CHAPTER 6 RESOURCE NATIONALISM AND REGULATORY REFORM
| Jurisdiction | Derecho Internacional |
(Apr 2013)
RESOURCE NATIONALISM AND REGULATORY REFORM
Attorney & Mineral Economist
Boulder, Colorado
JAMES OTTO has been engaged during his professional career in the practice of mineral economies and natural resources law, working in over 60 nations for governments, the private sector, multi-lateral institutions, and universities. He has undertaken a wide variety of mining and natural resources assignments related to the development of national mining policies, laws and fiscal systems; sustainable development; environmental impact mitigation; and mineral sector driven poverty alleviation. He has developed country risk assessment systems for major mining companies. He was formally the founding Director and Professor of the Advanced Degree Program of Environmental and Natural Resources Law at the University of Denver; the Director and founding Professor of the Institute for Global Resources Policy and Management at the Colorado School of Mines; Deputy and Acting Director and RTZ Senior Lecturer at the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee; United Nations Chief Technical Advisor UNDTCD; and Project Fellow and Coordinator of the Asia-Pacific Mineral Trade and Investment Project East West Center. He holds degrees in engineering, mineral economies and law.
I. WHAT IS RESOURCE NATIONALISM?
II. MOTIVATION FOR REFORM
[1] High Prices and Super Cycles
[2] Peer Pressure
[3] Evolution of the Regulatory System
[4] The Obsolescent Bargain and the Individual Project
III. KEY ISSUES
[1] Expropriation
[2] Closure by Public Action
[3] License\Lease\Concession Renewal Denial
[4] Denial of Permits and Determination of Non-Compliance
[5] Bans and Moratoriums
[6] Mineral Ownership
[7] Share Ownership
[8] Fiscal Take
[9] Community Expectations and Company Obligations
[10] Resource Security and Protectionism
[11] Downstream Processing
[12] Preferential Sourcing of Goods and Services
IV. SUMMARY
[1] Topics addressed
[2] Looking forward
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Abstract
Resource Nationalism is a term widely applied to a rebalancing of interests relating to natural resources projects, to the benefit of society and government at the expense of investors. The author of this paper (whose clients include reform-initiating governments) will review some of the key issues that are affecting regulatory and fiscal reform initiatives including basic concepts such as the evolving ownership of minerals and what that implies; what constitutes a fair fiscal take, and who should share and how in revenues; the satisfaction of community expectations and related legal arrangements to achieve them; resource security and protectionism; and others. Real-world examples are drawn from regulatory reform projects for governments in Africa, Asia, South America and the Pacific. Throughout this paper examples or summaries of legislation are provided from a variety of jurisdictions. These examples do not necessarily reflect the most current legislation in that jurisdiction, but are provided to illustrate an issue or a concept.
I. WHAT IS RESOURCE NATIONALISM?
Nations with mineral endowments are each unique in their challenges, opportunities and capacities, but many nations share common objectives. One such objective is the development of natural resources in a manner that best benefits the nation. What is seen as best benefiting the nation can change over time, giving rise to changes in policy that are implemented by revisions to the natural resources regulatory structure. Such regulatory structure can include statutory laws, regulations, agreements, other legal instruments and administrative practice. In the academic literature and popular press the term "resource nationalism" is used in a diverse variety of ways. For example, some authors use the term to describe actions such as expropriation, "creeping expropriation", the transfer of ownership to the state, the transfer of ownership to nationals, the unilateral modification of agreement terms, the imposition of additional investor obligations, changes to the fiscal regime and so forth. For the purposes of this paper, "resource nationalism" means a regulatory rebalancing of interests, relating to natural resources projects, to the benefit of society and government at the expense of investors.
In the next section, examples of motivational factors that can lead to regulatory reform or activities are introduced. This is followed by a look at selected actions by governments that fall within the above definition of resource nationalism.
II. MOTIVATION FOR REFORM
[1] High Prices and Super Cycles
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There are few events more dispiriting to a national treasury than to witness a run-up in prices for a commodity produced in the nation but to see little immediate commensurate increase in the "tax take" from mines producing that commodity. Although most nations impose a gross revenue based royalty that mirrors price changes (an ad valorem royalty), often the income tax in any one year will not correlate to price change. When commodity prices increase dramatically over a short period, the fiscal system may be vulnerable to modification because politicians will seek to accommodate the public sentiment that current income tax take should reflect current price. Most income tax systems are not designed to do this; instead, they take into account a longer term tax calculation that includes revenue smoothing measures such as the carrying forward of deductible losses from prior years and depreciation deductions relating to exploration, development and capital equipment.
Commencing in 2004, the price of many mineral commodities began to rapidly escalate (see Figure 1) and with the continuation of this escalation into 2005, 2006 and 2007, most mineral-led economies began to question whether their existing fiscal arrangements were providing the nation with a fair share of resulting revenues. Some argued that the minerals industry had begun an upward trending "super-cycle" (see Figure 2) that would see a continuation of high prices driven by the demand for metals in economies of countries such as China and India. If such a super-cycle trend is occurring, it can be surmised that until the world's mineral supply increases substantially thus driving prices down that existing mines will reap increasing economic rents. In light of this, important mineral producing nations such as Australia, Brazil, Chile, China, Indonesia, Peru, South Africa, United States of America, Zambia and others have considered legislation that will or have increased their nation's fiscal take of such economic rent.
During this price upturn many mining companies extolled record profits in their annual reports and press releases, and in a few nations where most mines are foreign investor-owned some politicians found ready constituencies that favored a government or national equity ownership interest (for example, in Bolivia, Guinea, Mongolia, and Venezuela).
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Figure 1. Price Index of Metals, (1980-2011) (2005=100) Price Chart 2
Figure 2. Oil and Metal Price Super-cycles 3
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[2] Peer Pressure
If a nation whose economy is mineral-led observes efforts in other mineral-led economies to increase their mineral sector fiscal take or ownership interest, it too may be motivated to consider increasing its fiscal take or ownership interest. In effect, a paradigm shift may occur as more and more nations seek to obtain what they may perceive to be a new global norm.
An example of this is the renewed interest in excess and additional profits types of taxes. At the turn of this century, very few nations imposed any type of mineral sector "excess profits" tax, and the few that did, such as Papua New Guinea and the Philippines, were repealing them or rolling them back. Over the past ten years, particularly after the price rises commencing in 2004, this began to change. Chile, perhaps in part because of a renewed call for a resource rent type of minerals tax in Australia and excess profits tax introduced by Zambia and Mongolia (since repealed), imposed an additional profits tax on large copper producers. Nearby, Peru followed suit as did Australia (on iron ore and coal producers). Liberia has introduced surtax on mineral projects (a form of additional profits tax based on cumulative cash-flow). Uruguay, in 2012 drafted legislation to introduce an additional profits tax, and the government of South Africa is now considering anew policy that would introduce an excess profits tax. It is too early to predict whether other nations will follow this trend. If producers perceive that a paradigm shift is taking place, they may follow. Excess and additional profits taxes will be further examined in another section of this paper. Earlier examples of "peer pressure" phenomena can be pointed to with regard to mine expropriations by governments in the 1960s and 1970s, and the reduction of mineral sector taxes that occurred as countries competed for investment in the 1980s and 1990s.
[3] Evolution of the Regulatory System
In many mineral-led economies that anticipated benefits such as economic development and tax revenues, these did not materialize at the anticipated level. Perceptions that a mine or mines would act as a springboard for broader development often did not transpire because of a variety of factors. On the employment side, current large modern mines are capital intensive and require less labor than in prior eras. Additionally, mines can be isolated from the general economy with few linkages and low economic multipliers (i.e. operate as an isolated economic enclave). On the tax side, even well designed tax systems with reasonable tax rates may fail to deliver projected fiscal revenues. Governments that are disappointed with unmet expectations...
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