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Mineral Agreements in Developing Countries: Structures and Substance

Published online by Cambridge University Press:  28 March 2017

David N. Smith  and
Louis T. Wells Jr.
David N. Smith
Affiliation:
Harvard Law School
Louis T. Wells Jr.
Affiliation:
Harvard Business School
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Extract

Despite the many dramatic developments that have occurred over the past half dozen years in relation to the production of natural resources in some areas of the third world, mineral production in most developing countries is still carried out through contractual arrangements between foreign firms and host country governments. The nationalization of the copper industry in Chile and the bauxite industry in Guyana, the spectacular successes of OPEC, and the completed or projected nationalizations of petroleum operations in a number of countries have taken center stage since 1969. Nevertheless, these developments are not typical of the vast majority of mineral arrangements in developing countries.

Type
Research Article
Information
American Journal of International Law , Volume 69 , Issue 3 , July 1975 , pp. 560 - 590
Copyright
Copyright © American Society of International Law 1975

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References

1 See, for example, Hyde, , Economic Development Agreements, 105 Rec. des Cours 272, 283 (I, 1962)Google Scholar (“. . . practical difficulties of assembling primary source material.”); Brudno, , Review of Considerations Arising in Foreign Oil Operations, Ninth Ann. Institute on Oil and Gas Law and Taxation 397 (1958)Google Scholar (“Information as to the details of existing concessions is sparse, and that as to the actual tax results of operating under these concessions is elusive.”); Guldberg, International Concessions, A Problem of International Economic Law, 15 Nordisk Tidsskreft for International Ret 47, 50 (1944) (“. . . [M]ost of the concession agreements which are reproduced here are of older concessions. This is due to the fact that concession agreements are nearly never published. They are jealously hidden. . . .”)

2 In Indonesia the “work contracts” for the development of hard minerals are quite different from the “production-sharing contracts” for the development of oil. Compare, e.g., Contract of Work between the Republic of Indonesia and P. T. Kennecott Indonesia (Nov. 1, 1969) (for the development of copper) and Production-Sharing Contract between P.N. Pertamina and Phillips Petroleum Company (1968). Unless otherwise indicated, specific contracts are in the personal files of the authors.

3 Many so-called “work contracts” are essentially the same as the traditional concession. The main distinction appears, in many cases, to be simply the minor issue of the point at which title to the mineral is vested in the foreign company.

4 In the early 1960’s in Indonesia a number of “work contracts” for the exploration and exploitation of oil were negotiated. They were essentially profit-sharing arrangements. See, e.g., Contract of Work between P.N. Pertambangan Minjak Nasional and P.T. Stanvac Indonesia (1963). Reproduced in 3 ILM 243 (1964). The recent hard mineral “work contracts” provide for the imposition of a normal corporate income tax. See Contract of Work between Indonesia and P.T. Kennecott Indonesia, note 2 supra.

5 Id., Preamble; see also Art. 1(a).

6 Concession Agreement between the Republic of Liberia and the Gewerkschaft Exploration Company, Dusseldorf, West Germany (1958) in Chapter 33 of the Acts Approved by the Legislature of the Government of the Republic of Liberia during the 1958-59 Session.

7 Id. Art. 1.

8 These implications may, of course, be very important. On this issue, see 2 The Valuation of Nationalized Property in International Law at 78 and 111-12 (R. Lilliched. 1973).

9 This has been done by us for host governments and by others in unpublished materials. See E. G. Wamer, Mixed International Joint Ventures in the Exploration, Development, and Production of Petroleum, June 1972 (unpublished M.S. thesis, Sloan School of M.I.T.); W. T. Levy Consultants Corp., N.Y., A Comparative Evaluation of Major Concessionary Arrangements Now in Effect, cited in Warner at 40, 60. See also T. R. Stauffer, Economics of Petroleum Taxation in the Eastern Hemisphere, a paper delivered at an OPEC seminar on International Oil and Energy Policies of the Producing and Consuming Countries (Vienna, June 30-July 5, 1969).

10 Peru, General Mining Law: Decree Law No. 18880 (Lima: Ministry of Economics and Finance, Office of Public Relations, 1971). A number of countries legislated new mining codes in the first half of the 1970’s. See, for example, Ecuador, Mining Development Law (Supreme Decree 101 of January 24, 1974), U.S. Dept. of Interior, Bureau of Mines, 71 Mineral Trade Notes, April 1974, at 7; Saudi Arabia, Mining Code 70 id., June 1973, at 20; Sudan Mines and Quarries Act, 1972, id., May 1973, at 15.

For general information on mining legislation, see UN ECAFE, Proceedings of the Seminar on Mining Legislation and Administration (Mineral Resource Development Ser. No. 34), UN Doc. E/CN.11/919 (1969) and UN ECAFE, Proceedings of the Seminar on Petroleum Legislation with Particular Reference to Offshore Operations (Mineral Resource Development Ser., No. 40), UN Doc. E/CN.11/1052 (1969).

11 For details, see OECD, The Exploration for and Exploitation of Crude Oil and Natural Gas in the OECD Area Including the Continental Shelf; Mining and Fiscal Legislation (1973).

12 In describing a 1906 concession grant by the Congo Comité Special du Katanga to the Union Minière du Haut-Katanga, two commentators wrote that “the Company’s rights were so extensive as to partake of quasigovernmental powers akin to those accorded the great trading companies of an earlier concession era.” Wetter and Schwebel, Some Little Known Cases on Concessions, 40 Brit. Y.B. of Int. Law 193 (1964). Fifty years ago the United Fruit Company owned or leased about 5,000 square miles of tropical lands, using only about 10% productively at the time. Fox, United Fruit and Latin America, 4 Harvard Rev. 32, 33 (No. 4, 1968).

13 The lease given to the Firestone Company by the Liberian Government in 1926 was to run for 99 years and covered one million acres of land. See W. C. Taylor, The Firestone Operations in Liberia xi (Washington: National Planning Association, 1956).

14 See the various land taxes listed in Ghana, , Report of The Commission of Enquiry into Concessions 32-79 (Accra-Tema: Ministry of Information, 1961)Google Scholar.

15 Cattan, H., The Evolution of Oil Concessions in the Middle East and North Africa 8 (1967)Google Scholar.

16 Id. at 33.

17 Id. at 34.

18 Concession Agreement between the Government of Liberia and Liberian Mining Company, Ltd. (Aug. 27, 1945), Art. 9(a); Approved by an Act of the Legislature January 22, 1946.

19 See, Ghana, Report . . . , supra note 14, at 32ff.

20 Wilkins, M., The Maturing of Multinational Enterprise 127 (1974)Google Scholar.

21 The Ghana Commission of Enquiry into Concessions concluded in 1961 that “all mineral and timber royalties should [henceforth] be required by law to be computed on a percentage of the sales price. . . .” Ghana, Report . . . , supra note 14, at 10.

22 See note 18 supra.

23 For an example of a stumpage fee adjusted in accordance with the wholesale price of standard newsprint, see the Agreement between the Province of Newfoundland and Newfoundland Pulp and Chemical Co., Ltd. (July 5, 1960), Sec. 14.

24 See Cattan, supra note 15, at 44.

25 See note 18 supra.

26 See Collateral Agreement of March 12, 1952, approved by an Act of the Legislature March 10, 1953.

27 Amendatory and Tax Agreement dated as of January 1, 1965 between the Government of the Republic of Liberia and Liberian Mining Co., Ltd., Clause 1.

28 This is the case in Malaysia and Canada, for example.

29 An exception to this is the situation where, as has been the case in petroleum, a posted price is used.

30 Ghana, Report . . . , supra note 14, at 10.

31 Private interview.

32 See Wedderspoon, , Simplifying Taxes in East Africa, 6 Finance and Development 51 (1969)Google Scholar.

33 Adelman, , Is the OU Shortage Real?, 9 For. Pol. 69, 84 (Winter 1972-73)Google Scholar.

34 Joint Venture Agreement between the Liberian American Mining Co. and Bethlehem Steel (April 28, 1960). Chapter LXV of Acts Passed by the Legislature of the Republic of Liberia During the Session 1959-1960. For a detailed discussion of the financial structure of the Lamco Joint Venture, see R. W. Clower, et al., Growth Without Development: an Economic Survey of Liberia 210 ff. (1966).

35 Clower, supra note 34, at 219.

36 Analysis suggests that much of the loan capital might better have been characterized as equity rather than debt. In such a case “interest” payments would be treated as “dividend” payments and would not be deductible from gross income for tax purposes. This problem is discussed in detail in Chapter 3 of our forthcoming book.

37 Concession Agreement between the Government of the Republic of Liberia and the National Iron Ore Company, Ltd. (March 13, 1958). Art. 7 reads:

Since the Government presently owns, or has the right to acquire, one-half of the shares of the Concessionaire to be issued, the Government forever waives all royalty. . . . In lieu of all other Liberian taxes . . . the Concessionaire shall pay an exploitation tax and a surface tax.

In commenting on the NIOC arrangement, an economic survey team has observed that “the government’s equity participation in the National Iron Ore Company is extremely costly. It has invested $5 million as a stockholder, just half of the total equity capital. As a 50 percent stockholder, it will get 50 percent of net (distributed) profits, the other shareholders paying zero income taxes on their 50 percent of net profits.” Clower note 34 supra.

38 Agreement between Institute de Fomento Industrial and Compañia de Niquel Colombiano, S.A. (July, 1970). See Colombia Mine Accord Regarded as Pace-Setter, N.Y. Times, Aug. 15, 1970, at 31. The Bougainville Agreement was ratified in 1967. See Territory of Papua and New Guinea, Mining (Bougainville Copper Agreement) (Ordinance 1967). The Agreement was amended in 1974 (See Mining (Bougainville Copper Agreement) (Amendment) Bill 1974.)

39 Private interviews.

40 Harvey, , Tax Reform in the Mining Industry, in Bostock, M. and Harvey, C. (eds.), Economic Independence and Zambian Copper: A Case Study of Foreign Investment 131 (1972)Google Scholar.

41 OECD, Oil: The Present Situation and Future Prospects 91 (1973).

42 Peru, General Mining Law, Art. 281ff, note 10 supra.

43 Sekou Touré’s Iron Mountains, West Africa, Feb. 19, 1973, at 239. But see Big Bauxite Mine Begins, id., March 26, 1973, at 421.

44 Interest in Nigerian Coal Grows, id., May 6, 1974, at 535.

45 Opting Out of Iron Ore, id., March 5, 1973, at 303, April 30, 1973, at 577.

46 It has been suggested that despite the management control provisions in its production- sharing oil agreements, Indonesia’s highly touted state oil company, Pertamina, actually exercises little real management control over foreign operations. Robert Fabrtkant, Oil, Discovery and Technical Change in Southeast Asia—Legal Aspects of Production Sharing Contracts in The Indonesian Petroleum Industry at 21 ff. (Singapore: Institute of Southeast Asian Studies, 1973. Field Report Ser. No. 3.)

47 Goldberg, Arthur J., Debate on Outside Directors, N.Y. Times, Oct. 29, 1972 Google Scholar, §3, at 1. See also Levy, , How an Audit Committee Can Help, N.Y. Times, Dec. 3, 1972 Google Scholar, §3, at 16; Townsend, , Let’s Install Public Directors, Business and Soc. Rev., at 69-70 (1972)Google Scholar.

48 For a full statement of the terms of the new agreement, see Consolidated African Selection Trust Ltd., Report to Members on Agreement with the Government of Sierra Leone, Sept. 11, 1970.

49 These contracts are described in some detail in M. Bostock and C. Harvey, supra note 40, at 229

50 For a discussion of management contracts, see P. Gabriel, The International Transfer of Corporate Skills: Management Contracts in Less Developed Countries (1967).

51 Murphy, E. Jr., Oil Operations in Latin America: The Scope for Private Investment, 2 Int. Lawyer 455, 471 (1968)Google Scholar.

52 See, for example, Contract of Work between Indonesia and Freeport Indonesia, Inc. (April 7, 1967), Art. 5.

53 But see note 8, supra.

54 Cattan, Present Trends in Middle Eastern Oil Concessions and Agreements, in Private Investors Abroad—Problems and Solutions in International Business in 1969, at 140 ff (Cameron ed. 1969); also OECD, Oil . . . , supra note 41, at 92 ff.

55 Bolivia: General Laws of Hydrocarbons, 69 Mineral Trade Notes, Nov. 1972, at 14 ff.

56 OECD, OIL . . . , supra note 41, at 92.

57 For a full discussion of the agreements negotiated during this period, see Gibson, Production-Sharing, 2 Bull, of Indonesian Economic Studies, Feb. 1966, at 52 ff. (Part I) and June 1966, at 75 ff (Part II).

58 Id. pt. I, at 52.

59 Id. pt. I, at 52-54.

60 Hunter, Oil Developments, 7 Bull, of Indonesian Economic Studies, March 1971, at 98. For a thoughtful analysis of post-Sukarno production-sharing contracts, see R. Fabwkant, note 46 supra.

61 “Affiliate” is defined in Section I, subsect. 1.2.14. It is noteworthy that the earlier (1966) Production-Sharing Contract between P.N. Pertambangan Minjak Nasional and Kyushu Oil Co., Ltd. makes no reference to affiliates.

62 See the Arco contract of August 9, 1971 and the Indonesian Offshore contract of March 3, 1972, for example. Both are reproduced in R. Fabrikant, Oil Discovery and Technical Change in Southeast Asia—The Indonesian Petroleum Industry: Miscellaneous Source Material (Singapore: Institute of Southeast Asian Studies, 1973. Field Report Ser. No. 4).

63 Smith, , Libya Intensifies Oil Restrictions, N.Y. Times, Aug. 14, 1973, at 43 Google Scholar.

64 See Vernon, R., Sovereignty at Bay: The Multinational Spread of U.S. Enterprise 41-43 (1971)Google Scholar. The ability of Chile to sell copper was, of course, subject to attempts by the companies whose properties were nationalized to block sales of Chilean copper shipments through court action.

65 In mid-1973 Ecuador signed a new agreement with Texas-Gulf Consortium providing for the right of Ecuador to purchase up to 51% of the company’s total production for its own merchanidising. See New Oil Contract Signed by Ecuador and Consortium, N.Y. Times, Aug. 8, 1973, at 47.

66 Uranium—Niger, 71 Mineral Trade Notes, May 1974, at 12.

67 For a strong argument in favor of wide use of service and management contracts, see T. H. Mohan, The Impact of U.S. Direct Investment on Latin-American Relations (prepared for the Commission on U.S.—Latin-American Relations, Washington, June 1974). An interesting study of minerals investment in Australia found a strong relationship between the benefits to Australia and the bargaining variables discussed in the first Chapter of our forthcoming book. However, ownership appeared to be unrelated to the determinants of bargaining power. Apparently, Australia had not attached great significance to equity holdings, but had concentrated on the economic returns. See R. McKern, Multinational Enterprise and Natural Resources: A Study of Foreign Direct Investment in the Australian Minerals Industry, Feb. 1972 (unpublished doctoral dissertation, Harvard Business School).