CHAPTER 16 THE IMPACT OF HOST COUNTRY LAWS AND POLICIES ON OPERATIONS AND PROFITS

• Jurisdiction: United States

International Resources Law: A Blueprint for Mineral Development
(Feb 1991)
CHAPTER 16
THE IMPACT OF HOST COUNTRY LAWS AND POLICIES ON OPERATIONS AND PROFITS
By Lucinda A. Low
Sherman & Howard
Denver, Colorado

I. Introduction

This paper outlines some of the major non-tax issues which may be faced by U.S. investors in mineral-development projects in foreign countries. In particular, this paper will focus on host-country laws and policies which can affect the freedom of an investor to operate a foreign mineral venture as the investor sees fit and its profitability. Particularly in developing countries, objectives of the host country government which transcend the goals of a particular venture may affect the venture's freedom to operate with regard to a variety of issues. Obviously, too, the economic circumstances of the host country, including but not limited to its monetary and exchange situation, can have a profound impact on the terms on which a mineral project will be allowed to operate. Government regulation in these areas can have the effect of making the host-country government a de facto party to the mineral-development project, albeit a party which may have a very different set of concerns and objectives than those of the foreign investor in the project.

The specific areas on which this paper will focus are: (1) the effect of host-country regulation, including "buy local" policies, on the importation of the various "inputs"—whether of machinery and equipment, people, supplies, or financing—necessary to a particular mineral project; (2) the implication of government policies regarding the development of infrastructure for individual mineral-development projects; (3) host-country labor and employment policies; (4) export incentives and requirements for mineral projects; (5) exchange controls; and (6) miscellaneous host-country legal issues which can arise in the course of acquiring and operating a mineral project. After outlining the kinds of issues that may arise in these areas, this paper will then try to provide guidance on coping with these issues.

Before outlining the issues in these areas, this paper will give a brief overview of the various development strategies of host countries which may affect foreign-owned mineral projects, and of the types of currency problems which may be encountered.

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II. Development Strategies of the Host Country Affecting Mineral Projects

A. Import-Substitution

Import-substitution, as its name suggests, is the replacement of formerly-imported goods and services with locally-produced goods and services. Since at least the 1950's, it has been actively pursued as a development strategy by a large number of countries.

From the host-country perspective, a successful import-substitution program has several beneficial results. First, it lessens the dependence of the host country on foreign goods and services. Second, it reduces the amount of foreign-currency outlays which the host country must make. Finally, it transfers economic activity from abroad to the host country. The amount of activity transferred should not be measured simply by the dollar value of the substituted goods and services; the multiplier effects of the transferred activity must also be considered.

Import-substitution policies result in laws and regulations in the host country requiring or providing significant incentives for the local procurement of goods and services. Usually these laws and regulations make exceptions, such as where the goods or services are not available locally, or the locally-produced goods or services are not of a comparable quality, or the price of the locally-produced goods or services exceeds by a specified margin the price of imported goods or services.

B. Export-Promotion

Export promotion has come into vogue as a development strategy more recently than import-substitution and is still very much in evidence in many countries. Export-promotion policies emphasize the production of goods and services for export markets rather than for the domestic market. Often such policies stem from a desire on the part of the host country to generate additional foreign currency or to reduce balance-of-payments shortfalls.

Export-promotion policies can result in the favoring of certain types of economic activity (those having the potential for export sales) over others. They may also result in the creation of incentives or benefits for enterprises engaging in export sales, or of the denial of certain benefits to enterprises which do not engage in export sales. These preferences, incentives and benefits can manifest themselves in a variety of areas of host-country law and regulation.

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C. Local Technology Transfer and Training

Closely related to the import-substitution policy discussed under point A above are local technology transfer and training policies. These policies promote the acquisition by local enterprises and the local workforce of knowledge and skills, again with the multiple motivations of reducing the dependence of the host country on outsiders, reducing currency outflows, increasing the competitiveness of local enterprises, and increasing the skill level of the local workforce.

Local technology-transfer policies may affect the ability to obtain or enforce intellectual-property rights in the host country. They may affect the deductibility for tax purposes of payments made for the use of intellectual property rights, or the payment stream for such rights. Local training policies — the more significant of the two for mineral projects — may affect the foreign investor's ability to bring in expatriate personnel, either initially or over time, and may result in the imposition of obligations with respect to the training and promotion of the local workforce.

D. Infrastructure-Building

A fourth policy that affects foreign mineral development projects is the infrastructure-building policy. This policy is most prevalent in the least-developed countries. A government adhering to such a policy will look to foreign investors as a source of funding for infrastructure-building projects in the host country. Such projects may include roads, ports or other forms of access, schools, hospitals, or other facilities or services for use by the general public or by workers employed in the particular project and their dependents.

Infrastructure-building policies do not typically manifest themselves in hard-and-fast rules about what foreign investors in the host country must do. This is presumably because such rules would not offer to the host government the flexibility that is needed to respond to investments and projects of different sizes, in different locations, and bringing different needs and opportunities.

E. Policies Regarding Foreign Investment in General

A final policy which must be...