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Investors move to secure positions in light of Tanzania natural resources reforms

Investors move to secure positions in light of Tanzania natural resources reforms

Recent measures introduced in the Tanzanian natural resources and mining sectors could have far-reaching implications for the value of investments in the country. As a result of legislation, approved by the National Assembly in early July, companies face the prospect of having to grant a 16 per cent free carried interest to the government, acquisition of up to 50 per cent of the company, increased royalties and forced renegotiation of certain terms.

The reforms are the latest in a campaign to exercise greater control over the extractives sectors. This has already given rise to two new claims by foreign investors since the beginning of July. Those with interests in the country’s mining, oil and gas industries will be closely observing developments, reviewing their contractual investment treaty protections and taking steps to protect their assets and any future claims.

The key provisions of significance to foreign investors are as follows:

Natural Wealth and Resources Contracts (Review and Re-negotiation of Unconscionable Terms) Act 2017

This Act grants the government far-reaching powers to renegotiate contracts relating to any natural resources where they contain what are considered by the National Assembly to be “unconscionable terms”. This power of review extends to contracts predating the Act. Terms that are deemed to be unconscionable include those which:

  • are aimed at restricting the state’s right to exercise sovereignty over its wealth, natural resources and economic activity;
  • restrict the state’s right to exercise authority over foreign investment within the country;
  • are “inequitable and onerous to the State”;
  • grant “preferential treatment” designed to create a “separate legal regime to be applied discriminatorily for the benefit of a particular investor”;
  • deprive the Tanzanian people of the economic benefits derived from natural resources;
  • empower transnational corporations to intervene in Tanzania’s internal affairs;
  • subject the state to the jurisdiction of foreign tribunals or laws.

What might be an unconscionable term is extremely broad – indeed, most recent contracts in which foreign entities are (even indirectly) involved are likely to contain provisions that would be caught. This again evidences the progressive change in policy towards foreign investment, going directly against many of the protections in Tanzania’s 11 bilateral investment treaties (BITs) currently in force.

Changes to the Mining Act 2010

The Written Laws (Miscellaneous Amendments) Act 2017 introduced the requirement that, where a company is carrying out any mining operations under a mining licence or special mining licence, the government shall have a minimum 16 per cent free carried interest in its shares. In addition, it will be entitled to acquire up to 50 per cent of the shares of the company, “commensurate with the total tax expenditures incurred by the Government in favour of the mining company”.

It remains to be seen whether the government will take the 16 per cent free carried interest where operations occur under existing licences, or only where new licences are granted. How the government’s “entitlement” to acquire additional shares will work is equally uncertain. Investors are likely to face difficult strategic decisions over the coming months in light of the risk of seizure of their shares or other assets.

Additionally, this Act increases the royalty rate payable for uranium, gemstones and diamonds from 5 per cent to 6 per cent, and for other metals including gold from 4 per cent to 6 per cent. There is a new requirement that one third of royalties are to be paid by depositing minerals of the equivalent value with the government.

Natural Wealth and Resources (Permanent Sovereignty) Act 2017

This Act provides that the people of Tanzania have permanent sovereignty over all natural wealth and resources, ownership and control of which vests in the government on their behalf. The President is to hold the country’s natural wealth and resources on trust for the people. This in itself may not have an immediate impact upon investments, but again sends a fairly clear message as to the government’s intentions.

Finally, the Act provides that disputes “arising from extraction, exploitation or acquisition and use of natural wealth and resources shall be adjudicated by judicial bodies or other organs established in the United Republic and [in] accordance with laws of Tanzania”.

It is doubtful whether a foreign tribunal considering its jurisdiction under a pre-existing valid arbitration clause would pay regard to this provision. The Act also provides that the jurisdiction of the Tanzanian courts must be acknowledged and incorporated in any “arrangement or agreement” – which may have significant implications for agreeing a forum for disputes outside Tanzania under future agreements.

It is unclear whether the Act intends to attempt to exclude ICSID jurisdiction. However, it would be unlikely to be effective where consent to that jurisdiction has been expressed by Tanzania in BITs (which consent cannot unilaterally be revoked). It should therefore be open to investors still to initiate ICSID arbitration under such treaties.

Impact and potential claims against Tanzania

Against the backdrop of the tightening regime relating to the natural resources sector, two international companies are reported to have commenced arbitration proceedings in as many months.

Two subsidiaries of Acacia Mining started LCIA arbitrations based on their Mineral Development Agreements (MDAs) with Tanzania. The arbitrations followed a ban on mineral exports by the companies imposed following allegations by the state that Acacia had under-reported its exports, amounting to a multi-million-dollar tax evasion. Acacia’s parent company, Barrick Gold, is said to have intervened to attempt to resolve the dispute with the government, and it was reported on 20 October that a settlement deal has been proposed. This would involve Acacia forming a new joint venture with the Tanzanian government to operate three gold mines, with Tanzania receiving a 16% stake in the mines and a 50% share of the profits, as well as a one-off payment of $300million from Acacia.[1]

South African company AngloGold Ashanti also announced earlier this month that it had begun arbitration proceedings against Tanzania, in response to the ability to renegotiate contracts pursuant to the Unconscionable Terms Act. Reports state this was a precautionary step taken by the company to protect its indirect subsidiaries’ agreements with the government in relation to the development and operation of the Geita Gold Mine. This pre-emptive action demonstrates the serious threat the new governmental powers pose to foreign investments.

Whilst the three arbitrations already launched are based on the companies’ contracts, investors with the government should also consider the BIT protections available to them and what claims could be brought before ICSID (with the increased potential for publicity and direct enforcement this entails). Where an applicable BIT contains an umbrella clause (as many of Tanzania’s do), any breach of an Mineral Development Agreement or other contract will also constitute a breach of the BIT, opening the door to ICSID jurisdiction over the dispute.

Even where no contract is in place, the measures threatened may well breach BIT provisions and trigger further claims. Any demand for carried interest without compensation is likely, for instance, to constitute an unlawful expropriation. If this were the case, the investor would usually be entitled to recover the fair market value of the shareholding immediately prior to the expropriation. The same would be true of any additional shares compulsorily acquired for which adequate compensation was not given.

Many of the measures identified may also breach fair and equitable treatment provisions in BITs (which include protection of an investor’s legitimate expectations) and provisions promising treatment no less favourable than that afforded to a state’s own nationals.

Those with interests in Tanzania’s mining, oil and gas industries would be well advised to take all possible steps to protect their investments in light of this legislation and widely anticipated further measures to create yet more state control over the sectors.

[1] “Tanzania takes steps to settle mining dispute”, Global Arbitration Review, 20 October 2017.

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Investors move to secure positions in light of Tanzania natural resources reforms

Extractives companies’ human rights records ranked in Benchmark study

Developments continue apace in human rights responsibilities for businesses. We are seeing persistent implementation of new reporting requirements across EU jurisdictions and beyond, judgments of national courts and international tribunals holding corporations to ever stricter account for their responsibilities in this area and UN negotiations continuing for a global treaty imposing binding international law obligations on businesses.  Staying ahead of the field in this area is crucial.

While the responsibilities imposed by the UN Guiding Principles on Business and Human Rights (the UNGPs) are not in themselves legally binding, governments’ expectations that companies will step up in this area have been made clear through National Action Plans, parliamentary enquiries and the introduction of “hard” legal requirements, such as under the Modern Slavery Act in the UK.

Now, the Corporate Human Rights Benchmark (CHRB) has ranked 98 of the largest publicly traded companies globally on 100 human rights indicators, focusing on the Extractives, Agricultural and Apparel industries.  These areas were specifically selected because of the high human rights risks they carry, the extent of previous work on the issue, and global economic significance.  41 Extractives companies featured.

The CHRB is a collaboration between investors and a number of business and human rights NGOs. It has emphasised this is a pilot assessment and welcomes input on the methodology used.  The study was compiled from publicly available information, with the selected companies also having the opportunity to submit information to the CHRB.  Companies were given scores for the measures they are taking across six themes, grounded in the framework of the UNGPs:

  • Governance and policy commitments.
  • Embedding respect and human rights due diligence.
  • Remedies and grievance mechanisms.
  • Performance: Company human rights practices.
  • Performance: Responses to serious allegations.
  • Transparency.

The selected companies were then banded according to their overall percentage score.  The performance-related criteria carried greater weight than the policy-based heads, with “Embedding respect and human rights due diligence” and “Company human rights practices” counting for 25% and 20% respectively.

Results skew significantly to the lower bands

There was a wide spread in the participants’ performance, with a small number of clear leaders emerging. No company scored above the 60-69% band, with only three companies falling within that band.  A further three scored 50-59% and 12 scored 40-49%.  48 companies fell within the 20-29% band.

Of the companies in the top band, two were in the Extractives sector; a further six Extractives companies fell within the 40-49% band; 19 scored 20-29% and five were found to trail at less than 19%.

The generally low scores across the three industries may be explained by the fact that the impact of some businesses’ human rights processes may still be filtering through. We should expect that in future years the authors of the survey will adopt a more stringent approach and subject low-scoring businesses to greater criticism.

Gap between policies and performance

On the whole, companies tended to perform more strongly on policy commitments, high-level governance arrangements and the early stages of due diligence. They performed less well on actions such as tracking responses to risks, assessing the effectiveness of their actions, remedying harms and undertaking specific practices linked to key industry risks.  There is often a mismatch between board level measures and their granular implementation, as well as between public responses to serious allegations and taking appropriate action.

Of the Extractives companies surveyed, only six companies scored were given a zero score for their policy commitments, whereas this was the case for 17 companies for “Embedding respect and human rights due diligence” and nine for “Company human rights practices”.

On the policy side, some Extractives companies scored points for emerging practices such as regular discussion at board level of the company’s human rights commitments, linking at least one board member’s incentives to aspects of the human rights policy, and committing not to interfere with activities of human rights defenders, even where their campaigns target the company.

In terms of implementation, some participants explained how human rights risks are integrated into their broader risk management systems, how they monitored their commitments across their global operations and business relationships, and how they had systems in place for identifying and engaging with those potentially affected by their operations.

Companies were also scored for their practices in relation to selected human rights specific to each industry. Those in which the Extractives participants featured included freedom of association and collective bargaining, health and safety, land acquisition, water and sanitation and the rights of indigenous people.

Conclusion

The significant interest in the CHRB since it began its work is unsurprising given it provides an opportunity to demonstrate commitment and progress in this area vis-à-vis competitors. The pilot methodology will be refined and ultimately the CHRB will be produced on an annual basis for the top 500 companies globally.  We expect it to contribute to the continued drive of companies across all sectors to proactively manage human rights risks in their own operations and through their expectations of their business partners.

Extractives companies’ human rights records ranked in Benchmark study