Main Policy Objectives of Mineral Exporting and Importing Countries and General Mining Law
By Lyman Mlambo
Mineral exporting countries try to put in place policy measures to maximize their benefits from the comparative advantage they have in mineral resources (See Gocht, et al, 1988). Mineral exporting countries mainly seek to achieve the following policy objectives: (i) Acquisition of sovereignty over mineral exploitation through mechanisms to control their production and marketing, including influencing ownership structures (for example, by state participation or licensing systems or agreements) or measures to promote indigenous enterprises in the sector; (ii) Enhancing fiscal revenue coming from the sector; (iii) Increasing or rationalizing, where the country has a significant world market share, of production levels in order to positively influence export earnings; (iv) Diversification of the minerals industry to lessen risky dependence on a few commodities; (v) Promoting local value addition and national industrialization through increasing domestic processing, beneficiation and manufacturing (upstream and downstream industries); (vi) Controlling the exploitation of minerals to preclude destructive exploitation or premature abandonment; (vii) Development of infrastructure and employment creation in rural areas; (viii) Ensuring that the exploitation of minerals does not cause significant environmental damage; (ix) Creating adequate national supply of strategic minerals to reduce imports hence spending of foreign currency; and (x) Achieving consistent export earnings.
Countries that are not adequately endowed with mineral resources import significantly, and normally have different policy objectives regarding the mining sector (See Gocht, et al, 1988). Generally, the aim is to take as much advantage of outside resources as possible while at the same time progressively reducing dependency on those outside resources. Specific policy objectives of significant mineral importers include: (i) Seeking supply guarantees through mining investments abroad (100% or partial ownership), long-term supply contracts or cooperation agreements and diversification of international supply sources; (ii) Promotion of any possible economic domestic mineral production; (iii) Supporting intensive and extensive research in the area of substitution possibilities as well as improving the efficient utilization of mineral raw materials, which is why one might find such countries making tremendous technological progress and moving towards nanotechnology or miniaturization; (iv) Increase of mineral recycling; and (v) Minimizing adverse environmental effects of any mining and mineral processing taking place in the country.
From mining policy follows the mining law. Mining law typically explains who owns or controls mineral resources, how those resources are to be developed and exploited (the development phases of a mining project), and the sharing of benefits from mining in terms of fiscal regime and profit. There are two mining law traditions that have influenced the current mining law in various countries – namely, regalian law and common law. The regalian law, which originates from the Romans, ascribes control or even ownership of sub-surface minerals to government while the surface land may be owned by individuals or organizations. Thus, the state has authority to determine how exploration, mine development and mining should be done, and normally collects tax. Common law does not separate surface rights from the sub-surface mineral rights. In most countries, the current law recognizes that government should control or own the mineral resource base of its country, and thus, has been heavily influenced by the regalian law.
According to Gocht et al (1988), mineral-rich developing countries face two apparently conflicting goals namely:
- to exercise control over the exploitation of their resources and obtain the greatest possible benefits; and
- the need to obtain assistance from industrial countries in terms of the technical know-how and capital to develop those resources.
The result is a mining legislation that tries to balance between the two goals – to maintain sovereignty over resources and to meet the interests of foreign capital including economic guarantees (for example, security of tenure), fiscal incentives and favourable foreign exchange laws.
In pursuance of the first goal, the developing countries have adopted participation policies which are broadly categorized into two types:
- progressive participation by government or state enterprise, which eventually leads to 100% ownership by the state, with the attendant issues of compensation having to be addressed;
- local equity participation (joint venture). There are various forms of local equity including majority joint venture (where the foreign investor gets 51% of the shares), equity joint venture (where the foreign investor gets 50% of the shares), minority joint venture (where the foreign company gets 49% of the shares) and fade out joint venture (where a majority equity converts into a minority equity after an amortization period).
The last form may have phase out clauses, which provide for the complete withdrawal of the foreign investor, in which case it is very similar to progressive participation.
Participation policies in developing countries have five main objectives. Government seeks to maximize revenue (fiscal revenue and dividends) and foreign exchange earnings. The use of global market strategies by multi-national or transnational companies to maximize their international profits, such as transfer mispricing, re-invoicing and thin capitalization, works to the disadvantage of the host country. Government equity participation places the government in a position to be able to monitor and control production and marketing processes. Government also seeks to gain management control – participation allows government to influence company decisions on employment, local procurement (of equipment and materials), investment, production levels, local value addition (mineral processing, beneficiation and manufacturing), environmental practices, etc. Participation allows local managers, engineers, geologists, and other personnel to learn from the foreign investors. Thus, government, by participation seeks also to effect technology and skills transfer.
Lastly, there is the political objective. The need to assert national sovereignty over natural resources especially in former colonies, while simultaneously shifting financial risk to multi-national companies has resulted in various concepts of co-operation between foreign investors and government agencies, including Production Sharing Agreements (PSA). (Lyman Mlambo is the Executive Director of LMS Mining Consultancy. This article is a direct extract, with small changes, of Section 2.8 from the author’s report on “Extractives and Sustainable Development II: Minerals, Oil and Gas Sectors in Zimbabwe”, which was funded and published by the Friedrich Ebert Stiftung Zimbabwe in 2018. For details on any references in the article kindly contact the author through firstname.lastname@example.org)