Pickaxes and pitfalls – some hints at the legal challenges of undertaking mineral and infrastructure developments in Africa

Another aspect to be taken into account at the inception of a mining project or, indeed, any commercial activity (including infrastructural developments) is the variety of rights that can be held in land. Indeed, a 'title to land' will not have the same meaning all throughout Africa. Therefore, when securing land rights in respect of the land in which the opencast mine is to be conducted or the mine shaft sunk; or the power plant is to be constructed and power generated; or the railway line constructed and train services provided; the true nature of the rights that can be obtained in the relevant land should be ascertained at the outset.

The African countries that have a Roman-Dutch legal system (such as South Africa, Namibia and Zimbabwe), or a system based on a European civil law (most of West Africa, which has further developed its commercial law through OHADA), have fully developed land laws, granting and upholding strong rights of ownership and other real rights in land. These countries usually have a land registry in which ownership of land and other real rights against land are recorded. However, in some countries, statutory provisions may explicitly provide that all mineral deposits found in that country are state property (for example, the DRC and Madagascar).

On the other hand, some African countries do not enforce all registered rights of land ownership – Zimbabwe is an obvious example. Other countries (such as Mozambique and Tanzania) do not permit any private ownership of land and all land is owned by the state. The private sector can obtain leasehold rights for specified periods of time but nothing stronger.

Some other countries that have a legal system that is a combination of an European legal system and indigenous law (such as some North African countries, Swaziland and Botswana) have unique land laws, which often do not permit ownership of land in certain areas by companies or foreign persons. In these areas, the land rights fall short of ownership and, sometimes, even of leasehold rights, and might not provide adequate tenure in respect of a project that will require hundreds of millions of dollars to develop. Accordingly, it is of great importance to ascertain what land rights are available and to whom they can be granted before embarking on any commercial development, as land rights and the security of tenure will be of great importance to any financiers.

A mining development or any other development does not exist in a vacuum – it requires supporting infrastructure and resources such as road, rail, air travel facilities, harbours, access to water, sewerage and electricity. In most countries, it is the responsibility of the state to provide such infrastructure and resources and often the law grants the state sole control over and sole right to provide these. However, more often than not, the exploitation of mineral resources happens in areas that do not have developed infrastructure, and roads, rail, air travel facilities and utilities need to be developed in order for the mining development to be undertaken. There are several issues for which developers must be aware.

• Firstly, whether the right to develop that infrastructure is granted solely to the state or whether other people can undertake that development. Usually, this right resides in a governmental body or agency. Very often, this legislation does not contemplate that the private sector can undertake or participate in any way in the development or operation and maintenance of the required infrastructure. If the private sector is permitted to participate, there are often requirements that such participation is only permitted after a public tender has been conducted to select the person entitled to participate in those activities. This requirement gains added importance if the host country is being funded by development finance institutions (DFI) or mandated lead arrangers (MLA) loans from entities such as the World Bank or the African Development Bank, or in the situation where the infrastructure will be used by the public generally;
• Secondly, if the right can be granted by the state to another person to undertake the development of infrastructure, the question arises whether the correct entity or person within the state has granted that right. It is a common occurrence in the sometimes Byzantium state structures in African countries that the wrong ministry grants a rights to the private sector and that grant is totally invalid and ultra vires;
• Thirdly, does the state have the right to redirect a resource from one use to another use? This is a particular concern in respect of water in the drier Southern African states. In a number of these countries, the water laws provide that the state can redirect the use of water from one user to another user if that redirection is for the greater socio-economic benefit of the country and its people. This is also a concern in respect of the use of railway lines and train services.

Environmental issues are often overlooked in Africa – or so it seems. This is rapidly changing. A number of African states have developed, or are developing, sophisticated legislation dealing with environmental matters. Most projects in Africa need the involvement of DFI funding due to political risk issues and also the size of the financing required, which increases the emphasis on environmental issues. In addition, most of the large financial institutions that are home-grown in Africa have signed up to the Equator Principles. Lastly, African countries are also becoming more and more concerned about the socio-economic impact of these mining developments and other developments on their people. Accordingly, it is of great importance to pay attention to environmental issues from the first stages of conception of a project, as it is often impossible to retrace missed stages of the environmental process – and missed stages can cause extremely lengthy delays.

There is now increased importance on the African country deriving some benefits from the exploitation of its mineral resources, or at least the right to undertake infrastructural developments. Greater emphasis is being placed on these benefits by African nations. Most African countries in which we have worked have some form of requirement for citizen economic empowerment (as it is called in Botswana and Mozambique), or black economic empowerment and the national industrial participation programme (as it is called in South Africa) or indigenisation (as it is called in Zimbabwe). These requirements might not be, and often are not, reduced to the form of statute, but they will be requirements for licences or for access to land, or incorporated in the grant of the rights.

These requirements can take several forms, such as: the obvious one of requiring local companies and people to own equity in the company that is granted the mineral right or title; requiring investment in and development of an industry in the country (such as the requirement to develop diamond cutting in Botswana and to develop a local gas industry in Mozambique); the employment, skills development and training of local people (such as in Guinea); and the construction and maintenance of utilities and infrastructure for use by local people, such as schools, hospitals or sports facilities. All of these requirements will obviously add to the cost of the development of the project, and it is strongly advised that it be ascertained what requirements there are (both formal and informal) in respect of sharing the benefits of the development of the mineral resources with the local people. It must also be borne in mind that there might be such requirements at various levels of authority, from the state down to the province, to the local authority and to the local tribe.

Another area in which there is growing awareness and demand among African countries and their peoples is in respect of the upholding and enforcement of human rights, social and corporate responsibility, and sustainability of economic activities. These issues, while extremely laudable and important, can impose a hidden, additional and unexpected layer of costs to a development.

• Among these rights and issues is the issue of human resettlement. As populations have become more educated on their rights, they want to be consulted on whether they should be paid out monies or resettled. We have experience of where a village has been moved only for the inhabitants to demand financial compensation for the destruction of the original village rather than for the building of a new village;
• Another issue is the increasingly important one of health and safety, not only in the work place but for the general population. This can be an issue of great importance for developments such as power generation and transmission and rail projects, where interaction with the general populace cannot be avoided. Often, indigenous laws impose obligations in respect of death and injuries in addition to the legislated laws;
• The impact of an imported work force on the local population is becoming an issue of increased concern for a number of African states that are increasingly reluctant to open their borders in such a way for use on a particular project;
• Labour laws can be demanding in a number of African countries at present, and the requirements for the employer to provide support to the work force in respect of health and family issues are important in those countries. In addition, these laws and requirements are becoming more important in a number of other African countries. In recent years, we have seen an increase in the demand for the advice and skills of employment law experts across the continent of Africa;
• In addition, DFIs and MLAs are using their financial power to enforce laws and rules in connection with corruption, money laundering, human rights abuses and sanctions against rogue states. As commercial financial institutions have turned increasingly in recent years to American and European governments, DFIs and MLAs as sources of finance, we have seen increased enforcement by them of these laws and rules as well, as terms are imposed on them in turn by their lenders. Examples of such rules and laws are the OFAC, UK and EU sanctions in respect of Zimbabwe. Similarly, the FCPA, the Dodds-Frank Act and the soon-to-come-into-force UK Bribery Act are making their presence felt. In addition, in a number of countries, breaches of local laws in respect to a number of these matters can render the grant of the underlying right or title void (one such country is South Africa in respect of corruption).

It must be noted that there is increasing pressure being placed by African states on the financiers of projects. This is to impose social and corporate responsibility and sustainability obligations on their borrowers and the developments that they are undertaking. This can, on occasion, mean that a particular type of project cannot have access to a particular source of funding – for example, coal fired power plants will battle to raise finance from DFIs in certain African countries.

A fundamental issue in the development of African resources and infrastructure projects is the ability of financiers to take security over the mineral rights and titles, and other licences and rights, and then to enforce that security easily. This is not as simple as it seems. The security laws and enforcement structures vary across Africa (such as some North, East and Southern African countries) from the very sophisticated to the untried and untested (such as Botswana and DRC). Many African legal systems have the concept of security and the theoretical ability to enforce it. However, due to lack of development in, or experience of, local courts, there is no experience in respect of the taking of such security or the enforcement of it.

Some of the difficulties we have experienced in respect of the granting of security to financiers are as follows:

• the state might have the right to refuse to register the transfer of the mining right or title or other rights or licences (such as electricity generation licences and gas transportation licences), following an exercise of the security, if the transferee does not meet with specific requirements (for example, in respect of expertise or local participation in their equity);
• often there is no history in respect of enforcement of the security rights. Financiers do not like to be the first people to do something – they prefer to know that the systems and structures are tried and tested before they will risk large sums of money on a project;
• regularly the structures to register the security simply do not exist in practice.

It is important to identify upfront what security the financiers will require and what needs to be done to meet these requirements. For mining and infrastructure projects in certain countries, security given over assets situated offshore may be the only security available.

Finally, it is essential to ascertain that the mineral or other resource does not fall within an area that two or more countries, or two or more provinces or states, claims belongs to them. We have worked on a few projects where competing companies have been awarded rights to the same mineral resource or to develop the same infrastructure project (such as power projects using the same fuel source, which is subject to an ownership dispute) by competing countries or provinces. As can be imagined, this leads to huge delays and problems in undertaking the development.

Mining, resources and infrastructure projects can be undertaken in Africa and undertaken well. However, an essential ingredient in that recipe for success is to ascertain the legal pitfalls in advance and avoid them.

Bruce Dickinson

Partner

Bruce Dickinson specialises in mergers and acquisitions in the mining industry. He was involved in the first black empowerment mining project financing in South Africa and subsequently the largest such transaction to date (Anglo/Kumba/Eyesizwe empowerment transaction).

He advises clients on the structuring of M&As, tax issues, corporate finance, structured finance and project finance, and cross-border transactions in the mining industry in South Africa and Africa. This is in order to limit the risks associated with such transactions and to maximise the commercial advantages sought.

Bruce advises various international companies (NYSE, LSE, ASX, TSX and AIM listed) on their business activities in South Africa and Africa and he is a trustee of several trusts in the mining industry.

Aside from transactions in South Africa, Bruce has advised on transactions in Angola, Botswana, Burkina Faso, DRC, Gabon, Ghana, Guinea, Iran, Lesotho, Liberia, Madagascar, Mali, Mozambique, Namibia, Swaziland, Tanzania, Zambia and Zimbabwe. These have involved virtually all precious and base metals, dimension stones, heavy minerals and industrial minerals.

Bruce has assisted clients with submissions to the South African Parliament on the Mineral and Petroleum Resources Development Act and its associated legislation.

He has been a speaker at various mining conferences and courses, has published a number of articles, and is recognised as a leader in his field by various prominent domestic and international journals.

Bruce is admitted as an attorney in South Africa and as a solicitor in England and Wales.

Brigette Baillie

Partner

Brigette Baillie is a partner and head of the Project Development & Finance Practice at Webber Wentzel.

She is experienced in the areas of non-recourse and limited recourse financing, structuring of projects, as well as corporate and equity finance. Brigette has expertise in concession and PPP agreements, PPAs, construction contracts – from standard form FIDIC and NEC contracts to bespoke construction, EPC and EPCM contracts, as well as operation and maintenance contracts across a wide spectrum of sectors. Her experience in financing ranges from general banking facilities to limited or non-recourse financing to preference share and other corporate financings and equity acquisition financings.

Brigette is regularly ranked by international and business directories as among the leading practitioners in her field of law. According to Legal 500, in the area of Banking and Finance: “In Brigette Baillie, Webber Wentzel has a first-class practitioner, and the firm often attracts major mandates in the banking sector”, while in Project Finance: “Webber Wentzel has one of the country's top projects practices, and in Brigette Baillie an internationally renowned practitioner”.