The Challenge of Monetizing Africa’s Mineral-rich Resources

Foreign-owned companies looking to monetize Africa’s mineral-rich resources must navigate multiple challenges in developing large-scale projects.

September 11, 2013

Clement Fondufe is a partner at Latham & Watkins and the global Chair of the firm's Africa Practice. In this interview, he looks at some of the challenges facing foreign-owned companies operating in Africa’s mining, oil and gas, and energy sectors as they look to develop large-scale infrastructure and investment projects.

What regulatory challenges are facing foreign-owned companies that want to build large-scale infrastructure and investment projects in Africa?

Fondufe: A significant challenge facing foreign companies relates to risks associated with a change in the law and/or renegotiation of existing concessions. For example, a company is granted a mining concession by an African country pursuant to a mining code, and several years later the government decides to amend its mining code and make it applicable retroactively to every company operating within that sector in the country. A company could find itself in a position where there is a new law that impacts its project in a manner that alters the economic balance — notwithstanding the fact that the law comes into force years after its concession was granted by the government.

Or a government may conclude that it is no longer adequately compensated under the terms of a mining concession and decide to amend it. This would be the case if, for example, the government may have granted the company a 10-year tax holiday on certain items, but then five years later decides to eliminate the tax holiday prior to the expiration of the 10-year period.

What challenges does compliance with local content laws pose to project development and implementation?

Fondufe: African governments are increasingly requiring beneficiaries of concessions to participate in capacity building through the use of the country’s local content. This means that under a concession, a foreign-owned company would be required to procure certain goods and services required for its project from local providers. In certain countries, there is specific legislation setting out local content requirements, with specific objectives that must be met by companies operating in those countries. An item that is of particular interest to host governments is the training of local staff, since the government’s aspiration is that through this mechanism and over time, there will be a transfer of knowledge and management required for the implementation of these large-scale projects.

Nigeria has had a local content law for the oil and gas industry since 2010, and Ghana is currently in the process of adopting one. In other countries where there is no specific legislation, the concessions tend to contain provisions requiring the use of local content. This could be quite challenging for foreign investors who are required to use a specified number of local experts whereas in some countries, such expertise does not exist.

However, this is a trend that is not likely to change. Those foreign companies that understand this concept and have found a way to work with host governments have been positively perceived.

Do governments in Africa want to take a larger ownership role in project development?

Fondufe: In the past, governments generally satisfied themselves with the requirement of a royalty payment and other taxes. Over time and more recently, several African governments are seeking ownership roles for two principal reasons: the first one is pure economics and the desire to share in the profits of the project, while the second reason is to be able to — through their active participation in board meetings — influence the implementation of projects on schedule. As a result, many governments have modified or are enacting new laws and modifying existing concessions in order to set out the right of the government to own a certain percentage of a company implementing a project in Africa.

Of course, this is creating a major issue since the government, as a shareholder, is required to contribute its share of the company’s equity. However, many governments are simply not able to make the actual contributions — since these are capital-intensive projects and they therefore require the foreign companies to “carry” the government, usually for free.

Why are foreign-owned companies willing to give African governments a large stake in their operations?

Fondufe: Many (not all) national oil companies rely on international companies to bring the capital, operational expertise, technology and market position to a joint venture. The natural resources in most countries are owned by the government. So there is a natural partnership that develops between a country that has the resource and an international company that has the technical, operational and financial ability to develop those resources. 

Further, the participation of a national company is often a requirement of law, so the international oil companies do not have the luxury of deciding whether to partner with a national oil company or not. If they want to secure access to resources, then they must comply with the requirements of these host governments.

Over the past decade, we have witnessed a significant spike in the quest for Africa’s oil and gas as well as mining resources from all over the world, including from Asia (mostly China), the United States and Europe. This has increased the competition and given the African governments more leverage in their negotiations with international oil companies and so they are able to obtain more favorable terms.

I also note that sometimes the participation of a national oil company in a project provides a sort of “protective umbrella” for the international company. The theory is that it is unlikely that a host government will seek to take decisions that would adversely impact the activities of a project company if the national oil company is one of its shareholders. This therefore provides some measure of protection to the international oil company.

What are some of the infrastructure challenges facing mining companies specifically?

Fondufe: The lack of any significant industry in most of Africa for the transformation of raw materials into finished and semi-finished products means that for most mining companies, the real value is not in the local market. The long-term buyers of minerals like bauxite, iron ore, manganese, nickel, cobalt and platinum are in the export markets. In most cases, the mines are hundreds of kilometers away from the seaport and, because the road infrastructure is neither efficient nor reliable for transportation of these minerals, these mining companies must find a railway infrastructure that is reliable. In some cases, existing seaports have to be deepened to allow large vessels to berth. The issues surrounding Africa’s infrastructure are well-documented, but in the mining industry, it is even more pressing.

In terms of developing the infrastructure, I should note that even where the government grants rights to build the infrastructure, the mining company is required to provide “open access”, including opening access to the infrastructure by other mining companies, which may include its competitors. This raises questions of operation, management and maintenance and, critically, priority of access, especially vis-à-vis competitors. Further, governments want to use this for national transportation purposes. These issues all make even the financing of these infrastructure projects quite complicated.

How can foreign-owned companies protect their investments in Africa?

Fondufe: Investment protection is a critical part of the diligence that a foreign company must conduct in order to determine if it can make an investment in a particular country. This requires the evaluation of various risks to which the foreign investor may be exposed and the structuring of various protective measures. This is necessarily specific to each country, so I would caution against broad generalizations.

However, it would be prudent to ensure that an adequate protection is built in, including the following items:

  • Existence of an applicable bilateral investment treaty
  • Stabilization of the contract and laws
  • The fiscal rules allow repatriation of capital and free convertibility of currencies
  • The dispute resolution mechanism allows for international arbitration in a recognized forum such as the International Chamber of Commerce (ICC)

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