Anonymous investor: 'we will go ahead with international arbitration'

Miningmx.com is reporting anonymous threats by mine investors that they will challenge the Government's new tax regime through international arbitration. Development Agreements between the companies and state allow for arbitration in the case of a dispute between the contracting parties. The Zambian state has recently announced that it will unilaterally impose new taxes without consulting the companies, overriding 'stability clauses' in the Agreements that commit the Government not to alter the tax burden applying to the mines for 15 to 20 years. As discussed on minewatchzambia before, the constitutionality of these stability clauses, and indeed the Development Agreements themselves may well be open to challenge.

A senior mining executive who, rather tellingly, declined to be named, told MiningMX: “We have development agreements in place and they still have a decade to run. We will go ahead with international arbitration if this fiscal regime goes ahead, but we trust it will not come to that.” That's a pretty explosive suggestion and as direct a threat (even if anonymous) as we've had from any mining company. The addition of the 'we trust it will not come to that' phrase at the end is very suggestive. The companies are clearly trying to threaten the Government, or to secure concessions before legislation reaches Parliament. This is a political question as much as a legal one.

Mines minister Kalombo Mwansa told Miningmx that international arbitration would probably "come to nothing" and asked mining companies to accept higher taxes. The fiscal regime “won’t change,” Mwansa said on the sidelines of the Africa Mining Congress in Livingstone, Zambia. “We’ll have dialogue with the mining companies, but we will not change the fiscal regime... Nobody likes to pay tax, but that shouldn’t stop them from investing,” Mwansa said international arbitration would be the least favourable course of action. “I’d appeal to them not to do that and to not get into an antagonistic situation that will lead to nothing,” he said. “It is in their interests to work with us and stay in our good books.”

Mwansa's final comments should encourage the mining companies to think carefully before pursuing arbitration. Were it to come to it, the Development Agreements propose arbitration through the World Bank's International Centre for the Settlement of Investment Disputes (ICSID), which would be chaired by World Bank President Robert Zoellick and the membership of which would be made up of other countries that have signed the international investment convention that established the body.

So, if it came to arbitration, what might happen? Firstly, it could prove expensive for the companies (the parties to a dispute at ICSID cover the costs of the process). Secondly, the outcome might not be what the companies were hoping for. Should a case come to arbitration, the state would be well placed to raise a number of issues beyond the question of tax. Although the Development Agreements were historically kept secret between the mining companies and the Zambian Government, their publication on this website has allowed researchers to look more closely into their provisions. One effect has been to suggest significant degrees of non-compliance by the companies with the commitments they made in the agreements. New research into the situation with individual companies would clearly be very useful, as soon as possible. Details of mines safety, environmental regulations, social provisions, labour rights and even immigration law are laid out in some detail in the Agreements, but actual practice in Zambia appears historically to have been a question of the Government exercising an extremely soft touch, partly due to administrative weaknesses in the regulatory organs of the state, partly because the agreements were secret and the companies got away with telling regulators and unions that they were covered by contracts those actors didn't have access to, partly because of minority share-holding in the companies by the state, and partly because the companies and Government decided that a partnership that kept each in the other's 'good books' was in both of their interests. The implication of this historically cosy relationship, however, is that the companies have been getting away with non-compliance in many areas covered in their Development Agreements for some time. They might find themselves on the wrong end of a settlement should the arbitration process broaden out beyond tax.

However, any investor falling out with the Zambian authorities might suffer more serious problems that just those caused by the arbitrator. Firstly, they could expect much more zealous regulation. What's more, the companies operate in Zambia through a 'license to operate' that is far more than merely legal - the companies need the co-operation of the Zambian state in areas that go well beyond formal contracts - the provision of infrastructure, including roads, rail and energy sectors are fundamental to the companies. Some aspects of what the state will provide are covered in the Development Agreements - others aren't. Vast shares of Zambia's shaky electrical supplies are set aside for the mines, via arrangements between the state electricity company ZESCO and the Copperbelt Energy Corporation. These relations have been hard enough in recent times with negotiations over costs and difficulties with load-shedding shutting down the mines unexpectedly, damaging production and equipment. The Government could almost certainly make things significantly more difficult for any investor they fell out with. The same is true of labour relations. Whether through their refusal to amend Zambia's appalling labour rights legislation, through their failure to implement existing rights, or through the policing of demonstrations, the Zambian state is absolutely central to the maintenance of an unjust industrial order on the Copperbelt that the companies benefit from. In a region that is already tense (there were illegal strikes and pickets in a majority of the mines in the last twelve months) any political signal from the state that workers would be favoured over a particular company would be absolutely disastrous for that company.

Thirdly, companies refusing to accept the new fiscal regime would be taking a chance with their international reputations. The original Development Agreements are widely regarded as a scandal, and corruption cases have surrounded at least some of the negotiators on the state side. Few companies would welcome further dicussion of how they won the contracts. With the ICSID process, and some of the companies themselves already the subject of major international NGO campaigns, any legal challenge to the right of the Zambian state to make what are welcome, just and really very balanced (some would even say conservative) alterations to the mining regime, would rightly meet an aggressive popular campaign, both in Zambia and internationally. I'll sign up now to doing my bit to make it happen, if necessary! I suspect the companies will see sense, and it won't be.