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Australia: Stronger focus needed on Africa’s mining regulatory regimes

Governments in Australia should have a larger focus on providing programmes supporting the design of regulatory and fiscal regimes for their African counterparts.

Phil Edmands, a partner in Gilbert + Tobin’s resources and energy practice group, said a number of valuable initiatives and aid programmes were being undertaken by Australian governments, and in particular, the Western Australian Government.

However, there were a number of missing elements in the interactions these programmes encouraged.

He told delegates that while there is currently a strong focus on education, training and technology transfer – the area of regulatory and fiscal regimes needs to be given equal prominence.

“And where policy work already occurs, greater involvement of investors would help in its targeting and design,” he said.

Edmands told African Down Under delegates that having poor regulatory settings made shareholder management more difficult and could lead to increased sovereign risk concerns.

“For example, sometimes investors have failed to develop resources acquired from African states in a timely manner.

“There may be a whole range of strategic reasons why an investor might do this, including competition between the particular project and other projects the investor owns, the investor’s view of when the best time to develop the project is, given relevant markets and demand, and even constraints affecting the particular investor, including its own financial constraints.

“However, often the resource, particularly in the context of smaller African countries, is very significant for development of the national economy.

“Where this is the case, development may be tangibly linked to improved infrastructure, improved medical facilities and access and improved educational facilities.

“For a country with a poor population, this means there is a very real sense that lives may depend on the development proceeding in a timely manner.

“In these circumstances, perceived delays in development of projects often create such a groundswell of political concern that African states, whether or not strictly entitled to do so, have taken action to address the issue.

“That of course, then lays them open to accusations of raising sovereign risk. Yet sometimes in truth, the relevant government has had little choice but to do something.

“Clearly uncertainty where entitlements can be abrogated, because of these pressures, is not optimum.

“But neither is it sustainable that parties can sit on assets that are absolutely critical to the development of a State.”

Edmands said further policy development resulting in implementation at the outset of very clear, fair and certain rules that required holders of mining assets to operate under a ‘use it or lose it’ policy, could help address this issue.

He said perception that some investors are rorting the system to minimise tax, either more broadly or in relation to particular royalties or customs duties, have also resulted in a very heavy handed response, which has again raised issues of sovereign risk.

“Again, policy settings that result in a clear and more easily policed and administered regime can prevent the need to take more drastic action – which is sometimes rushed and underdone because it is in response to acute political pressure.”

Edmands also highlighted examples where an investor has been granted mining tenure effectively for free, but instead of developing it, has spent a small amount on the ground and then “flipped” the investment for significant profit through an offshore transaction, avoiding the need for both State consent and any tax or duty on the transaction.

“While many of the loopholes allowing this type of activity have been progressively closed in African jurisdictions, this situation leads to an intolerable domestic issue for the State to deal with – namely external parties profiting from often iconic national assets when they have done very little to earn that profit, and with no material return or dividend to the State, or its people.

“Again, enhanced policy and regulatory settings that tighten requirements for State consent for direct or indirect dealings in mining assets, and enhanced tax regulation so significant profits made from these transactions are taxed (and the tax recovered), is ultimately in the interests of the State but also all serious investors.”

Another area that Edmands highlighted where there needs to be a major focus is on collaboration between Western Australia and the areas where its Mining Equipment, Technology and Services (METS) expertise can be exported.

He told the audience that local METS providers are being disadvantaged as the Western Australia and Australian Governments are not providing sufficient support to their investing companies and to the METS providers.

“If regulatory settings for mining and resource investment in African jurisdictions are improved, it puts Australian and Western Australian investors in a much stronger position,” said Edmands.