MONGOLIA PARLIAMENT: Negotiating Mining Agreements Appropriately?

By Solongoo Bayarsaikhan

Mining agreement is a project specific regulatory tool utilized by some countries to promote investment in large-scale mine operations or to give assurance for foreign investors. Even though it has important development implications for host country, its negotiation process has not received as much attention as it would deserve until recently. However, as general trend moves towards greater transparency and accountability of creating regulatory mechanism in mining industry, quest for open and transparent negotiation process of mining agreements has emerged. In this respect, conventional roles of stakeholders such as Parliament are redefined as to increase transparency and accountability. 

Parliament has important role to hold the executive to account and scrutinize mining agreements as last resort to veto by ratifying them as legislature. This analysis has looked at recent negotiation experience of Mongolia to develop large-scale mineral projects by assessing the role played by the Parliament. Role of Parliament was not regarded as such to increase accountability of the government and ensure transparency and openness of the negotiation process, in contrast it facilitated negotiation process by amending existing laws and regulations in conflict with the negotiated agreement. In future, to clarify role of Parliament and to ensure more transparent and open process it is recommended to ratify mining agreements by Parliament. 

Despite the fact that general regulatory framework of mining sector is in place, many countries offer possibility to conclude a mining agreement (MA) to promote investment in exceptional projects.[1] Negotiation process of MA takes place between government and investor with little input from other interest groups, even though development implications of MAs are far-reaching in developing countries where it is often used. In line with general trend towards greater transparency in extractive industry, it has been urged to increase transparency and accountability of negotiation process of MAs.[2]The Parliament as a legislature and oversight of executive is emerged to have important role in increasing the transparency and accountability of negotiation process of MAs.[3]

Role of Parliament in negotiating Mining Agreements 

The Case for Transparency and Accountability in negotiation of MAs 

MA is a “contractual document in which the desire of a Transnational Mining Company (TMC) to invest in a mineral venture meets the desire of the Host Country (HC) to attract investment.”[4] From a developing countries perspective the following reasons necessitate the conclusion of MA: special nature of the TMC, role of TMC in the economic development of HC, and legal tradition of the nation.[5] Even though foreign investment brings much needed capital, expertise and technology to the HC and contributes to economic development by providing increased tax revenues and foreign exchange, MA as a tool to promote investment might not be always advantageous to the HC. As interests of the parties to the MA are inherently conflicting, government without adequate institutional capacity and experience might end up cutting bad deal for its people.[6]

Once signed, an MA operates as a one-way channel. Its content binds the HC for long period of time as investors seek to secure their investment by stabilization clauses to ensure stable tax or regulatory environment of a project. This can undermine sustainable development of the HC by restricting regulatory power of the HC to increase environmental and social standards, a phenomenon known as “regulatory chill”.[7]In addition, MA often refers future disputes arising out of MA to international arbitration with effect of delocalizing MA from the HC` s jurisdiction. Even though development implications of MAs are far-reaching from the HC perspective, its negotiation process is not as open and transparent as it should be. In a quest for greater transparency in the extractive industry, transparency and accountability of negotiation of MA has also been urged. [8]

It is argued that increased transparency and openness puts pressure on both government and company sides to reach a fair deal. By obtaining more information, the public will have an opportunity to review the negotiated agreements and be able to hold government officials to account.[9] In addition, while negotiated with view of governing long term relationship of parties, MAs are vulnerable to unilateral changes taken by governments.[10] State contracts in the extractive industry are atypical in a sense that frequent renegotiations and legal disputes often interrupt the long term operations of contracts.[11]This uncertainty not only raises perceived and real political risk of HC[12] thereby increasing risk premium required by TMCs but also increases transaction costs for both parties.[13] It is argued that increased transparency of MAs can help to build durable and stable relationships which serve the interest of both parties.[14] Therefore, in line with general trend towards increased transparency and consensus building process of creating regulatory framework of mining regime,[15] transparency of negotiation of MA and widening of the parties involved in the process also becomes a requirement for building effective and beneficial contractual arrangement between the HC and TMC. 

Role of Parliament in negotiation of MA 

Conventional approach to discuss and analyze MAs has been bi-polar: it focuses on interests and rights of the HC represented by Central Government and TMC. As MA is `one of the main ways for an HC to express its political will` towards development of mining sector,[16] this will is expressed usually by the executive, central government of a country concerned.[17]Indeed, the main role of the executive is to act and domestic policy of respective government is often reflected in the actions of the executive.[18] However, in countries with weak institutional mechanism and immature democratic regime, negotiation of MAs as a complex legal document covering a wide range of issues such as taxation and environment can pose significant challenges to governments. Issues related to information asymmetries, agency problems and high enforcement costs also raise risk of negotiating inequitable deal for developing countries.[19]Moreover, as negotiation of MAs is often conducted in secrecy and confidentiality, it raises suspicions and concerns over corruption or improper conduct.[20]

In this respect, Parliaments and civil society organizations can help Government to negotiate a good deal for the country by increasing available information and improving negotiating capacity of the government.[21] Increased attention to Parliament in negotiation process has been supported by the fact that representative democracy as an ideal form of governance has found its roots in almost all countries worldwide, although in a variety of forms. In addition, by XXI (21st) century, as governments become the most powerful organs of states, holding them to accountable to citizens is at the centre of academic discussion and pressing practical issue.[22]

In this context, control of Government as the basic function of the Parliament[23] is emphasized as to increase transparency and accountability of negotiation process of MAs. As a principal purpose of parliamentary instruments to control the Government is to acquire information and enable public control,[24]the Parliament can increase the transparency and accountability of the negotiation process by obtaining information and enabling public access to negotiation process. In addition, the Parliament as legislature can `scrutinize the negotiated agreement and veto as last resort by ratifying the MA as a legislative act`.[25] In the past, even though used in practice, conventional objective of parliamentary ratification was not regarded as such to provide transparency and accountability of negotiation process: it was necessary because it provided additional security for investors[26] or it was required in mostly common law jurisdictions because the negotiated agreement superseded generally applicable law.[27]

To make parliamentary ratification a meaningful and effective control mechanism, Members of Parliament (MP) must have the opportunity and time to know and discuss the provisions of negotiated agreements. A recent highly controversial agreement between Mittal Steel and Liberia demonstrates an example of ineffective parliamentary control: even though the agreement was ratified by Parliament, MPs have never received the full text of negotiated agreement.[28] In addition, it is argued that ratification of MA would allow citizens to challenge the terms of MAs in national courts.[29]However, legal effects of parliamentary ratification vary from jurisdiction to jurisdiction. For example: in Canada, Federal Court refused to interpret an Aboriginal Land Claim Agreement ratified by Parliament in same way as statute, reasoning that an Agreement is not statute but “legislated contract”. [30] The Court held that “while the agreement was confirmed by legislation, it is fundamentally a “legislated contract ... that derives all of its legal force even as a contract from the laws which are to give it effect and validity.”[31] Therefore, one must be careful in analyzing ratified legal consequences of MAs in different jurisdictions. 

As mentioned before, current trend moves towards consensus building process involving all the stakeholders having a stake in development of making regulatory regime of mining[32] process and redefining the roles of the conventional stakeholders such as Parliament. Although above-mentioned parliamentary control mechanisms are all desirable and recommended, effectiveness thereof as to increase accountability of negotiation of MA might be restricted, since `the very nature and purpose of a parliament is to support and legitimize the executive` s action, and not to restrain it from action`.[33] As we will see subsequently, parliamentary structure and procedures should be pluralist as to ensure meaningful and effective parliamentary control.[34]

NUTSHELL:

This analysis seeks to examine how and to what extent Parliament enhances transparency and accountability in negotiation process of Mining Agreements (MA). According to Solongoo, although use of MAs is not restricted to developing countries,[35] the analysis has focused  on perspectives of developing countries where transparency and accountability is often a missing ingredient of negotiation of MAs.[36] In subsequent articles the analysis will examine international trends from a comparative perspective and examine Mongolia` s recent negotiation experience with Oyu Tolgoi investment agreement as a case study. Also, the current regulatory framework and negotiation process of MAs in Mongolia will be examined. Now from the Mongolian and developing economy perspective, how many countries are facing this same situation; one in which the locals may be getting poor deals because parliament has not been able to negotiate fair value and appropriate deals for the local economy? Let us know what your experience is like. For more information about this article and to view Solongoo's professional profile, click here -->

[1] Otto, J. and Cordes, J.(2002): Regulation of Mining Enterprises, 4-3 

[2] IIED: Lifting the Lid on Foreign Investment Contracts: The Real Deal for Sustainable Development, Briefing Paper, September 2005, available at: http://www.iied.org/pubs/pdfs/16007IIED.pdf; (Last visited 26th January 2010) 

[3] Bryan, Sh. and Hofmann, B.: Transparency and Accountability in Africa` s Extractive Industries: The Role of Legislature, National Democratic Institute, 2007 available at: http://www.ndi.org/files/2191_extractive_080807.pdf (Last visited 26th January 2010) 

[4] Barberis, D. (1998): Negotiating Mining Agreements, Past, Present and Future 

[5] D. Smith and L.T.Wells Jr. (1975): Negotiating Third World Mineral Agreements, p. 29 

[6] Stiglitz, J.: What is the Role of the State? In: Escaping the Resources Curse, Humphreys, M. et al (2007) 

[7] Cotula, L: Regulatory Takings, Stabilization Clauses and Sustainable Development, paper prepared for OECD Global Forum on International Investment, March 2008, available at: http://www.oecd.org/dataoecd/45/8/40311122.pdf (Last visited 26th January 2010) 

[8] Rosenblum, P. and Maples, S.: Contracts Confidential, Ending Secret Deals in the Extractive Industries, September, 2009 available at: http://www.revenuewatch.org/news/publications/RWI-Contracts-Confidential.pdf (Last visited: 26th January 2010) 

[9] Supra Note 2 

[10] Dietsche, E.: Minerals Taxation regimes: A review of issues and challenges in their design and application, ICMM and Commonwealth Secretariat, February 2009, available at: http://www.icmm.com/page/10049/minerals-taxation (Last visited: 25th January 2010) 

[11] Hogan, W., Sturzenegger, F. and Tai, L.: Contracts in natural resources: a primer, October 6, 2007, available at: http://www.hks.harvard.edu/fs/whogan/Populism_Nat_Res/Populism_Agenda_files/HST_Intro_101007.pdf (last visited: 19th January 2010) 

[12] Supra note 10 

[13] Supra note 13 

[14] Supra note 11. 

[15] Bastida, E: Rethinking Mining Law, IBA Mining Law Newsletter, August 2009, a summary of the conference paper 

[16] Supra note 6, p. 50 

[17] Distinction between unitary and federal state is not made and issues arising from different constitutional structures in this context are not addressed in this paper 

[18] Craig, P. and Tomkins, A.: Introduction in: the Executive and Public Law, Craig. P and Tomkins A. (ed.) (2006) 

[19] Supra note 12 

[20] Chene, M.: Corruption and the renegotiation of mining contracts, Anti-Corruption Resource Centre, November 2007, available at: http://www.u4.no/helpdesk/helpdesk/query.cfm?id=156 (Last visited: 25th January 2010) 

[21] Genasci, M: Negotiation of Mining and Oil Legal Agreements, March 2009, Comments presented at the World Bank Extractive Industries Week, Revenue Watch Institute, p. 3 available at: http://www.revenuewatch.org/images/RWI_Genasci_WB_Comments_032009.pdf (Last visited 20th January 2010) 

[22] Supra note 20 

[23] Gusy, Ch.: Parliaments and the Executive, Old Control Rights and New Control Context in Germany, in: Constitutionalism and Role of Governments, Ziegler, K. et al (ed.) (2007) 

[24] Ibid 

[25] Supra note 2 

[26] Ibid 

[27] Supra note 1 

[28] Supra note 10 

[29] Supra note 2 

[30] Eastman Band v. Canada (Federal Administrator), [1993] 1 F.C. 501 Available at: http://recueil.cmf.gc.ca/eng/1992/1993fca0421.html/1993fca0421.html.html (Last visited 26th January 2010) 

[31] Ibid 

[32] Supra note 17 

[33] Bradely, AW., Ziegler, K. and Baranger, D: Constitutionalism and Role of Parliament, in Constitutionalism and Role of Parliament, Ziegler, K. et al (ed.) (2007) 

[34] Ibid 

[35] Extensive use of MAs in development of Western Australian mining sector was commented as somewhat anomalous practice in Hillman, R: The Future Role of State Agreements in Western Australia, p. 293 

[36] Supra Note 2