May 2011

Mineral development agreements cause of contention

Lack of understanding leads to unmet expectations

By Paul Brent

Mineral development agreements between governments and mining firms are increasingly becoming flashpoints for controversy, according to World Economic Forum (WEF) executive Britt Banks.

In many parts of the world, mineral development agreements are heralded with promises of jobs and revenue, only to quickly fall short of expectations, Banks said in his keynote address at the Mining, People and the Environment conference held in conjunction with the PDAC Convention in Toronto in March. “Five years later it seems as if absolutely nobody is happy with the situation,” he explained. “The new government that has taken power since then says, ‘Wait a minute [we] didn’t negotiate this agreement,’ commodity prices have skyrocketed and people feel like they didn’t cut a good enough deal, and they are not getting enough of a share of the pie.”

Over the past year, the WEF held a series of meetings in Columbia, Tanzania and Mongolia. As well, stakeholder consultations and interviews were conducted with the resources industry, government, civil society (including NGOs) and other relevant actors (academics, consultants) in Africa, Asia-Pacific and Latin America to explore the issue of mineral development agreements. “It seemed like a very good idea to try to look at what exactly were the dynamics of these types of agreements,” said Banks, a former Newmont Mining Corp. executive who chairs the Global Agenda Council on the Future of Mining and Metals at the WEF. Banks is also an adjunct professor with the University of Colorado Law School.

Among the key findings of the WEF study were that many mineral development agreements led to unrealistic expectations. “This theme came through over and over again,” said Banks. Going into negotiations, there was an insufficient understanding of the “nature, scope and timing of the benefits and costs” from the projects during the early stages of negotiation and development, he said. Frustrations also included the timing of tax revenue flowing out of the project, and the speed and depth of employment from the project.

A second common criticism, particularly in developing countries, was termed as “asymmetric bargaining power.” Mining companies typically have hard-won expertise drawing up development deals, while governments often have little or no experience doing such deals. “When you have this type of asymmetry it can really impair the perceived legitimacy of these types of agreements,” Banks explained.

Another issue is agreements in which key details of the deal are not made public. “When that is the case, then people will automatically assume the worst about what is in the agreement and about how the agreement was negotiated,” he added. “So while there might be competitive advantages to keeping agreements secret, people need to understand that there are often a lot of costs.”

The WEF intends to hold eight to 10 multi-stakeholder dialogue sessions around the world over the next year, starting with a meeting in Brazil in April. “Ideally, some pilot projects might be developed on one or two of these specific recommendations or proposed solutions,” said Banks. “And the hope is that a framework for mineral development arrangements could be developed.”

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