Africa has shown robust growth over the past decade. The riches of Africa are significant, but in order to unlock those riches it is important to understand the continent and, more importantly, the country in which those riches are to be found. Africa is a diverse continent in terms of languages, culture and systems of law. Although there are some similarities among jurisdictions and a measure of harmonisation in each of West, East and Southern Africa, it remains critical to understand the investment environment of each target country.
Africa remains a volatile playing field with numerous recent elections having taken place or scheduled to take place in the next 12 months. Invariably, this has brought with it a review of the State's role in the development of mining and infrastructure projects, ranging from passive regulator, to being an active player and all the way through to calls for nationalisation. Resource nationalism remains a key theme, bringing with it a continued tinkering with tax and royalty regimes, mining code and contract reviews.
Accountability, transparency and sustainable development of finite natural resources for the betterment of the populace as a whole are becoming key issues in elections with a shift against those in power seeking to secure as much of the pot for themselves. Similarly, compliance with and the enforcement of anti-corruption laws (both local and international) as well as sanctions against rogue states are making their presence felt. The FCPA has gained greater prominence, as has the recently enacted UK Bribery Act. Transparency is receiving greater attention through the Extractive Industries Transparency Initiative, as well as through the enactment of legislation such as the Dodd-Frank Act. On the ground, voters are taking to the street or ballot box to demand their share of the pot.
Foreign investment in the mining and infrastructure sectors plays a fundamental role in the growth of many of the developing economies on the continent. Host governments are forming strong views on the role that companies should play in sustainable development. It has become increasingly important for African countries that they derive lasting benefit from the exploitation of their finite mineral resources, with benefits being sought on various levels. These include ownership, community development, infrastructure development, employment and skills transfer, health, safety and the environment and in-country beneficiation. We will return to these elements later in this article. What should be noted though is that, in order to mitigate against the risk of having rights withdrawn or contracts reviewed, when in structuring one's investment, economic equilibrium should be sought. In other words, mitigating risk through entering into balanced arrangements where the investment is profitable for all stakeholders (investors, shareholders, host country and the general population).
In order to undertake mining and infrastructure projects in Africa, it is important to give due consideration to structuring one's entry into the host country. This is particularly with regard to balancing tax and commercial efficiency against available BIT protection. Appropriate structures should be put in place upfront, not only in-country but often through appropriate intermediary jurisdictions. To try and remedy an inappropriate structure at a later stage often involves significant unnecessary tax leakage and/ or obtaining consent from regulators, both of which an investor would obviously not find desirable.
Security of tenure as well as securing all rights in relation to the entire project is critical for any mining or infrastructure project. Diligence, diligence and more diligence – the history of the title is very important, and not only the current title should be considered. If mineral rights and titles are not granted in accordance with legislative processes, such rights may be validly withdrawn without compensation by the authorities. The last few years have clearly shown that there is increased risk of withdrawal or review in countries with political change (DRC / Guinea), and there is far greater emphasis being placed by host governments on compliance with concession agreements and the timeframes set out therein. In short, it is important for any potential investor to clearly understand the legal and fiscal environment that is being entered into and to comply strictly. There remains a popular misconception that legal processes and requirements can be by-passed and that short-cuts are available.
Despite the important differences between mining legislation on the African continent, the presence of a set framework is common to all of the countries in which we work (such as Namibia, Botswana, Eritrea, Zimbabwe, Mozambique, Lesotho, DRC, Ghana, Zambia, Burundi, Uganda, Liberia, Madagascar, Tanzania and Guinea to name but a few). The same cannot, however, be said in respect of the laws governing the provision of infrastructure such as roads, rail, water and electricity, where they range across the various countries from particularly underdeveloped to extremely sophisticated. Even within one country, the laws range from sophisticated in a sector of specific interest to the country (such as gas, for instance) to underdeveloped or nonexistent in another sector. This dichotomy can exist between neighbouring countries.
Once the rights and titles have been granted, it is of great importance that such rights and titles grant exclusive rights to the holder. If these exclusive rights are to be upheld, then it is essential that the state granting such rights has the ability, the will and the intention to enforce such exclusivity. On several transactions on which we have worked (in countries such as the DRC and Lesotho), the lack of enforcement of the exclusivity of mineral rights and titles, or the rights to undertake the infrastructure project has been a major problem and, ultimately, sometimes has led to the project not proceeding. Accordingly, this situation has to be ascertained before large amounts of money are sunk into a project.
Another aspect to be taken into account at the inception of a mining project or, indeed, any commercial activity (including infrastructure development) is the variety of rights that can be held in land. Indeed, a 'title to land' will not have the same meaning all throughout Africa. Therefore, when securing land rights in respect of: the land in which the opencast mine is to be conducted or the mine shaft sunk; or the power plant to be constructed and power generated; or the railway line constructed and train services provided; the true nature of the rights that can be obtained in the relevant land should be ascertained at the outset.
The African countries that have a Roman-Dutch legal system (such as South Africa, Namibia and Zimbabwe), or a system based on a European civil law (most of West Africa, which has further developed its commercial law through OHADA), have fully developed land laws. These grant and uphold strong rights of ownership and other real rights in land. These countries usually have a land registry in which ownership of land and other real rights against land are recorded. However, in some countries, statutory provisions may explicitly provide that all mineral deposits found in that country are state property (for example, the DRC and Madagascar).
On the other hand, some African countries do not enforce all registered rights of land ownership – Zimbabwe is an obvious example. Other countries (such as Mozambique and Tanzania) do not permit any private ownership of land and all land is owned by the state. The private sector can obtain leasehold rights for specified periods of time but nothing stronger.
Some other countries that have a legal system that is a combination of a European legal system and indigenous law (such as some North African countries, Swaziland and Botswana) have unique land laws. These often do not permit ownership of land in certain areas by companies or foreign persons. In these areas, the land rights fall short of ownership and, sometimes, even of leasehold rights. As such, they might not provide adequate tenure in respect of a project that will require hundreds of millions of dollars to develop. Accordingly, it is of great importance to ascertain what land rights are available and to whom they can be granted before embarking on any commercial development, as land rights and the security of tenure will be of great importance to any financiers.
A mining development or any other development does not exist in a vacuum – it requires supporting infrastructure and resources such as road, rail, air travel facilities, harbours, access to water, sewerage and electricity. In most countries, it is the responsibility of the state to provide such infrastructure and resources, and often the law grants the state sole control over and sole right to provide these. However, more often than not, the exploitation of mineral resources happens in areas that do not have developed infrastructure. In these cases, roads, rail, air travel facilities and utilities need to be developed in order for the mining development to be undertaken. There are several issues for which developers must be aware.
- Firstly, whether the right to develop that infrastructure is
granted solely to the state or whether other people can undertake
that development. Usually, this right resides in a governmental
body or agency. Very often, this legislation does not contemplate
that the private sector can undertake or participate in any way in
the development or operation and maintenance of the required
infrastructure. If the private sector is permitted to participate,
there are often requirements that such participation is only
permitted after a public tender has been conducted to select the
person entitled to participate in those activities. This
requirement gains added importance if the host country is being
funded by DFI or MLA loans from entities such as the World Bank or
the African Development Bank, or in a situation where the
infrastructure will be used by the public generally;
- Secondly, if the right can be granted by the state to another
person to undertake the development of infrastructure, the question
arises whether the correct entity or person within the state has
granted that right. It is a common occurrence in the sometimes
Byzantium state structures in African countries that the wrong
ministry grants a right to the private sector and that grant is
totally invalid and ultra vires;
- Thirdly, does the state have the right to redirect a resource
from one use to another use? This is a particular concern in
respect of water in the drier Southern African states. In a number
of these countries, the water laws provide that the state can
redirect the use of water from one user to another if that
redirection is for the greater socio-economic benefit of the
country and its people. This is also a concern in respect of the
use of railway lines and train services.
Environmental issues are often overlooked in Africa – or so it seems. This is rapidly changing. A number of African states have developed, or are developing, sophisticated legislation dealing with environmental matters. Most projects in Africa need the involvement of DFI funding due to political risk issues and the size of the financing required, which increases the emphasis on environmental issues. In addition, most of the large financial institutions that are home-grown in Africa have signed up to the Equator Principles. Lastly, African countries are also becoming more and more concerned about the socio-economic impact of these mining developments and other developments on their people. Accordingly, it is of great importance to pay attention to environmental issues from the first stages of conception of a project, as it is often impossible to retrace missed stages of the environmental process – and missed stages can cause extremely lengthy delays.
As mentioned above, there is now increased importance on the African country deriving meaningful benefits from the exploitation of its mineral resources, or at least the right to undertake infrastructural developments. Most African countries in which we have worked have some form of requirement for citizen economic empowerment (as it is called in Botswana and Mozambique), or black economic empowerment and the national industrial participation programme (as it is called in South Africa), or indigenisation (as it is called in Zimbabwe). These requirements might not be, and often are not, reduced to the form of statute, but they will be requirements for licences or for access to land, or incorporated in the grant of the rights.
These requirements can take several forms, such as: the obvious one of requiring local companies and people to own equity in the company that is granted the mineral right or title; requiring investment in and development of an industry in the country (such as the requirement to develop diamond cutting in Botswana and to develop a local gas industry in Mozambique); the employment, skills development and training of local people (such as in Guinea); and, the construction and maintenance of utilities and infrastructure for use by local people, such as schools, hospitals or sports facilities. All of these requirements will obviously add to the cost of the development of the project, and it is strongly advised that it be ascertained what requirements there are (both formal and informal) in respect of sharing the benefits of the development of the mineral resources with the local people. It must also be borne in mind that there might be such requirements at various levels of authority – from the state down to the province, the local authority, and to the local tribe.
Another area in which there is growing awareness and demand among African countries and their peoples is in respect of the upholding and enforcement of human rights, social and corporate responsibility, and sustainability of economic activities. These issues, while extremely laudable and important, can impose a hidden, additional and unexpected layer of costs to a development.
- Among these rights and issues is the issue of human
resettlement. As populations have become more educated on their
rights, they want to be consulted on whether they should be paid
out monies or resettled. We have experience of where a village has
been moved only for the inhabitants to demand financial
compensation for the destruction of the original village rather
than for the building of a new village;
- Another issue is the increasingly important one of health and
safety, not only in the workplace but for the general population.
This can be an issue of great importance for developments such as
power generation and transmission and rail projects, where
interaction with the general populace cannot be avoided. Often,
indigenous laws impose obligations in respect of death and injuries
in addition to the legislated laws;
- The impact of an imported workforce on the local population is
becoming an issue of increased concern for a number of African
states that are increasingly reluctant to open their borders in
such a way for use on a particular project;
- Labour laws can be demanding in a number of African countries
at present, and the requirements for the employer to provide
support to the workforce in respect of health and family issues are
important in those countries. In addition, these laws and
requirements are becoming more important in a number of other
African countries. In recent years, we have seen an increase in the
demand for the advice and skills of employment law experts across
the continent of Africa;
- In addition, DFIs and MLAs are using their financial power to
enforce laws and rules in connection with corruption, money
laundering, human rights abuses and sanctions against rogue states.
As commercial financial institutions have turned increasingly in
recent years to American and European governments, DFIs and MLAs as
sources of finance, we have seen increased enforcement by them of
these laws and rules. This is as terms are imposed on them in turn
by their lenders. Examples of such rules and laws are the OFAC, UK
and EU sanctions in respect of Zimbabwe. Similarly, the FCPA, the
Dodds-Frank Act and the UK Bribery Act are making their presence
felt. In addition, in a number of countries, breaches of local laws
in respect to a number of these matters can render the grant of the
underlying right or title void (one such country is South Africa in
respect of corruption).
It must be noted that there is increasing pressure being placed by African states on the financiers of projects. This is to impose social and corporate responsibility and sustainability obligations on their borrowers and the developments that they are undertaking. This can, on occasion, mean that a particular type of project cannot have access to a particular source of funding – for example, coal fired power plants will battle to raise finance from DFIs in certain African countries.
A fundamental issue in the development of African resources and infrastructure projects is the ability of financiers to take security over the mineral rights and titles, and other licences and rights, and then to enforce that security easily. This is not as simple as it seems. The security laws and enforcement structures vary across Africa (such as some North, East and Southern African countries) from the very sophisticated to the untried and untested (such as Botswana and DRC). Many African legal systems have the concept of security and the theoretical ability to enforce it. However, due to lack of development in, or experience of, local courts, there is no experience in respect of the taking of such security or the enforcement of it.
Some of the difficulties we have experienced in respect of the granting of security to financiers are as follows:
- the state might have the right to refuse to register the
transfer of the mining right or title or other rights or licences
(such as electricity generation licences and gas transportation
licences), following an exercise of the security, if the transferee
does not meet with specific requirements (for example, in respect
of expertise or local participation in their equity);
- often there is no history in respect of enforcement of the
security rights. Financiers do not like to be the first people to
do something – they prefer to know that the systems and
structures are tried and tested before they will risk large sums of
money on a project;
- regularly the structures to register the security simply do not
exist in practice.
It is important to identify upfront what security the financiers will require and what needs to be done to meet these requirements. For mining and infrastructure projects in certain countries, security given over assets situated offshore may be the only security available.
Finally, it is essential to ascertain that the mineral or other resource does not fall within an area that two or more countries, or two or more provinces or states, claims belongs to them. We have worked on a few projects where competing companies have been awarded rights to the same mineral resource or to develop the same infrastructure project (such as power projects using the same fuel source, which is subject to an ownership dispute) by competing countries or provinces. As can be imagined, this leads to huge delays and problems in undertaking the development. Mining, resources and infrastructure projects can be undertaken in Africa and undertaken well. However, an essential ingredient in that recipe for success is to ascertain the legal pitfalls in advance and avoid them.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.