractual right the right to mine) It would not be uncommon for litigation of this

type to sit in courts for over 50 years especially as many African jurisdictions do not

have functioning fast track commercial courts37 and possess judicial systems which

are inexperienced in handling large-scale commercial claims By requiring companies

to think more deeply about a broad range of issues prior to applying for the licence

and by requiring a wider cross-governmental consultative approach the GMC is

effectively mitigating the risk of the project being derailed later on as a result ofinterested stakeholders uncovering environmental andor social risks In the next

section we will look at the important issue of community rights and whether

companies now have an obligation to obtain a social licence to operate in addition to

the legal right to mine and how this relates to key themes in this paper

Mining companies should note that Article 32 of the GMC has increased the

duration of operating permits to 15 years (up from 10 years in the 1995 code) with the

possibility of several five-year extensions subject to the holder being in compliance

with its obligations In addition article 18 of the GMC prescribes a maximum duration

of 25 years for mining agreements which may subsequently be renewed through 10

year extensions This would align the term concession very well with the long-term

nature of most project finance arrangements By extending the concessions the

256 K Bhatt

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government has also removed the need for companies to frequently renew operating

permits which entails a bureaucratic process that can be can be time-consuming and

costly Furthermore and for obvious reasons lenders prefer the term of the concession

agreement to be fixed as closely as possible to the life of the project it is not goodbusiness sense to lend millions or even billions of dollars to a project that does not

explicitly permit the project company to mine for a number of years as the lenders are

repaid out of the cash generated from the project Clearly this provision will be most

useful for sponsors when trying to attract project financing

Environmental and social issues

The GMC prioritises environmental and social issues As noted above in order toobtain a mining permit an applicant must provide a detailed feasibility study

incorporating (among other things) an environmental and social impact study and

management plan and a community development plan

The GMC further requires mining companies to prevent and minimise negative

environmental and health outcomes of mining activities Mining right holders are

required to prevent andor treat spillages and waste minimise the use of harmful and

hazardous chemical products and prevent water air and soil pollution Neighbouring

Sierra Leone also prioritises environmental health and safety issues seriously in its2009 Mines and Minerals Act38 In the context of environmental protection Sierra

Leone has gone one step further and in 2008 it set up the Environment Protection

Agency which is in the final stages of passing a landmark set of environmental and

social regulations for the mining sector aimed at regulating and minimising the

harmful environmental effects of mining activities in the country39 Sierra Leone is

also producing detailed health and safety regulations for inter alia open pit mining

underground mining waste disposal explosives and blasting dredging activities

reclamation and mine closure Guinea may follow Sierra Leonersquos lead and drafthealth and safety regulations for the mining sector The new mining code in Angola

published by Law No 3111 of 23 September 2011 sets forth environmental

obligations by requiring compliance with environmental impact assessment imposi-

tions and the implementation of environmental protection measures

The GMC specifically requires mining companies to plan for and mitigate

hardship for those forced to move owing to mining activities The GMC requires

companies to provide compensation to displaced persons for loss of income in

accordance with international principles aligned to the World Bank policy objectivesfor involuntary resettlement which include minimising involuntary resettlement

consulting with affected communities and providing adequate compensation where

resettlement occurs40

Mining companies may well be worried by the increased cost of compliance with

a new raft of international environmental and health and safety standards imposed

on the mining sector Another issue is the time it will take for them to comply and the

penalties imposed on them for non-compliance Time and money are often the

salient reasons forwarded by companies in resisting new regulation in this area aswell as a perceived reluctance on the grounds that regulations are somehow going

above and beyond international standards There are a few points worth noting here

Firstly international mining companies operating in developing counties will in all

likelihood already be complying with environmental and social standards in

developed countries in which they operate By arguing against new regulations as

South African Journal of International Affairs 257

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time-consuming and expensive companies send the underlying message that the

citizens of Guinea deserve less protection of human rights than those in more

developed countries

In many African countries governments are simply enacting environmental and

social legislation which has been lacking By lobbying against such legislation mining

companies are signalling that they would prefer no regulation in these areas and thus

have no regard for the environmental and social impact of their mining operations

or that of other companies However there are several more commercial incentives

for prioritising environmental and social issues in mining operations These include

reputational damage the spectre of lengthy court battles and retaining access to

finance especially in view of the Equator Principles discussed below

The commercial rationale for prioritising environmental and social policies

Moving away from ethical considerations the benefits of sound environmental

compliance are also robust from a commercial perspective in both the short and long

term Discussions regarding direct loans to companies operating in these sectors

either in the form of project finance or as corporate facilities take into account the

level of sustainability of the companyrsquos operations and how this can negatively

impact a business Ignoring sustainability risks can also lead to conflicts with

communities who may feel they have been resettled unfairly or inadequately

compensated Potential conflicts with the wider population (including civil society

groups) are as a result more likely causing reputational damage to a mining

company and potential litigation

Delays in the construction and operation of the mine owing to civil unrest strikes

or lengthy court battles arising from poor social or environmental management can

have disastrous effects on contractual arrangements Mining companies may not be

able to commence construction or continue operations owing to stoppages on site

Depending on the contractual arrangements in place delays in construction caused

by such stoppages may result in the mining companyrsquos sponsor having to pay

liquidated damages pursuant to the terms of the construction contract In addition

the sponsor may then have to pay damages under the borrowerrsquos sales contracts if

there are delays in construction leading to the final product not being ready for sale

as per the contractual arrangements The possible scenarios are multifarious Delays

such as these can have a disastrous effect on the economics of the project as in a

project finance deal the sponsor will be largely relying on payments under the sales

contracts to repay the debt A company that fails to prioritise sustainability and the

social aspects of its licence to operate could find itself in a position where it

potentially defaults on debt repayment as per its financing arrangements is unable to

construct the project and is thus liable to pay a substantial damages bill pursuant to

its long-term sales contracts

Mining companies must also take a long-term view when it comes to appreciating

the benefits of integrating sustainable practices into operations Giving full support

to legislation which puts environmental and social considerations into investment

practice makes business sense investing in compliance would reap good results in the

future in terms of mitigating potential defaults caused by sustainability risk and will

generate goodwill with the host government and local communities After all the

mining companies plan to be present in the host state for a number of years and it is

258 K Bhatt

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

South African Journal of International Affairs 259

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

260 K Bhatt

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

South African Journal of International Affairs 261

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

South African Journal of International Affairs 263

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

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people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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that current law and regulation in Guinea was not a deterrent to investment no

companies voted in category five For the category of lsquopolicymineral potential

assuming no land use restrictions in place and assuming industry lsquolsquobest practicersquorsquo rsquo

53 of mining companies voted in category one with no votes placed in category fiveIn relation to the taxation regime (which includes personal corporate payroll

capital and other taxes and complexity of tax compliance) 35 of mining

companies voted that the tax regime was not a deterrent to investment and only

13 voting in category five For the category lsquouncertainty concerning environmental

regulationsrsquo 32 of mining companies voted in categories one and two with the

remaining amounts shared equally at 12 between categories three to five The fact

that 15 out of 17 respondents voted that Guinea has the least favourable policies

towards mining overall is not borne out by the exploration budgets which aregrowing So the picture is not entirely clear However in general when asked to rate

the importance of mineral potential vs policy factors 59 responded that mineral

potential was more important than policy factors33 Tied to mineral potential of

course is the price of those minerals in any given period and as has often been said

the answer to most things lies in lsquofollowing the moneyrsquo

Commercial decisions on whether and how much to invest will revolve around

the expected direction of movement in commodity prices Although the Frasier

Institutersquos research found less optimism among mining companies about commodityprices than in the recent past the research notes that the decline should not be

overstated34 Averaging across the minerals only 144 of mining companies expect

prices to decline while 49 expect prices to increase by 10 or less (roughly at the

rate of inflation) over the next two years One-third of mining companies expect

increases of 2050 while 4 expect increases over 50 Price projections for gold

and silver seem to be the most positive which is good news for Guinea given its vast

reserves of these metals Fifty-one per cent of mining companies believe that gold

prices will increase by more than 50 over the next two years with gold assigned thelargest proportion of each companyrsquos budget by far at 47

The World Bank35 notes that historically metal prices decreased in 2012 but are

expected to increase marginally in 2013 It notes that aluminium prices fell below

$2000 per ton in the third quarter of 2012 near to their pre-2005 levels Prices

nevertheless are now unlikely to fall much further and the World Bank notes that

aluminium prices are expected to increase almost 3 in 2013 and remain at that level

for the two subsequent years As bauxite is the raw material for aluminium Guinea is

well-positioned in this regardThere will be a tipping point of course where the effects of increasingly extreme

and onerous government policies will override expected profits from surging

commodity prices and may over time deter companies from investing regardless

of the productive potential of a mine However outside of these exceptions (of which

the GMC is certainly not an example) the research from the Frasier Institute shows

that mineral potential and economic potential and not fiscal policy appear to be the

determining factors for companies when making investment decisions

Permitting requirements

The GMC introduces more stringent requirements for obtaining mining permits than

existed under the 1995 code For example applicants must provide a completed

feasibility study incorporating (among other things) an environmental and social

South African Journal of International Affairs 255

Dow

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impact study a detailed work schedule a plan for supporting local Guinean

businesses and for utilising locals to provide the goods and services required for the

mining project an economic and financial plan and a community development plan

covering training medical facilities social work education road works water supply

and electricity36 Requiring this level of information from the outset may seem overly

cumbersome to mining companies in the long term this level of due diligence and

planning will no doubt pay off in terms of risk identification mitigation planningand increased government and community support for the project Potential project

finance providers will also look more favourably on investing in companies with a

track record of taking environmental and social issues seriously (in view of the risk

analysis this covers as we will discuss in more detail in the next section) thus helping

private sponsors seeking project finance to achieve one of their commercial

objectives leveraging as much debt as possible Overall this level of information

and detail gives a strong signalling effect to stakeholders that an investor is a

responsible long-term partner

The GMC also provides for a process by which government power is subject to

checks and balances these ensure decisions are not subject to one decisionmaker and

are filtered through a number of channels to promote transparency legitimacy and

credibility in the process of awarding mining rights Under Article 18 of the GMC

the Minister of Mines can only sign a mining contract with the consent of the

National Commission for Mines and with the authorisation of the Council of

Ministers Mining contracts will then be submitted to the legal opinion of theSupreme Court and ratified by Parliament

Although mining companies may argue that the permitting process is now more

time-consuming and overly administrative it is worth noting that the long-term

benefits can be immense Mining contracts have regularly been re-opened owing to

civil society opinion that a contract has been unfairly awarded In a worst case

scenario civil society groups may lodge a formal appeal in a competent court against

the awarding of a mining right and a mining company may find itself in the

unenviable position of being locked into lengthy and costly litigation challenging the

legality of the concession contract (which contains the companyrsquos most important

contractual right the right to mine) It would not be uncommon for litigation of this

type to sit in courts for over 50 years especially as many African jurisdictions do not

have functioning fast track commercial courts37 and possess judicial systems which

are inexperienced in handling large-scale commercial claims By requiring companies

to think more deeply about a broad range of issues prior to applying for the licence

and by requiring a wider cross-governmental consultative approach the GMC is

effectively mitigating the risk of the project being derailed later on as a result ofinterested stakeholders uncovering environmental andor social risks In the next

section we will look at the important issue of community rights and whether

companies now have an obligation to obtain a social licence to operate in addition to

the legal right to mine and how this relates to key themes in this paper

Mining companies should note that Article 32 of the GMC has increased the

duration of operating permits to 15 years (up from 10 years in the 1995 code) with the

possibility of several five-year extensions subject to the holder being in compliance

with its obligations In addition article 18 of the GMC prescribes a maximum duration

of 25 years for mining agreements which may subsequently be renewed through 10

year extensions This would align the term concession very well with the long-term

nature of most project finance arrangements By extending the concessions the

256 K Bhatt

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government has also removed the need for companies to frequently renew operating

permits which entails a bureaucratic process that can be can be time-consuming and

costly Furthermore and for obvious reasons lenders prefer the term of the concession

agreement to be fixed as closely as possible to the life of the project it is not goodbusiness sense to lend millions or even billions of dollars to a project that does not

explicitly permit the project company to mine for a number of years as the lenders are

repaid out of the cash generated from the project Clearly this provision will be most

useful for sponsors when trying to attract project financing

Environmental and social issues

The GMC prioritises environmental and social issues As noted above in order toobtain a mining permit an applicant must provide a detailed feasibility study

incorporating (among other things) an environmental and social impact study and

management plan and a community development plan

The GMC further requires mining companies to prevent and minimise negative

environmental and health outcomes of mining activities Mining right holders are

required to prevent andor treat spillages and waste minimise the use of harmful and

hazardous chemical products and prevent water air and soil pollution Neighbouring

Sierra Leone also prioritises environmental health and safety issues seriously in its2009 Mines and Minerals Act38 In the context of environmental protection Sierra

Leone has gone one step further and in 2008 it set up the Environment Protection

Agency which is in the final stages of passing a landmark set of environmental and

social regulations for the mining sector aimed at regulating and minimising the

harmful environmental effects of mining activities in the country39 Sierra Leone is

also producing detailed health and safety regulations for inter alia open pit mining

underground mining waste disposal explosives and blasting dredging activities

reclamation and mine closure Guinea may follow Sierra Leonersquos lead and drafthealth and safety regulations for the mining sector The new mining code in Angola

published by Law No 3111 of 23 September 2011 sets forth environmental

obligations by requiring compliance with environmental impact assessment imposi-

tions and the implementation of environmental protection measures

The GMC specifically requires mining companies to plan for and mitigate

hardship for those forced to move owing to mining activities The GMC requires

companies to provide compensation to displaced persons for loss of income in

accordance with international principles aligned to the World Bank policy objectivesfor involuntary resettlement which include minimising involuntary resettlement

consulting with affected communities and providing adequate compensation where

resettlement occurs40

Mining companies may well be worried by the increased cost of compliance with

a new raft of international environmental and health and safety standards imposed

on the mining sector Another issue is the time it will take for them to comply and the

penalties imposed on them for non-compliance Time and money are often the

salient reasons forwarded by companies in resisting new regulation in this area aswell as a perceived reluctance on the grounds that regulations are somehow going

above and beyond international standards There are a few points worth noting here

Firstly international mining companies operating in developing counties will in all

likelihood already be complying with environmental and social standards in

developed countries in which they operate By arguing against new regulations as

South African Journal of International Affairs 257

Dow

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time-consuming and expensive companies send the underlying message that the

citizens of Guinea deserve less protection of human rights than those in more

developed countries

In many African countries governments are simply enacting environmental and

social legislation which has been lacking By lobbying against such legislation mining

companies are signalling that they would prefer no regulation in these areas and thus

have no regard for the environmental and social impact of their mining operations

or that of other companies However there are several more commercial incentives

for prioritising environmental and social issues in mining operations These include

reputational damage the spectre of lengthy court battles and retaining access to

finance especially in view of the Equator Principles discussed below

The commercial rationale for prioritising environmental and social policies

Moving away from ethical considerations the benefits of sound environmental

compliance are also robust from a commercial perspective in both the short and long

term Discussions regarding direct loans to companies operating in these sectors

either in the form of project finance or as corporate facilities take into account the

level of sustainability of the companyrsquos operations and how this can negatively

impact a business Ignoring sustainability risks can also lead to conflicts with

communities who may feel they have been resettled unfairly or inadequately

compensated Potential conflicts with the wider population (including civil society

groups) are as a result more likely causing reputational damage to a mining

company and potential litigation

Delays in the construction and operation of the mine owing to civil unrest strikes

or lengthy court battles arising from poor social or environmental management can

have disastrous effects on contractual arrangements Mining companies may not be

able to commence construction or continue operations owing to stoppages on site

Depending on the contractual arrangements in place delays in construction caused

by such stoppages may result in the mining companyrsquos sponsor having to pay

liquidated damages pursuant to the terms of the construction contract In addition

the sponsor may then have to pay damages under the borrowerrsquos sales contracts if

there are delays in construction leading to the final product not being ready for sale

as per the contractual arrangements The possible scenarios are multifarious Delays

such as these can have a disastrous effect on the economics of the project as in a

project finance deal the sponsor will be largely relying on payments under the sales

contracts to repay the debt A company that fails to prioritise sustainability and the

social aspects of its licence to operate could find itself in a position where it

potentially defaults on debt repayment as per its financing arrangements is unable to

construct the project and is thus liable to pay a substantial damages bill pursuant to

its long-term sales contracts

Mining companies must also take a long-term view when it comes to appreciating

the benefits of integrating sustainable practices into operations Giving full support

to legislation which puts environmental and social considerations into investment

practice makes business sense investing in compliance would reap good results in the

future in terms of mitigating potential defaults caused by sustainability risk and will

generate goodwill with the host government and local communities After all the

mining companies plan to be present in the host state for a number of years and it is

258 K Bhatt

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

South African Journal of International Affairs 259

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

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people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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impact study a detailed work schedule a plan for supporting local Guinean

businesses and for utilising locals to provide the goods and services required for the

mining project an economic and financial plan and a community development plan

covering training medical facilities social work education road works water supply

and electricity36 Requiring this level of information from the outset may seem overly

cumbersome to mining companies in the long term this level of due diligence and

planning will no doubt pay off in terms of risk identification mitigation planningand increased government and community support for the project Potential project

finance providers will also look more favourably on investing in companies with a

track record of taking environmental and social issues seriously (in view of the risk

analysis this covers as we will discuss in more detail in the next section) thus helping

private sponsors seeking project finance to achieve one of their commercial

objectives leveraging as much debt as possible Overall this level of information

and detail gives a strong signalling effect to stakeholders that an investor is a

responsible long-term partner

The GMC also provides for a process by which government power is subject to

checks and balances these ensure decisions are not subject to one decisionmaker and

are filtered through a number of channels to promote transparency legitimacy and

credibility in the process of awarding mining rights Under Article 18 of the GMC

the Minister of Mines can only sign a mining contract with the consent of the

National Commission for Mines and with the authorisation of the Council of

Ministers Mining contracts will then be submitted to the legal opinion of theSupreme Court and ratified by Parliament

Although mining companies may argue that the permitting process is now more

time-consuming and overly administrative it is worth noting that the long-term

benefits can be immense Mining contracts have regularly been re-opened owing to

civil society opinion that a contract has been unfairly awarded In a worst case

scenario civil society groups may lodge a formal appeal in a competent court against

the awarding of a mining right and a mining company may find itself in the

unenviable position of being locked into lengthy and costly litigation challenging the

legality of the concession contract (which contains the companyrsquos most important

contractual right the right to mine) It would not be uncommon for litigation of this

type to sit in courts for over 50 years especially as many African jurisdictions do not

have functioning fast track commercial courts37 and possess judicial systems which

are inexperienced in handling large-scale commercial claims By requiring companies

to think more deeply about a broad range of issues prior to applying for the licence

and by requiring a wider cross-governmental consultative approach the GMC is

effectively mitigating the risk of the project being derailed later on as a result ofinterested stakeholders uncovering environmental andor social risks In the next

section we will look at the important issue of community rights and whether

companies now have an obligation to obtain a social licence to operate in addition to

the legal right to mine and how this relates to key themes in this paper

Mining companies should note that Article 32 of the GMC has increased the

duration of operating permits to 15 years (up from 10 years in the 1995 code) with the

possibility of several five-year extensions subject to the holder being in compliance

with its obligations In addition article 18 of the GMC prescribes a maximum duration

of 25 years for mining agreements which may subsequently be renewed through 10

year extensions This would align the term concession very well with the long-term

nature of most project finance arrangements By extending the concessions the

256 K Bhatt

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government has also removed the need for companies to frequently renew operating

permits which entails a bureaucratic process that can be can be time-consuming and

costly Furthermore and for obvious reasons lenders prefer the term of the concession

agreement to be fixed as closely as possible to the life of the project it is not goodbusiness sense to lend millions or even billions of dollars to a project that does not

explicitly permit the project company to mine for a number of years as the lenders are

repaid out of the cash generated from the project Clearly this provision will be most

useful for sponsors when trying to attract project financing

Environmental and social issues

The GMC prioritises environmental and social issues As noted above in order toobtain a mining permit an applicant must provide a detailed feasibility study

incorporating (among other things) an environmental and social impact study and

management plan and a community development plan

The GMC further requires mining companies to prevent and minimise negative

environmental and health outcomes of mining activities Mining right holders are

required to prevent andor treat spillages and waste minimise the use of harmful and

hazardous chemical products and prevent water air and soil pollution Neighbouring

Sierra Leone also prioritises environmental health and safety issues seriously in its2009 Mines and Minerals Act38 In the context of environmental protection Sierra

Leone has gone one step further and in 2008 it set up the Environment Protection

Agency which is in the final stages of passing a landmark set of environmental and

social regulations for the mining sector aimed at regulating and minimising the

harmful environmental effects of mining activities in the country39 Sierra Leone is

also producing detailed health and safety regulations for inter alia open pit mining

underground mining waste disposal explosives and blasting dredging activities

reclamation and mine closure Guinea may follow Sierra Leonersquos lead and drafthealth and safety regulations for the mining sector The new mining code in Angola

published by Law No 3111 of 23 September 2011 sets forth environmental

obligations by requiring compliance with environmental impact assessment imposi-

tions and the implementation of environmental protection measures

The GMC specifically requires mining companies to plan for and mitigate

hardship for those forced to move owing to mining activities The GMC requires

companies to provide compensation to displaced persons for loss of income in

accordance with international principles aligned to the World Bank policy objectivesfor involuntary resettlement which include minimising involuntary resettlement

consulting with affected communities and providing adequate compensation where

resettlement occurs40

Mining companies may well be worried by the increased cost of compliance with

a new raft of international environmental and health and safety standards imposed

on the mining sector Another issue is the time it will take for them to comply and the

penalties imposed on them for non-compliance Time and money are often the

salient reasons forwarded by companies in resisting new regulation in this area aswell as a perceived reluctance on the grounds that regulations are somehow going

above and beyond international standards There are a few points worth noting here

Firstly international mining companies operating in developing counties will in all

likelihood already be complying with environmental and social standards in

developed countries in which they operate By arguing against new regulations as

South African Journal of International Affairs 257

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time-consuming and expensive companies send the underlying message that the

citizens of Guinea deserve less protection of human rights than those in more

developed countries

In many African countries governments are simply enacting environmental and

social legislation which has been lacking By lobbying against such legislation mining

companies are signalling that they would prefer no regulation in these areas and thus

have no regard for the environmental and social impact of their mining operations

or that of other companies However there are several more commercial incentives

for prioritising environmental and social issues in mining operations These include

reputational damage the spectre of lengthy court battles and retaining access to

finance especially in view of the Equator Principles discussed below

The commercial rationale for prioritising environmental and social policies

Moving away from ethical considerations the benefits of sound environmental

compliance are also robust from a commercial perspective in both the short and long

term Discussions regarding direct loans to companies operating in these sectors

either in the form of project finance or as corporate facilities take into account the

level of sustainability of the companyrsquos operations and how this can negatively

impact a business Ignoring sustainability risks can also lead to conflicts with

communities who may feel they have been resettled unfairly or inadequately

compensated Potential conflicts with the wider population (including civil society

groups) are as a result more likely causing reputational damage to a mining

company and potential litigation

Delays in the construction and operation of the mine owing to civil unrest strikes

or lengthy court battles arising from poor social or environmental management can

have disastrous effects on contractual arrangements Mining companies may not be

able to commence construction or continue operations owing to stoppages on site

Depending on the contractual arrangements in place delays in construction caused

by such stoppages may result in the mining companyrsquos sponsor having to pay

liquidated damages pursuant to the terms of the construction contract In addition

the sponsor may then have to pay damages under the borrowerrsquos sales contracts if

there are delays in construction leading to the final product not being ready for sale

as per the contractual arrangements The possible scenarios are multifarious Delays

such as these can have a disastrous effect on the economics of the project as in a

project finance deal the sponsor will be largely relying on payments under the sales

contracts to repay the debt A company that fails to prioritise sustainability and the

social aspects of its licence to operate could find itself in a position where it

potentially defaults on debt repayment as per its financing arrangements is unable to

construct the project and is thus liable to pay a substantial damages bill pursuant to

its long-term sales contracts

Mining companies must also take a long-term view when it comes to appreciating

the benefits of integrating sustainable practices into operations Giving full support

to legislation which puts environmental and social considerations into investment

practice makes business sense investing in compliance would reap good results in the

future in terms of mitigating potential defaults caused by sustainability risk and will

generate goodwill with the host government and local communities After all the

mining companies plan to be present in the host state for a number of years and it is

258 K Bhatt

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

South African Journal of International Affairs 259

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

260 K Bhatt

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

South African Journal of International Affairs 261

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

262 K Bhatt

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

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people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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government has also removed the need for companies to frequently renew operating

permits which entails a bureaucratic process that can be can be time-consuming and

costly Furthermore and for obvious reasons lenders prefer the term of the concession

agreement to be fixed as closely as possible to the life of the project it is not goodbusiness sense to lend millions or even billions of dollars to a project that does not

explicitly permit the project company to mine for a number of years as the lenders are

repaid out of the cash generated from the project Clearly this provision will be most

useful for sponsors when trying to attract project financing

Environmental and social issues

The GMC prioritises environmental and social issues As noted above in order toobtain a mining permit an applicant must provide a detailed feasibility study

incorporating (among other things) an environmental and social impact study and

management plan and a community development plan

The GMC further requires mining companies to prevent and minimise negative

environmental and health outcomes of mining activities Mining right holders are

required to prevent andor treat spillages and waste minimise the use of harmful and

hazardous chemical products and prevent water air and soil pollution Neighbouring

Sierra Leone also prioritises environmental health and safety issues seriously in its2009 Mines and Minerals Act38 In the context of environmental protection Sierra

Leone has gone one step further and in 2008 it set up the Environment Protection

Agency which is in the final stages of passing a landmark set of environmental and

social regulations for the mining sector aimed at regulating and minimising the

harmful environmental effects of mining activities in the country39 Sierra Leone is

also producing detailed health and safety regulations for inter alia open pit mining

underground mining waste disposal explosives and blasting dredging activities

reclamation and mine closure Guinea may follow Sierra Leonersquos lead and drafthealth and safety regulations for the mining sector The new mining code in Angola

published by Law No 3111 of 23 September 2011 sets forth environmental

obligations by requiring compliance with environmental impact assessment imposi-

tions and the implementation of environmental protection measures

The GMC specifically requires mining companies to plan for and mitigate

hardship for those forced to move owing to mining activities The GMC requires

companies to provide compensation to displaced persons for loss of income in

accordance with international principles aligned to the World Bank policy objectivesfor involuntary resettlement which include minimising involuntary resettlement

consulting with affected communities and providing adequate compensation where

resettlement occurs40

Mining companies may well be worried by the increased cost of compliance with

a new raft of international environmental and health and safety standards imposed

on the mining sector Another issue is the time it will take for them to comply and the

penalties imposed on them for non-compliance Time and money are often the

salient reasons forwarded by companies in resisting new regulation in this area aswell as a perceived reluctance on the grounds that regulations are somehow going

above and beyond international standards There are a few points worth noting here

Firstly international mining companies operating in developing counties will in all

likelihood already be complying with environmental and social standards in

developed countries in which they operate By arguing against new regulations as

South African Journal of International Affairs 257

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time-consuming and expensive companies send the underlying message that the

citizens of Guinea deserve less protection of human rights than those in more

developed countries

In many African countries governments are simply enacting environmental and

social legislation which has been lacking By lobbying against such legislation mining

companies are signalling that they would prefer no regulation in these areas and thus

have no regard for the environmental and social impact of their mining operations

or that of other companies However there are several more commercial incentives

for prioritising environmental and social issues in mining operations These include

reputational damage the spectre of lengthy court battles and retaining access to

finance especially in view of the Equator Principles discussed below

The commercial rationale for prioritising environmental and social policies

Moving away from ethical considerations the benefits of sound environmental

compliance are also robust from a commercial perspective in both the short and long

term Discussions regarding direct loans to companies operating in these sectors

either in the form of project finance or as corporate facilities take into account the

level of sustainability of the companyrsquos operations and how this can negatively

impact a business Ignoring sustainability risks can also lead to conflicts with

communities who may feel they have been resettled unfairly or inadequately

compensated Potential conflicts with the wider population (including civil society

groups) are as a result more likely causing reputational damage to a mining

company and potential litigation

Delays in the construction and operation of the mine owing to civil unrest strikes

or lengthy court battles arising from poor social or environmental management can

have disastrous effects on contractual arrangements Mining companies may not be

able to commence construction or continue operations owing to stoppages on site

Depending on the contractual arrangements in place delays in construction caused

by such stoppages may result in the mining companyrsquos sponsor having to pay

liquidated damages pursuant to the terms of the construction contract In addition

the sponsor may then have to pay damages under the borrowerrsquos sales contracts if

there are delays in construction leading to the final product not being ready for sale

as per the contractual arrangements The possible scenarios are multifarious Delays

such as these can have a disastrous effect on the economics of the project as in a

project finance deal the sponsor will be largely relying on payments under the sales

contracts to repay the debt A company that fails to prioritise sustainability and the

social aspects of its licence to operate could find itself in a position where it

potentially defaults on debt repayment as per its financing arrangements is unable to

construct the project and is thus liable to pay a substantial damages bill pursuant to

its long-term sales contracts

Mining companies must also take a long-term view when it comes to appreciating

the benefits of integrating sustainable practices into operations Giving full support

to legislation which puts environmental and social considerations into investment

practice makes business sense investing in compliance would reap good results in the

future in terms of mitigating potential defaults caused by sustainability risk and will

generate goodwill with the host government and local communities After all the

mining companies plan to be present in the host state for a number of years and it is

258 K Bhatt

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

South African Journal of International Affairs 259

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

260 K Bhatt

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

South African Journal of International Affairs 261

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

262 K Bhatt

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

South African Journal of International Affairs 263

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

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people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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time-consuming and expensive companies send the underlying message that the

citizens of Guinea deserve less protection of human rights than those in more

developed countries

In many African countries governments are simply enacting environmental and

social legislation which has been lacking By lobbying against such legislation mining

companies are signalling that they would prefer no regulation in these areas and thus

have no regard for the environmental and social impact of their mining operations

or that of other companies However there are several more commercial incentives

for prioritising environmental and social issues in mining operations These include

reputational damage the spectre of lengthy court battles and retaining access to

finance especially in view of the Equator Principles discussed below

The commercial rationale for prioritising environmental and social policies

Moving away from ethical considerations the benefits of sound environmental

compliance are also robust from a commercial perspective in both the short and long

term Discussions regarding direct loans to companies operating in these sectors

either in the form of project finance or as corporate facilities take into account the

level of sustainability of the companyrsquos operations and how this can negatively

impact a business Ignoring sustainability risks can also lead to conflicts with

communities who may feel they have been resettled unfairly or inadequately

compensated Potential conflicts with the wider population (including civil society

groups) are as a result more likely causing reputational damage to a mining

company and potential litigation

Delays in the construction and operation of the mine owing to civil unrest strikes

or lengthy court battles arising from poor social or environmental management can

have disastrous effects on contractual arrangements Mining companies may not be

able to commence construction or continue operations owing to stoppages on site

Depending on the contractual arrangements in place delays in construction caused

by such stoppages may result in the mining companyrsquos sponsor having to pay

liquidated damages pursuant to the terms of the construction contract In addition

the sponsor may then have to pay damages under the borrowerrsquos sales contracts if

there are delays in construction leading to the final product not being ready for sale

as per the contractual arrangements The possible scenarios are multifarious Delays

such as these can have a disastrous effect on the economics of the project as in a

project finance deal the sponsor will be largely relying on payments under the sales

contracts to repay the debt A company that fails to prioritise sustainability and the

social aspects of its licence to operate could find itself in a position where it

potentially defaults on debt repayment as per its financing arrangements is unable to

construct the project and is thus liable to pay a substantial damages bill pursuant to

its long-term sales contracts

Mining companies must also take a long-term view when it comes to appreciating

the benefits of integrating sustainable practices into operations Giving full support

to legislation which puts environmental and social considerations into investment

practice makes business sense investing in compliance would reap good results in the

future in terms of mitigating potential defaults caused by sustainability risk and will

generate goodwill with the host government and local communities After all the

mining companies plan to be present in the host state for a number of years and it is

258 K Bhatt

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

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people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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absolutely essential that they attempt to build good working relationships with all

stakeholders

The role of development finance institutions

Environmental and social policy is also firmly on the radar of many of the financial

institutions which mining companies will need to approach for financing As noted

above one of the attractions for private sponsors of using project finance is its ability

to leverage large amounts of debt and from a variety of different sources This neatly

brings us to the next lsquoincentiversquo for mining companies to take seriously environ-

mental and social issues and matters of good governance the mandate of DFIs

These institutions are both financiers and development partners In the case of theEuropean Bank for Reconstruction and Development (EBRD) and the International

Finance Corporation (IFC) respectively the Independent Recourse Mechanism and

the Compliance AdvisorOmbudsman specifically assess violations of environmental

and social policies Furthermore the mandate of the African Development Bank

(AfDB) is lsquoto contribute to the sustainable economic development and social

progress of its regional members individually and jointlyrsquo Poverty reduction and

development are its central goals

DFIs often lend large sums to projects in emerging markets and the presence ofthese types of institutions has a positive effect in attracting other more risk-averse

financiers such as commercial banks to the project thus magnifying the debt

capacity of the project Commercial banks are attracted by the presence of DFIs

because as government-backed institutions DFIs are able to offer benefits such as

access to high-level policymakers in the host country which provides a stamp to

commercial lenders that the project is credible Given that DFIs are backed by

governments from developed countries developing host governments are much less

likely to default on loans or guarantees involving these types of entities owing tonegative fallout and the fear of that DFI not lending in future41 Mining companies

must appreciate the utmost importance which DFIs place on the environmental and

social issues and the level of engagement in these issues which they expect from their

borrowing investors In many cases DFIs will simply not lend to clients who have a

poor track record in this area and may even pull out of projects which cause

environmental and social problems in the host country42 The EBRD in 2007 pulled

out of the Sakhalin II project in Russia ostensibly for reasons of shareholder

configurations but most likely the protests from international environmental groupsalso played a role43 Without the presence of the EBRD the projectrsquos political

financial and reputational risks greatly increased This case illustrates the added

value DFIs can bring to a project Mining companies should not underestimate the

reputational benefit of having the IFC or any other DFI as part of its financing

package To this end DFIs can prior to lending take a leading role in ensuring that

their borrowing investors have taken steps to protect the environment and societies

due to be affected in effect securing a social licence to operate

The IFC has its own Environmental and Social Performance Standards which ituses to manage environmental and social risks in its projects44 In the case of IFCrsquos

direct investments (including project and corporate finance provided through

financial intermediaries) the bank requires its clients to meet and apply these

performance standards to manage environmental and social risks and impacts so

that development opportunities are enhanced throughout the life of the project

South African Journal of International Affairs 259

Dow

nloa

ded

by [

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orad

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embe

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14

At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

260 K Bhatt

Dow

nloa

ded

by [

Col

orad

o C

olle

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embe

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14

Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

South African Journal of International Affairs 261

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environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

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continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

South African Journal of International Affairs 263

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the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

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14

people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

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At the time of writing this article the AfDB was spearheading policy and research

into how the enormous wealth generated in the African economy from mining can be

translated into much needed revenues for governments DFIs are alert to the fact

that at present mining wealth is failing to translate into tangible returns forgovernments and host countries and are looking into how this can be best achieved

The AfDB in early 2012 published a report analysing the royalty rates for gold in

Africa45 for instance and has concluded that the rates are too low As part of its

recommendations the bank suggests a number of policy reforms for maximising

returns to African countries which include higher royalty rates ensuring mining

investment agreements comply with mining legislation and promoting environmental

reform for mining activities The bank acknowledges that lsquoas development partners

for regional countries DFIs have important roles to play in promoting sustainableenvironmental policiesrsquo46 If environmental social and good governance issues in the

mining sector are major policy and research issues for DFIs it is entirely logical that

when deciding to lend they will lend to clients that have a better track record in these

areas and are thus more in tune with the bankrsquos developmental vision and priorities

It also pays for mining companies to remain in favour with DFIs given the wide

variety of unique investment products DFIs can offer clients For example the IFC

offers a variety of investment products to companies from direct lending to co-

financing with other banks to equity and political risk insurance cover through theMultilateral Investment Guarantee Agency Another major advantage of having

DFIs in the financial plan is the benefit emanating from their preferred creditor status

For instance member governments of the IFC grant IFC loans preferential access to

foreign currency in the event of a country foreign exchange crisis Commercial lenders

co-financing with the IFC under special participation arrangements obtain the

benefit of IFCrsquos preferred creditor status and will also gain protection against

currency inconvertibility and transfer risk This is referred to as the lsquoIFC umbrellarsquo

and constitutes a major incentive for commercial banks to invest in riskier projectsthan they might otherwise consider As preferred creditors have fewer defaults arising

from sovereign risk the inclusion of a DFI in the financing package offered to a

sponsor is a natural political risk mitigant For these reasons the presence of DFIs is

very attractive to private sponsors when trying to leverage large amounts of financing

for projects in emerging markets with a high degree of political risk

Mining companies need to take a long-term view when investing keeping one eye

on the future financing of the project to be prudent that their environmental social

and governance practices do not alienate future financiers who can bring a plethoraof financing benefits with them

The Equator Principles

The seriousness with which multilateral lenders take environmental and social issues

has had a positive effect on commercial banks resulting in the financial industry

becoming much more aware in recent years of the relevance and material importance

of non-financial considerations Consequently issues such as adverse environmentaland social impacts and poor corporate governance have moved from the periphery to

the centre of effective financial decisionmaking for many in this sector47

One potentially valuable method of addressing environmental and social issues

in lending is through the Equator Principles (EPs) a set of 10 voluntary broad

principles48 applicable to project finance transactions and underpinned by the IFC

260 K Bhatt

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embe

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Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

South African Journal of International Affairs 261

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

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08

Dec

embe

r 20

14

environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

262 K Bhatt

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

South African Journal of International Affairs 263

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

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08

Dec

embe

r 20

14

the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

Dow

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ded

by [

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orad

o C

olle

ge]

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006

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r 20

14

people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

Dow

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orad

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olle

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at 2

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Dec

embe

r 20

14

Performance Standards guidelines and policies The banks which sign up to the EPs

are called the Equator Principles Financial Institutions (EPFI) The original EPs

(dubbed EP1) were conceived with the help of the IFC in 2002 and launched in 2003

EP1 was based on the IFCrsquos environmental and social safeguard policies andguidelines An updated set of EPs (dubbed EP2) were adopted in July 2006 by the

EPFI and a third version of the EPs (EP3) which has a strengthened environmental

and social risk management framework has been approved by the EPFI and came

into effect from 4 June 201349

Under the EPs the EPFI undertake not to provide loans to a project unless

sponsors can demonstrate that the project will be constructed and operated in

accordance with sound social and environmental management practices More and

more financial institutions are signing up to the EPs for a number of differentreasons These vary from a desire to protect their reputation to a desire for good

corporate governance based upon the need for sustainable or responsible banking

and a wish to reduce political risk to projects by addressing social and environmental

issues in a thorough and detailed manner which would by exceeding minimum legal

compliance be acceptable to the project host state or states50

One major drawback of the EPs is that they are not mandatory and there is no

formal enforcement mechanism which has been criticised by non-governmental

organisations and others However despite the soft law nature of the principles astaggering number of financial institutions have signed up to the EPs It is often cited

that collectively the EPFI now represent around 85 of the worldrsquos cross-border

project finance51 As Watchman et al stated in 2007

less commonly known is the finding that the total debt amount for EP debtfinancing in emerging markets was 93 for the first half of 2006 This figurecomprised the amount of debt underwritten by the EPFI in the emerging marketsand by several non-EPFI involved in lsquoEquator-compliantrsquo projects (where at leastone mandated lead arranger was an EPFI) Consequently it could be said thatlsquomost of the project financing is being carried out in some form or another underthe Equator Bank Principlesrsquo a remarkable achievement given that the EPs areentirely voluntary and that they have only been in existence since 200352

The EPs are now prevalent in mainstream project financing Given that the EPFI

undertake not to provide loans to a project unless private sponsors can demonstratethat the project will be constructed and operated in accordance with sound social

and environmental management practices mining companies which plan on using

project finance will need to take environmental social and possibly human rights

implications very seriously if they are to obtain adequate commercial bank financing

For mining companies that approach banks for financing it is clear that they must

start to think about the long-term social environmental and human rights effects of

their investments for a failure to do so will hit the bottom line and delay companies

being able to procure financing from both commercial banks and DFIs Thecommercial and reputational stakes are too high for companies to ignore environ-

mental and social issues

Adding environmental issues to financial regulation rules

Regulators can play an important part in creating the right incentives for environ-

mental and social considerations to trickle down into daily banking business Adding

South African Journal of International Affairs 261

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14

environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

262 K Bhatt

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orad

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006

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14

continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

South African Journal of International Affairs 263

Dow

nloa

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14

the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

Dow

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ded

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Col

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

environmental issues to financial regulation rules is the goal of the non-governmental

organisation called BankTrack53 which has made submissions to the Basel Committee

on Banking Supervision suggesting that the risk assessment and capital requirements

regulations contained in the Basel Capital Accord and the European Union CapitalRequirements Directive should be modified to ensure that banks integrate sustain-

ability factors in all their lending financing and investment decisionmaking

processes54 BankTrack suggest that the criteria for a banking licence should include

demands relating to institutional knowledge and assessment capacity on sustainability

risks and that in order to avoid liquidity stress banks should amend or avoid specific

investments that run against the principles of sustainable and socially equitable

developments

Under Basel II large banks can choose the Internal Ratings Based (IRB)approaches in which credit risks are assigned to individual transactions by the bank

itself When a bank wants to qualify for one of the IRB approaches regulators have

to be assured that the credit risk assessment system of the bank meets certain strict

validation and operational requirements BankTrack suggested that one way of

weaving environmental and social considerations into Basel II is for regulators to

demand that banks integrate sustainability criteria in their credit risk assessment

system when applying for IRB For banks clients that conduct environmental and

social due diligence of their projects could present a lower probability of default tobanks Choosing more responsible clients which pose a less risky investment could be

reflected in the amount banks have to set aside for capital adequacy purposes that is

they could set aside less as their clients pose a slightly lower default risk owing to the

bankrsquos environmental and social diligence and monitoring Whether BankTrackrsquos

suggestions are taken on board in any form remains to be seen

However what is worthy of note is the general policy principle emanating from

BankTrackrsquos suggestions if regulators incentivise banks by for example requiring

slightly less onerous capital adequacy requirements for banks which conduct soundenvironmental and social due diligence those banks will be incentivised to choose

clients who conduct their businesses in an environmentally sustainable manner Those

environmentally conscious banks will therefore in the long term find financing to be

cheaper as banks will be able to charge lower lending margins as the client poses a less

risky investment to the bank and lsquocostsrsquo the banks less in terms of the amount of

capital it needs to put aside Conversely mining companies who fail to take

environmental and social considerations seriously will find financing more expensive

as banks will be required to charge higher margins for more risky investments and tocover the requirement on banks to put away more capital if the bank chooses to invest

in an environmentally non-compliant project In a worst case scenario companies

which completely disregard environmental and social issues may end up being

blackballed by certain more developmentally-minded financial institutions Clearly

this type of policy and practice cannot happen overnight however the right incentives

(of which this is only one) need to be in place to promote a more environmentally and

socially responsible banking culture

A step further Requiring a lsquosocial licencersquo to mine

In this context should companies beyond the legal authorisation granted by

government through a mining concession also have an obligation to secure a lsquosocial

licencersquo to mine In one view this social licence would be important to ensure the

262 K Bhatt

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

South African Journal of International Affairs 263

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

continued legitimacy of mining operations and securing long-term acceptance of a

project from local communities As noted earlier undermined legitimacy can be

costly for companies in terms of reputational damage and potential liability caused

by project stoppages social conflict and environmental liability Increasingly

companies are not simply expected to lsquodo no harmrsquo to communities but are expected

to make positive contributions at the local level55 One important way for a company

to showcase that it is making a positive contribution is to take clear steps inobtaining a social licence to operate

Typically obtaining a social licence to operate is left to a companyrsquos voluntary

corporate social responsibility initiatives where they exist The problem with this

approach is obvious much is left to the company to define its own parameters of

what is good corporate governance and this can be a highly subjective analysis So

what can be done on a more formalistic level

Crucial to any effort is a common understanding of what a social licence entails

and how it would operate The basis for a social licence must be the imperative to

give local communities a voice in determining whether a project should go ahead

and if it should how communities can obtain a fair share of the benefits of the

project This entails community development plans transparency in the negotiation

of concession contracts and the injection of taxation revenues at local level

Much of this is already present in the mining codes of Guinea and Sierra LeoneArticle 30 of the GMC requires companies to support local businesses and create

community development plans Part XVI of the Sierra Leone 2009 Mines and

Minerals Act requires small- and large-scale mining licence holders to assist in the

development of mining communities that are affected by their operations in order to

promote sustainable development It also sets out specific situations in which

community development agreements are required with an iterative list of criteria to

be contained in those agreements for example educational requirements and

income-generating employment Furthermore companies are increasingly required

to interface directly with communities rather than waiting for the benefits of mining

revenues to lsquotrickle downrsquo (which may never take place owing to issues of

corruption) On this point it is interesting to note that Article 165 of the GMC

requires 15 of all mining taxes to be paid directly to local authority budgets thus

requiring money to be injected directly at community level for local purposes

In addition article 18 of the GMC requires all signed mining contracts to be

published on the website of the Ministry of Mines and after ratification to be

published in the Official Journal This is a major step forward in promoting thetransparency of investment contracts When contracts are in the public domain it is

easier for local communities to review the terms and give legitimacy to a project56 By

putting these requirements into legislation the Guinean government has gone further

than many African governments in formalising community rights

Arguably the most effective way in which a company and governments can secure

the legitimacy of a project from the outset is by involving affected communities in the

negotiation process and by obtaining the free prior and informed consent (FPIC) of

local communities The principle of FPIC is enshrined in customary international

law57 Article 32(2) of the UN Declaration on the Rights of Indigenous People places

a duty on states to ensure that the FPIC of indigenous people is obtained prior to the

approval of any project particularly in connection with the development utilisation

or exploitation of minerals water or other resources in other words prior to the

granting of a mining concession contract Unfortunately the GMC does not include

South African Journal of International Affairs 263

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

the FPIC principle Guinea would be advised to enact domestic legislation which

specifically incorporates the FPIC principle into local law

In addition to international law standards there are also corporate standards

relating to engagement with indigenous people According to these standards

obtaining the legitimacy of local communities is not only a duty on the state but also

a duty on companies who do business in developing countries One of the key themesin this paper is the role of DFIs in promoting the sustainable development of

extractive industries The IFC has expressly incorporated the FPIC standard into its

2012 Performance Standards (see Standard 7) and by extension EP2 (see Principle 5

on Consultation and Disclosure) which requires the sponsors of certain highly

sensitive projects located in non-industrialised countries to conduct free prior and

informed consultation and participation with affected communities to the satisfac-

tion of the relevant EPFIs The FPIC principle is acknowledged by mining

companies as making good business sense in terms of building good relations and

preventing project stoppages58

Increasingly the social licence to operate is taken seriously at the international and

corporate engagement level However implementing FPIC and thus obtaining a

social licence to operate can in the context of project financing be a challenging

prospect in practice As noted earlier in the discussion of project finance often the

banks will not see any repayment of principal and interest until a project is

constructed and fully operational and generating revenues through the projectrsquos salescontracts up to five years later This type of dynamic will require sponsors to adhere

to tight construction schedules As a consequence this may incentivise sponsors to

avoid or not comprehensively deal with issues which have the potential to delay the

construction of a project Such issues could include obtaining the consent of local

communities to the project (which in reality can be a time-consuming and protracted

process) and ensuring that the resettlement of communities (which takes place prior to

construction) is done in accordance with good industry practice Indeed from the

perspective of mining companies local communities are not typically categorised as

lsquostakeholdersrsquo in a project and may therefore be disenfranchised from the entire

consent and decision-making process for a project There is a danger that this

dynamic could interfere with a companyrsquos desire to obtain its social licence to operate

Another point to consider is potential conflicts of interest As noted above under

customary international law states have a duty to obtain the FPIC of local

communities affected by extractive industry projects This raises a dilemma as states

can also be equity participants in a project (as we have discussed earlier in this paper)

and will therefore have a vested interest in ensuring that a project is operational assoon as possible so that the state can claim dividends from a well performing project

This can directly conflict with its international law obligation under article 32(2) of

the UN Declaration on the Rights of Indigenous People Likewise DFIs despite

having a mandate to spearhead the developmental outcomes of extractive industry

projects are also project finance banks and will be subjected to the same financial

pressure to fully operationalise the project in order to generate cash flows for

repayment purposes

Finally some of the details of how FPIC works in practice remain unclear For

example who decides which communities should be consulted and who within a

given community needs to provide FPIC In the light of the above point as to

potential conflicts of interest this can be a controversial area as companies

governments and even DFIs may be incentivised to reduce the required number of

264 K Bhatt

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

Dow

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Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

Dow

nloa

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Col

orad

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at 2

006

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r 20

14

people to be consulted in order to pursue a project and realise financial returns as

soon as possible Each of these conflicts can jeopardise the proper implementation of

FPIC thus making it more challenging for companies to obtain the important social

licence to operate Without the long-term view of the sustainability of a project onthe part of the mining firms banks and sponsors involved these factors can derail

the FPIC concept in practice and in turn the social contract

Conclusion

In this article we have examined some of the key provisions of the GMC relating to

taxation permitting equity participation and environmental and social issues todetermine whether the revisions are overly onerous and could lead to mining

companies ceasing mining operations in Guinea The research conducted by the

Frasier Institute shows that mineral potential and economic potential continue to be

the determining factors for companies when making investment decisions When

commodity prices look likely to remain relatively high policy concerns such as unfair

taxation provisions or the implementation of environmental provisions in mining

codes have generally not deterred companies from investing Extreme policy factors

may it is conceded create a tipping point away from investment in exception to thesefindings

The article has analysed certain provisions of the GMC comparing it with other

neighbouring countriesrsquo mining codes to find that its provisions are neither

unprecedented nor unreasonable In fact the GMC is just one example of reforming

codes aimed at furthering the sustainable and equitable management of natural

resource wealth Many other African nations such as Liberia Sierra Leone and

Angola59 have reformed or are in the process of reforming their laws and reviewing

their mining agreements The discussion in the context of Guinea demonstrates thatby embracing the reforms discussed in this article relating to inter alia taxation and

environmental and social issues mining companies can reap reputational and

commercial benefits especially in the context of avoiding long delays in construction

and obtaining future financing for a project

Through the lens of the 2011 Guinean mining code this article has highlighted

that sustainability and fairness are not mutually exclusive to profitability of

investments and that with a long-term view mining companies can appreciate the

future benefits of changes introduced by the GMC With the current trend in mininglaw reform being spearheaded by donors DFIs governments non-governmental

organisations and academics it is likely that these types of changes will be introduced

by other African countries The arguments contained in this article could also be

applied to investment in other reforming countries that are advocating mining

policies which will for the first time fairly balance the interest of the state and its

citizens with those of the private sector

Notes on contributor

Kinnari Bhatt holds a LLB Joint Honours Law with French degree (University ofBirmingham) MSc in Development Studies (University of London) and a LPC (NottinghamTrent University) and is admitted to practice as a Solicitor in England and Wales She is alecturer in project finance at the University of East Anglia Norwich and the University ofGreenwich London and has worked as a consultant to the World Bank and to the RevenueWatch Institute

South African Journal of International Affairs 265

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

Dow

nloa

ded

by [

Col

orad

o C

olle

ge]

at 2

006

08

Dec

embe

r 20

14

Notes

1 The World Bank categorises Guinea as a low-income country The national poverty lineis the percentage of the population living below the national poverty line of US$125 perday National estimates are based on population-weighted subgroup estimates fromhousehold surveys httpdataworldbankorgcountryguinea

2 Resource rents do have an important effect on the risk of conflict and resources can financeand motivate conflict and induce patronage politics See Collier P amp A Hoeffler lsquoResourcerents governance and conflictrsquo The Journal of Conflict Resolution 49 4 2005 pp 62533See also Le Billon P lsquoThe political economy of warrsquo Political Geography 20 2001 pp 56184 who notes that although few wars are initially motivated by conflict over the control ofresources many integrate resources into their political economy

3 Ibid p 6274 Ibid p 6275 How such domestic legislation especially in the context of the trend in local content laws

in African countries such as Nigeria and Angola then interacts with international lawconventions such as World Trade Organisation agreements would make an interestingresearch topic

6 Camara O lsquoUnited Nations urges calm in Guinea after Alpha Conde declaredPresidentrsquo Bloomberg 16 November 2010 httpmobilebloombergcomnews2010-11-16un-urges-calm-in-guinea-after-conde-named-winner-in-presidential-election

7 Law L2011006CNT8 Article 2 of the GMC states that its purpose is to promote the systematic and transparent

management of the mining sector to guarantee durable economic and social benefit forthe Guinean people whilst ensuring a mutually advantageous partnership with investors

9 lsquoGuinea should rethink lsquolsquodemotivatingrsquorsquo mining code Valersquos Ferreira saysrsquo Metal Bulletin17 February 2012 Khrennikov I amp Y Fedorinova lsquoRusal says senseless to invest inGuinea after mining lawrsquo Bloomberg News 13 September 2011 httpwwwbusinessweekcomnews2011-09-13rusal-says-senseless-to-invest-in-guinea-after-mining-lawhtml

10 This was decree D2013075PRGSGG and Law L2013053CNT adopted by theNational Transitory Parliament (Conseil National de Transition lsquoCNTrsquo) on 8 April 2013which amended certain provisions of the GMC dated 9 September 2011 The mainrevisions to the 2011 GMC relate to the fiscal provisions For example profit tax has beenreduced from 35 to 30 Aegis Advisory lsquoGuinea Conakry opens for business forminersrsquo 16 April 2013 Strategy Risk Alert httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf Also Fortin P amp M Diakite lsquoNew perspectives for the mining sector inGuinea Promulgation of the law amending the Mining Code of 2011rsquo Emery MukendiWafwana amp Associates PC Lexology 22 April 2013 httpwwwlexologycomlibrarydetailaspxg0b120b8e-1997-482e-8d42-662818bcde9a

11 For an explanation of the various factors used in calculated royalty rates see Ndiaye G OGajigo amp E Mutambatsere lsquoRoyalty rates in African mining revisited Evidence from goldminingrsquo AfDB Africa Economic Brief 36 June 2012 httpwwwafdborgfileadminuploadsafdbDocumentsPublicationsAEB20VOL20320Issue20620avril20201220Bis_AEB20VOL20320Issue20620avril20201220bis_01pdf

12 Ndiaye G I Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147 March2012 p 20

13 Unfortunately the unit of taxation for each of the commodities is not clear in thedrafting of the 2009 Sierra Leone Mines and Minerals Act so it not possible to state withcertainty if these percentages are based on annual turnover amounts or a per tonne or perounce basis

14 The London Metal Exchange publishes a set of daily reference prices that are based onthe most liquid trading sessions of the day

15 Transfer pricing refers to the practice of two related companies trading with each otherTransfer pricing is not in itself illegal What is illegal or abusive is the setting of artificialprices between related companies enabling them to buy and sell products at anartificially low price One of the effects of abusive transfer pricing is that it robs a countryof its tax potential

266 K Bhatt

Dow

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ded

by [

Col

orad

o C

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ge]

at 2

006

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Dec

embe

r 20

14

16 Article 154 of the 2009 Mines and Minerals Act stipulates that holders of large-scalemining licences must sell mineral products lsquo(a) in accordance with generally acceptedinternational business practices (b) for exported minerals at the best availableinternational market prices at the time the contract for sale is made and (c) on thebest international terms compatible with world market conditionsrsquo Furthermore anysales commitments to affiliates can only be made at prices based on or equivalent toarmrsquos length sales to non-affiliated purchasers and in accordance with such terms andconditions on which agreements would be made if the parties had not been affiliated Theact also permits the government to re-price contracts where it considers a contract fallsfoul of these requirements

17 England A lsquoAfrica sees 27 surge in FDIrsquo The Financial Times London 3 May2012 httpwwwftcomcmss01c68c03a-9530-11e1-ad38-00144feab49ahtmlaxzz1zUNJLl69

18 Thomson Reuters Global Project Finance Review Fourth Quarter 2008 httponlinethomson reuterscomDealsIntelligenceReviewsAndAnalysisArchiveQuarterlyReviews

19 Hoffman S The Law and Practice of International Project Finance CambridgeCambridge University Press 2009 p 4

20 Examples include the International Finance Corporation the African DevelopmentBank the European Bank for Reconstruction and Development and the EuropeanInvestment Bank

21 Vinter G Project Finance London Thomson Sweet amp Maxwell 2005 See chapter 6 fora discussion on lsquobankabilityrsquo

22 For example the renegotiation of the Mineral Development Agreement between MittalSteel AG and the Government of Liberia in May 2007

23 Aegis Advisory Strategy Risk Alert lsquoGuinea Conakry opens for business for minersrsquo16 April 2013 httpwwwstrategicriskindexcompdfGuinea20Conakry20opens20for20business20for20miners201620April202013pdf

24 Ibid25 For an interesting article on the three generations of African mining codes and the

economic policies reflected in their terms see lsquoFocus Africa mining codes questionedrsquoMining Journal London 14 February 2003 p 106

26 There are many examples of international initiatives aimed at the equitable developmentof natural resource wealth for example the work of Paul Collier in the NaturalResources Charter which is a set of principles for governments and societies on how tobest harness the opportunities created by extractive resources for development as well asthe Extractive Industries Transparency Initiative and the work of the World BankInstitute to name a few

27 Sornarajah M The International Law on Foreign Investment Cambridge CambridgeUniversity Press 2011 p 281

28 The timing and process for the sale is not contained in the GMC We may see thedrafting of regulations or a policy paper to clarify the process

29 The recently approved new Mining Code in Angola was published by Law No 3111 of23 September 2011 The state is given the right to participate in the lsquoappropriation of themining productrsquo either (1) by means of at least a 10 participation in the share capitalof the concessionaire through a state-held company or (2) by participation in kind in themining product with the statersquos share increasing with the increase of the Internal Rate ofReturn of the project A combination of both these types of state participation may alsobe applied

30 The Frasier Institute is a public policy think-tank based in Canada with a mission tomeasure study and communicate the impact of competitive markets and governmentintervention on the welfare of individuals

31 Following email correspondence with one of the authors of the study it was confirmedthat the study referred to the GMC in the case of Guinea

32 McMahon F amp M Cervantes lsquoAnnual survey of mining companiesrsquo 2011 2012 researchreport by the Frasier Institute February 2012 p 24

33 Ibid pp 64834 Ibid p 5

South African Journal of International Affairs 267

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35 World Bank lsquoProspects for Commodity Marketsrsquo in Global Economic Prospects and theAnnex Commodity Market Outlook January 2013 pp 803 httpsiteresourcesworldbankorgINTPROSPECTSResources33493413225933055958287139-1358278153255GEP13AFinalFullReport_pdf

36 See article 30 of the GMC37 The Judiciary of Sierra Leone with support from the Investment Climate Facility for

Africa Trust and the Government of Sierra Leone is one of the first African nations toembark on the establishment of a Fast Track Commercial Court in Freetown SierraLeone

38 Under section 53 of the act the Minister of Mineral Resources after consultation withthe Minerals Advisory Board has the power to suspend or cancel a mineral right if theholder grossly violates health and safety regulations or causes environmental harm PartXV of the act contains an entire section devoted to the protection of the environment andimposes various environmental duties on the mineral right holder for example a generalduty to protect the environment and minimise pollution detailed requirements relatingto the provision of an environmental impact assessment and an environmental manage-ment report if relevant for the specific project

39 The environmental regulations for the mining sector emanate from the EnvironmentProtection Agency Act 2008 as amended by the Environment Protection Agency Act2010 which also establishes the Environment Protection Agency The main objective ofthe regulations is to ensure that mining activities are carried out in a sustainable mannerby minimising or eliminating negative environmental and community impacts

40 World Bank Operational Policy 412 lsquoInvoluntary resettlementrsquo policy paper February2011 httpwebworldbankorgWBSITEEXTERNALPROJECTSEXTPOLICIESEXTOPMANUAL0contentMDK20064610menuPK64701637pagePK64709096piPK64709108theSitePK50218400html

41 Even during times of economic hardship governments will continue to honourrepayments to DFIs in order to avoid being denied further funding For example duringthe 2001 Argentinean moratorium on government foreign debt payments the CentralBank of Argentina exempted payments to the IFC and other international organisationsfrom exchange rate restrictions and allowed IFC loans to be serviced without priorCentral Bank approval Similarly IFC loans were serviced in Russia during the 1998government restriction on the repayment of public debt and also in Pakistan when thegovernment ceased repaying foreign debt owing to severe balance of payments problems

42 The European Bank for Reconstruction and Development pulled out of the financing forthe $20 billion Sakhalin II Liquefied Natural Gas Project in Russia owing to changes inthe shareholding of the project Environmental groups such as Greenpeace and theWorld Wildlife Fund lobbied hard against the contribution of funds from public bodiessuch as the EBRD owing to the disastrous environmental impact of the project onsalmon spawning rivers and the summer feeding groups of rare grey whales In June 2005the EBRD delayed its approval of the project over possible problems with the projectrsquospipelines It ultimately withdrew its support for the project citing changes in share-holding as the reason however the reputational damage to the EBRD of beingassociated with such an environmentally devastating project was also a fundamentalconcern to the bank

43 Bergin T lsquoGreen groups welcome EBRD Sakhalin-2 pull-outrsquo Reuters London 12January 2007 httpwwwreuterscomarticle20070112shell-sakhalin-ebrd-idUSL1265195720070112

44 A new version of the IFCrsquos Performance Standards on Environmental and SocialSustainability came out in January 2012 The Policy on Environmental and SocialSustainability describes the IFCrsquos commitments roles and responsibilities related toenvironmental and social sustainability and covers topics such as inter alia theassessment and management of environmental and social risks labour and workingconditions community health safety and security land acquisition and involuntarysettlement and indigenous people

45 Ndiaye G O Gajigo amp E Mutambatsere lsquoGold mining in Africa Maximising economicreturns for countriesrsquo African Development Bank Group Working Paper No 147March 2012 p 21

268 K Bhatt

Dow

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46 Ibid p 3047 Watchman P A Delfino amp J Addison lsquoEP2 The revised Equator Principles Why hard-

nosed bankers are embracing soft law principlesrsquo March 2007 httpwwwequator-principlescomresourcesClientBriefingforEquatorPrinciples_2007-02-07pdf

48 These principles include inter alia the review and categorisation of risks the requi-rement to conduct a social and environmental assessment on projects consultation anddisclosure the implementation of grievance mechanisms and independent review TheEquator Principles apply to all new project financings globally with total project capitalcosts of $10 million or more and across all industry sectors In addition while theprinciples are not intended to be applied retroactively they will apply to all projectfinancings covering expansion or upgrade of an existing facility where changes in scale orscope may create significant environmental andor social impacts or significantly changethe nature or degree of an existing impact

49 See the EP3 press release lsquoBanks back move to strengthen Equator Principlesrsquo 14 May2013 httpwwwequator-principlescomresourcespress_release_epiii_launchedpdfFollowing on from the revised 2012 IFC performance standards which explicitly statethat business should respect human rights and must address any adverse human rightsimpacts which they may cause or contribute to the EP3 also adds human rights to itscredit risk management framework Mining companies need to keep abreast of suchchanges as they may need to be compliant should they seek project financing from anyEquator Principles Financial Institutions

50 Watchman P A Delfino amp J Addison lsquoEP2 The revised Equator Principles Why hard-nosed bankers are embracing soft law principlesrsquo March 2007 p 21 httpwwwequator-principlescomresourcesClientBriefingforEquatorPrinciples_2007-02-07pdf

51 Balch O lsquoBuilding a better world (for investors and whales)rsquo 3 July 2006 The Bankerp 54 httpwwwthebankercomMarketsClimate-CarbonBuilding-a-better-world-for-investors-and-whalesct=true

52 Watchman P A Delfino amp J Addison lsquoEP2 The revised Equator Principles Why hard-nosed bankers are embracing soft law principlesrsquo March 2007 p 27 httpwwwequator-principlescomresourcesClientBriefingforEquatorPrinciples_2007-02-07pdf

53 BankTrack (httpwwwbanktrackorgshowpagesabout_banktrack) is a global networkof civil society organisations and individuals tracking the operations of the privatefinancial sector (commercial banks investors insurance companies pension funds) andits effect on people and the planet

54 BankTrack Submission to the Basel Committee Comments on the documentslsquoStrengthening the resilience of the banking sector International framework for liquidityrisk measurement standards and monitoringrsquo 15 April 2010 pp 45 The document wasoriginally submitted to the European Commission as a contribution to the EuropeanUnion Capital Requirements Directive consultation

55 The International Council on Mining and Metals states that mining companies are nowexpected to demonstrate positive results and not just mitigate against negative impacts Itadvises that such an approach is essential if mining and metals-related activities are tomake the sustainable development contributions demanded by society and sought byindustry leaders See International Council on Mining and Metals summary briefing lsquoInbrief trends in the mining and metals industry miningrsquos contribution to sustainabledevelopmentrsquo June 2012 p 5

56 The Revenue Watch Institute has been working with the Government of Guinea toproduce an online contract database containing copies of all signed mining concessioncontracts The government has said that it will publish online all amended and futurecontracts See httpwwwcontratsminiersguineeorg

57 Article 19 of the UN Declaration on the Rights of Indigenous People is the clearestelaboration of the right of indigenous people to provide their free prior and informedconsent to any project particularly in connection with the development utilisation orexploitation of mineral water or other resources

58 See Colchester M lsquoFree prior and informed consent Making FPIC work for forests andpeoplesrsquo Research Paper ATFD Publication No 11 July 2010 p 15 which discussesworkshop discussions about FPIC with companies that are members of the Roundtable onSustainable Palm Oil Companies have consistently noted that consent-based agreements

South African Journal of International Affairs 269

Dow

nloa

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orad

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Dec

embe

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14

are sought by companies as these are considered a sound investment against future conflictsand assist in obtaining a companyrsquos social licence to operate httpwwwforestpeoplesorgsitesfppfilespublication201010tfdfpicresearchpapercolchesterhi-res2pdf

59 Cameroon is also planning on producing a model mining agreement and incumbentmining agreements may be re-negotiated although no formal process has started ineither of these areas

270 K Bhatt

Dow

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by [

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