Not a day goes by where infrastructure, mining or renewable energy is not the talk of the continent.
The infrastructure projects range from bridges, rails and roads, to ports, while mining covers the world’s need to transition to a more just society, one where energy poverty can be addressed and the essential minerals required for the energy transition can be sourced. Renewable energy appears to be finally receiving its day in the sun, with governments and investors taking Africa’s enormous potential more seriously. The scope of these projects is enormous – trillions of dollars impacting billions of people.
The main protagonist in this triumvirate of sectors is the investment contract. Potential and possibilities are interesting, but both of those will mean little without the agreement of governments and investors on an investment contract’s modalities.
The multidisciplinary contract
Most observers and the general public view contracts as little more than an agreement among dozens of lawyers, going back and forth and agreeing on a project’s minutiae. However, it is much, much more.
It is about financial modelling.
- What models have been created for the project, under what scenarios and by whom?
- Created by the private sector?
- Do they have the benefit of a government’s viewpoint about revenue and jobs, or are they (by creation) intended to bring value (profit) to a company?
It is about geological modelling. Again, who estimated a mine’s reserves? The company? Given that geology will impact the entire contract and that technological advances could add significant future value, what about triangulating that data with an external neutral party?
It is about value addition. For much of Africa’s history, the ‘resource formula’ has been ‘explore, exploit, export’ where a mineral’s added value was created elsewhere, usually in Europe, North America or Asia. African governments are now pushing back and insisting on many aspects of value addition/manufacturing, so the formula in the future could include manufacturing. However, how is that agreed in a contract? ‘Best efforts’ on the part of all? The training of citizens for local factories?
It is about social and environmental aspects. Which standards are being used in the contracts? Are they specific or mention “best international standards”? What about the IFC Performance Standards, arguably the one of the most thorough sets of standards thoroughly covering health, safety, security and the environment (HSSE), indigenous peoples and resettlement?
It’s just a clause, isn’t it?
Several types of clauses are ever present in contracts – stabilisation, force majeure, working provisions, among others. While it may feel like ‘just a clause’, getting just one clause wrong could cost governments and generations dearly.
[Stabilisation clauses exist to] prevent a president from waking up one day and destroying the project’s economics
Stabilisation clauses exist to – as one company executive put it – “to prevent a president from waking up one day and destroying the project’s economics”. While that may be somewhat paranoid, it is not unprecedented. The question remains, what can be stabilised? Just project economics or what about ‘evolution’ in HSSE, such as air conditioning in a truck in 40-degree heat, which could be seen as a human rights issue?
Force Majeure is one of the most boilerplate clauses, intended to be consulted in the wake of natural or man-made disasters, and governs how the project will be re-accessed given extraordinary circumstances. This clause garnered significantly more attention during the pandemic, when both investors and governments were trying to understand the implications. Suffice it to say that force majeure may likely be more nuanced in the future, with more attention paid to it at the negotiation table.
Working provisions clauses can be described as forcing a company to ‘use it or lose it’. This is particularly important in critical minerals, where governments feel that a country’s resource is in particularly high demand. The company may be hedging its bets, holding onto a resource for the future to mine or speculate to be sold onwards. Working provisions ensure that companies actually mine the resource.
Finally, the discussion around tax justice is increasingly taking centre stage. What are the implications of Base Erosion and Profit Shifting (BEPS) for contracts, and what is the relevance of the 15% global tax for African governments?
Governments are increasingly using Public Private Partnerships (PPPs) as a way to ensure delivery of goods and services for citizens, with reduced risk. Examples include the building and running of a toll road, a port or potentially an airport. These do ensure the delivery of services, but because they are private sector driven, they come at a price. Governments should understand the cost implications not only on the immediate budget, but also the financial feasibility of those commitments for the coming years.
Mentioned briefly above, many governments are very keen to break the pattern of providing ‘just’ a resource to have value added somewhere else. They are keen to play an active role in the manufacturing of those resources. For this to happen, companies will have a number of conditions to ensure that the investment is stable and that the government delivers on its commitments in planning and permitting. Governments may want to consider how feasible manufacturing is, think strategically about whether there is a critical mass of resources (every country will not be able to manufacture) and learn from others.
Negotiation support – solicit support when needed
The typical negotiation table is not balanced. One side is full of lawyers, geologists, financial modellers, infrastructure experts, among many others. They have an upper advantage, having negotiated in various regions around the world. They understand which financial models have been used in which region, the technological advances in understanding geology, as well as how technology could reduce operating costs (and thus lead to more profit).
Many governments have limited experience in negotiating investment contracts, as the occasion does not come too frequently. In many cases, they have left significant “money on the table” in their negotiations.
With contracts of up to 25-30 years, the generational implications are clear, particularly with Africa’s significant youth population
A recent example as to how much was seen in a renegotiation of the Panamanian copper mine. With the support of a financial modeller for 60 days, alternative financial models were created and a negotiation strategy was agreed. The result? An extra $15bn over 40 years for a country with under five million people. This example precisely demonstrates the efficiency and the effectiveness of tailored, multidisciplinary, short-term, demand-driven negotiation support. Most importantly, the government felt empowered to consider some of these issues in future negotiations.
With contracts of up to 25-30 years, the generational implications are clear, particularly with Africa’s significant youth population. One day, a 4th grader will turn 40 and that contract will accompany her for much of her life. For her sake and the sake of billions of others, Africa must negotiate a better deal.
Richard Dion is a Senior Advisor at the CONNEX Support Unit, based in Berlin.
This article represents the author’s own personal views, and not the views of the CONNEX Support Unit, its Board, its Advisory Committee or its funders.
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