Contract Negotiations and Fiscal Policies in the Extractive Industries

Extractive Industries are extremely valuable to Africa’s countries, and they can be leveraged to fuel sustainable and inclusive economic growth. They offer the potential to generate significant financial benefits and help countries fuel their economic growth and development through direct and indirect job creation, business opportunities, technologies and knowledge transfer and incomes generation. Taking into account these opportunities lead ultimately to a better life for the citizens of those countries by a sustained poverty reduction and an inclusive growth.

When it comes to negotiating complex mining contracts, governments can often feel that the playing field is tilted in one direction, favoring the private sector. This is a major challenge for Africa. In the 2013 “Africa Progress Report,” Kofi Annan, the former UN Secretary-General, says poorly negotiated contracts are partly responsible for countries not benefiting from their mineral wealth. The study compared the selling price for five mining assets in the Democratic Republic of Congo with an independent assessment of their value, and found the difference to be over $1 billion.

Negotiating mining contracts is an extremely complex endeavor that requires a clear set of objectives articulated by leadership; a variety of technical skills in law, engineering, economics, finance, and other areas; a high level of coordination across relevant government entities and the ability to pursue a consistent course over time.

To reach an agreement that is stable over time, the investor-state relationship must be perceived to be fair by the foreign investor and the host government, as well as local communities, broader civil society and the business community. A key to achieving the perception of fair negotiations is incorporating transparency into the process from the outset.

While transparency is crucial, the fact remains that the definition of the fiscal and taxation are a key to concluding a win-win contract.

Indeed, in developing countries, taxes on extractive industries often do not contribute as much as they could to public revenues. To address this issue, countries should develop national strategies that set up the terms under which their natural resources will be developed, particularly in regard to fiscal policies, contractual arrangements and tax regimes.

Considering the need for African countries more resources to support good growth momentum, strengthen the resilience of their economies and accelerate progress towards social progress in Africa, the contribution of extractive companies to fiscal revenues of the States may still seem insufficient in terms of income derived from the exploitation of mineral resources. 

Increased transparency and dialogue along the mining sector value chain will be essential to improve accountability, mitigating rent-seeking behavior, as well as to improve long-term and development-oriented revenue management.