Is achieving a win-win during partnerships and contract negotiation in transition mineral production possible?

In my last post, I briefly looked at extractive industries licenses and contract regimes, their differences, and how the legislative landscape of the countries involved shapes these. While countries generally tend to use a mix of licensing and contracts in the extractive sector, contracts are predominant in contexts with weak legal frameworks. In such cases, contracts may be long and comprehensive, governing most project aspects. If it is a large extractive project, it will involve a giant web of contracts between various actors.

Recently, several countries, including DRC, Ecuador, Ghana, Guyana, Nigeria, Peru, and most recently, Senegal, have taken action to withdraw or renegotiate previously signed contracts in the oil and gas sector. They aim to secure better terms for their natural resources, ensure more equitable revenue-sharing, address environmental concerns, and maximise national benefits from extractive contracts often developed in collaboration with multinational corporations. With the new scramble for minerals to produce renewable energy technology to meet global decarbonisation efforts, this is a good time to learn from the past and ensure that transition mineral contracts are equitable, respect human and environmental rights, and emphasize host countries’ jurisdictional power and sovereignty over resources.

?In this post, I will review the different types of contracts often signed between unequal partners, the challenges that could arise, and how these can be avoided to move towards win-win contracts.

Extractive contracts can take different forms, some of these include:

Service or Technical Service Agreement.

With such contracts, the state maintains ownership of the resource but hires a company to do the technical work of exploration, construction, production, or refining. This often involves contracts with different companies to provide services they lack themselves. The service-providing companies are paid based on their services and not on the level of production. Payment is either cash or a share of production. A Service Agreement often represents less risk for a company. On the other hand, the economic incentive is less for the company and higher for the government.

Concession Agreements

Here, the government grants a company the exclusive right to exploit a natural resource from a defined area for a specific period of time. In exchange for those rights, the government receives revenue in the form of royalties, taxes, and fees but is not involved in the actual development and operation of the project.

Production Sharing Agreements (PSA)

In this contract, the government or state-owned company retains ownership of the resource and more oversight over the project. On the other hand, the investor provides the financial and technical services. The company recovers its cost from the production. What is produced is then shared between the government and the investor at a negotiated rate after the company deducts the cost of investment and production. PSA are beneficial because they provide the needed details needed by investors to make decisions about whether to invest projects. PSA may be accompanied by Supplementary Agreements where the law does not cover specific technical and site-specific issues, such as infrastructure needs or local community engagement provisions that might be difficult to address where well-developed legal frameworks exist.

Despite their flexibility, contracts also present high risks and challenges when negotiated. Regardless of what regime is under consideration, negotiating between investors from countries with well-established governance systems, ideological and resource might and those grappling with having functional governance institutions is challenging for some reasons outlined below.

?1.???? Asymmetric bargaining positions

A country with less experience in the face of a company with multi-year and multiscale contract negotiating experience is already in a disadvantaged bargaining position. ?Moreover, a country’s need for development further undermines the strength of a government’s position

2.???? Information asymmetries

Investors often have more advanced technical and commercial information about all negotiated project aspects. Governments of countries hosting the minerals often have no choice but to rely on investors’ geological data, resource assessments, development plans, and economic modelling.

3.???? Negotiation experience asymmetries

Despite negotiations involving publicly owned resources with significant economic implications, it is done with little to no oversight, public consultation, or transparency, oftentimes confidential, excluding government agencies with obligations under the agreement. This could lead to underrepresentation of certain interests in the process.

4.???? Discretion and corruption

During contract negotiations, a few people, including high-level officials or political appointees, have significant discretion over these wide-ranging and potentially lucrative deals.

5.???? Lack of uniformity and conflicts with laws

Multiple contract negotiations by a country could result in a complex web of arrangements and agreements with non-harmonised terms, making it practically impossible to monitor them. Generally, the hierarchy of law dictates that contracts should align with the law and regulations. Unfortunately, in the context where laws are underdeveloped, contract terms often supplant and supersede the law.? For example, contracts should align with laws on environmental protection. Often, contracts go as far as having a stability provision inserted that exempts the project from being bound by future changes in law. This limits the government's power to enforce and adapt projects to respect new legal exigencies.

What can the governments of mineral-rich host countries do to address historical inequalities in contract negotiation as states negotiate and establish partnerships for transition minerals production?

-??????????? Enact and enforce transparent, well-defined laws with clear guidelines for contract terms, environmental protections, and tax regimes.

-??????????? Invest in and conduct thorough and transparent resource assessments using independent experts.

-??????????? Enlist the specialised expertise and negotiation team to ensure oversight and scrutiny through the contract negotiation period.

-??????????? Set clear national short-term and long-term development priorities, including environmental protection and safeguards, employment, local content, community development needs, infrastructure development, tech transfer, industrial diversification, and aligning Contract Terms with these.

-??????????? Conduct effective due diligence and require companies to provide critical and up-to-date geological and financial information before and during contract negotiation, with clauses for periodic reviews and contract renegotiation where possible.

-??????????? Effective public involvement rules focus on the efficiency and need for public participation, allowing for more scrutiny and public input throughout the contracting period.

-??????????? Specify clauses in the contract that are negotiable or non-negotiable to prevent unintended policy change that might occur when governments change.

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African Union African Development Bank Group University of South Australia University of Birmingham Coventry University The Commonwealth Donald Dimitri ONOUNGA EARTHWORKS ECOWAS Commission Giulia Jacovella Global South Opportunities The Nelson Mandela School of Public Governance Chatham House Harvard University IPCC Institute of Development Studies National Geographic Society Institute of Development Studies Omar Selim Oxfam The University of Queensland Sylvain Kouayep Lawou The World Bank Transparency International Uche Igwe, Ph.D Valéry Ramaherison Njenga Hakeenah Justus Wanzala Tah Kennette Konsum Seth Lartey Bart-Jaap Verbeek Pavel Bilek Claude Sango Claude Kabemba Emmanuel UMPULA Amadou BAH Doing A PhD In Africa Atemkeng Andre Ikfi Miranda AFRICA CLIMATE PEACE AND SECURITY SOLUTIONS EU Environment and Climate World Resources Forum Africa Evidence Network (AEN) Njenga Hakeenah National Geographic Society

Dr. Eric Ngang