Resource prices have fallen from their peaks, and Hugo Chavez has died. But the threat which Chavez symbolised for many companies – resource nationalism – is alive and kicking for the time being (not least on the part of Argentina’s President Cristina Fernández and Bolivia’s President Evo Morales, pictured below with Chavez). Across many jurisdictions, governments of resource-producing countries continue to push for greater benefits from and control over natural resources, whether in the form of tax or royalty increases, local equity participation, or beneficiation in-country. In some cases, this may be economically rational from a government perspective, but arbitrary changes clearly risk deterring further investment. What should responsible companies do in such situations, beyond waiting and hoping the falling prices will take the heat out of government demands?
This note highlights just a few patterns to watch out for when dealing with resource-nationalist governments, and approaches that may be helpful. It draws from our experience advising clients using our database of 200+ projects. The list below is broad-brush, in contrast to the detailed strategies we develop for clients, and is intended simply to provide some food for thought.
- Even the most hard-won agreements may be short lived, especially where a new government is elected and seeks to renegotiate contracts that they feel were negotiated unfairly.
- Complex fiscal structures may be challenged at a later date if their implications are not fully understood by government or society, particularly when they involve upfront payments to government and long term tax breaks for the company.
- An aggressive or overly legalistic approach to negotiations can be counter-productive, escalating disputes or restricting the potential for compromise in the future.
Contractual obligations and environmental or bureaucratic requirements are often used as a justification or as a lever in government attempts to extract more favourable terms.
- The Mongolian government’s recent attempts to revise the terms of Rio Tinto’s Oyu Tolgoi project stem partly from government perception, fair or not, that tax breaks agreed in 2009 were overly generous to the company.
- In April 2012 Argentina’s government nationalised YPF, on the populist pretext that its major shareholder Repsol had not met investment and production commitments, and was not serving the interests of the country.
- In 2007 Russia played up alleged environmental infractions as it forced Shell to accept a reduced share of its Sakhalin project. The government saw the original deal as unbalanced, and agreed by a weak predecessor.
Potential approaches – going beyond the basics*
- Developing means of clearly and credibly communicating project benefits to a broad range of stakeholders is vital.
- Finding ways for the government to secure a legitimate political ‘win’ with voters can take pressure off the company. This may include acceding to some government demands, especially in return for real guarantees of future fiscal stability.
- Investing in visible national development projects aligned with legitimate host government priorities can help win over suspicious stakeholders, especially when done in partnership with credible international NGOs or institutions. Responsibly leveraging relationships with key groups (national and global) able to advocate for the company also can provide protection.
- A robust stand on transparency and corruption often can build relationships with civil society and governments, and tackle head-on concerns about terms under which a project operates.
- Companies ultimately may choose to withdraw from a project and defend their interests in the international courts. Though a last resort, this may help to signal to other host governments internationally that unreasonable demands will be resisted.
- Coeur d’Alene Mines Corp has so far managed to avoid nationalisation in Bolivia (a fate other investors have succumbed to), in part by leveraging relationships with politically influential mining cooperatives.
- Newmont in Ghana insisted that the government publish the terms of its Ahafo mine agreement in Parliament in order to avoid allegations that the deal was unfair or that there was corruption in the securing of its licenses.
- In response to the threat of tough new fiscal terms, mining firms in Tanzania collaborated with ICMM and the World Gold Council to produce an analysis by credible international experts of the long term benefits of mining to the country. Suspicions of mining remain in Tanzania, but this contributed to better dialogue with the government.
- After the civil war in Angola ended, Chevron entered into a high profile national development partnership with USAID and UNDP. The partnership appears to have been one factor behind the extension of Chevron’s licenses.
*Please note these points are illustrative, synthesised and do not reflect the complexity of the situations or management approaches used
Picture: Presidencia de la Nación Argentina