Last week, the International Council on Mining and Metals (ICMM) announced that its 28 members had agreed a new commitment on contract transparency. This is an important step, both building on the progress made by the Extractive Industries Transparency Initiative (EITI), and responding to longstanding advocacy from civil society organizations around the world to “Disclose the Deal.”
The commitment also comes at an opportune moment, signaling one concrete way that governments and the private sector can improve accountability in the extractive industries. It comes against the backdrop of U.S. President Joe Biden’s first Summit for Democracy, the 2021 Open Government Partnership (OGP) Global Summit, and the proposal of an EU Corporate Sustainability Reporting Directive, which NRGI and other Publish What You Pay members argue should include a sector-specific sustainability standard for the extractive industries that would require contract transparency.  
 
Commenting on the ICMM commitment, NRGI president and CEO Suneeta Kaimal said: “Contract transparency is an essential way for companies and governments to be held accountable for the decisions made on behalf of a country’s citizens. With the energy transition spurring a round of new mineral investments around the world, this commitment sends a powerful signal to the rest of the mining industry and to ICMM’s peers in the oil and gas industry that responsible companies have nothing to fear from disclosing their contracts.”

What the commitment says and why it matters

The new commitment requires ICMM member companies to disclose all mineral development contracts granted or entered into from 1 January 2021. Members are also encouraged to disclose mineral development contracts granted or entered into before that date.
 
With the companies that make up the ICMM representing around a third of the global mining industry, this is a big deal. Moreover, the fact that CEOs are required to personally sign off on new member commitments like this suggests that those at the very top of the industry grappled with the debate on contract transparency and came out on the side of disclosure.
 
In terms of implications for wider uptake of contract transparency among extractive companies, the move brings the total number of oil, gas or mining companies with a public statement or policy on contract transparency up to at least 42. To put that number in context, the last comprehensive count made by Oxfam in 2018 was just 18.

Company statements of support for contract transparency have been vital to progress on this issue in recent years. They are important because they neutralize fears among government officials in producing countries that too much transparency might scare investors away. There are now at least 49 countries that have officially disclosed an extractive industry contract and 31 with policies that make publication mandatory. 
 
The commitment has been designed to bring ICMM policy in line with the EITI requirement on contract transparency, albeit with one notable caveat. While the EITI requirement applies to all contracts and licenses that are “granted, entered into or amended from 1 January 2021,” the ICMM requirement only applies to contracts that are “granted or entered into” from that date. As Oxfam has highlighted, omitting recently-amended contracts from the requirements means that citizens in producing countries could be left in the dark about new and important changes in the terms of existing contracts governing their national resources.  
 
One way that the commitment goes beyond other company statements and policies is in its focus on the actual disclosure of contract documents. Until now, only six extractive companies have committed to publishing contracts: Freeport-McMoRan, Glencore, Kosmos Energy, Newmont, Rio Tinto and Tullow. (Tellingly, four of these were ICMM members.) With the ICMM announcement, this number now climbs to 30.  
 
As they now look to implement the policy, ICMM companies have just a few good practice examples to draw from. Only five companies to date have proactively published contracts or included links to published contracts in company reporting: BP, Kosmos, Orano Mining, Rio Tinto and South32. (Our contract disclosure tracker includes links to each of these disclosures.)
 
While each of these approaches is noteworthy, Orano Mining uniquely lists any documents that are not public, in addition to those that are—a practice that helps citizens map the full universe of contracts, which is important information lacking in many contexts where contracts are kept secret. Kosmos also deserves a mention for its company policy to publish contracts as part of filings to the U.S. SEC and its helpful contract summaries highlighting important information that can be used for contract modelling.

The disclosures we can expect and why civil society action is essential

ICMM members collectively operate more than 650 assets in over 50 countries. If each of them follows the spirit of the commitment, not just publishing what they are required to, but also publishing the documents they are encouraged to make public, we would see a highly consequential wave of new disclosures. It would reach beyond EITI countries where the contract disclosure debate is advanced, to jurisdictions, like Russia, Chile and China, where secrecy around mining contracts has until now been standard practice.
 
To ensure that such far-reaching disclosures actually happen, citizens and civil society must do their part to hold ICMM members to their promises. Without external pressure, many companies will do the bare minimum—only releasing the handful of contracts required (those agreed after 1 January 2021). Some companies may also take advantage of loopholes in the commitment to justify the decision to keep further contracts secret.  
 
One potential such loophole was opened by a caveat in the commitment that joint venture companies that are majority owned by ICMM members are only encouraged to disclose contracts. Given that it is common practice to incorporate mining projects as joint ventures in host countries, disclosure will not actually be required for many mines.
 
Another loophole relates to a separate caveat that member companies do not have to publish where governments prohibit disclosure with a law or regulation. The good news is that in these situations, ICMM members have committed to encourage governments to provide consent. The challenge is confirming whether companies actually do this. But civil society actors can help by publicizing the ICMM policy, and inviting companies to speak publicly about their commitment as Total (now Total Energies) did in this interview.
 
Looking to the future, civil society organizations should mark 31 August 2022 in their diaries. That is the date (12 months after the commitment was approved) by which ICMM members must comply with the commitment. If there are any companies that have not disclosed by this date, under ICMM’s “conform-or-explain policy” they must publicly explain the reasons why they cannot. Again, civil society scrutiny will be essential to ensure that only the companies with reasonable grounds for non-disclosure are permitted to take this route.
 
The new ICMM commitment shows that the mining industry has never been more aligned with civil society actors on the importance of contract transparency. Now, as companies move to implement their commitments, civil society scrutiny will be essential to make disclosure a success.

How does the legal framework contribute to gender equity in the extractive sector? This was a driving question for joint research by NRGI and the World Resources Institute (WRI), leading to the publication of Gender and Extractive Governance: Lessons from Existing Legal and Policy Frameworks.

That research revealed that governments are influencing women’s involvement in the extractive industries and the benefits they receive—in both positive and negative ways—through provisions in their national laws, regulations, policies and guidelines. In this blog, I build on that important work by showing that governments and companies are also writing gender provisions into the contracts they agree with each other.

This is yet another reason why extractive industry contracts must be made public. With U.S. President Biden’s Summit for Democracy and the 2021 OGP Summit not far off, government reformers and their civil society counterparts should know that a commitment to resource contracts transparency can support gender goals in addition to improved governance of the extractive industries.

Gender provisions in extractive contracts

To explore the ways that governments and companies are using resource contracts to make rules on gender related issues, I searched for the words “gender”, “women” and “sex” on ResourceContracts.org—the world’s largest repository of publicly available oil, gas, and mining contracts.

The search returned over 200 documents with at least one of the search terms (roughly 10 percent of all the documents in the repository). While more research would be required to determine exactly how many of these actually point to gender equity provisions rather than mere incidental uses of the search terms, I was able to find at least four different types of clauses that sought to address gender issues. These covered: inclusion in consultation activities; protection from workplace discrimination; fairness in local content policies; and gender in site security. Examples of typical clauses for each of these general areas are provided in the table below.

Considerations around using contracts for gender provisions

There is some debate on whether using contracts to lay out obligations on issues like gender is a good idea. On the one hand, contract negotiation processes provide governments and companies an important opportunity to fill in gaps where legislation is insufficiently detailed; or to make rules for unusual oil, gas and mining projects that might not have been foreseen by existing laws (often the case after a big find). Given the pace of most legislative processes, and the wide-ranging interests of many legislators, contract negotiation processes can be faster and more reliable ways to lay down rules for specific issues.

On the other hand, excessive rulemaking by contract can undermine the role that the legislature and other democratic institutions play in the development and oversight of the law. In many instances, this accountability deficit is compounded because, unlike other parts of the legal framework, it is relatively common for resource contracts to be kept secret. As a consequence, citizens affected by contractual provisions—in this case women—may not be aware of rights or protections they are entitled to. Moreover, in instances where contractual terms are ineffective or negatively impact women, secrecy makes it hard to detect shortcomings, let alone work to address them.

Secrecy in the legal framework

Gender advocates should be asking for contracts

The movement for contract transparency in the extractive industries, most recently anchored by the global Publish What You Pay movement’s #DiscloseTheDeal campaign, has made significant gains. In 2019, EITI made it a requirement for the 50+ countries implementing the EITI Standard to disclose all contracts or licenses granted, entered into or amended from 1 January 2021. There are now 49 countries that have officially disclosed at least one extractive industry contract and 31 with policies in place making publication mandatory. 

But, despite these advances, there is still a long way to go. In many jurisdictions, including Egypt, Indonesia and Nigeria, the publication of resource contracts happens only rarely, if at all. In many more, disclosures are partial or incomplete. In these countries, it is impossible to know whether gender provisions are hidden in contracts, let alone determine whether they need to be changed or better enforced. This is why gender reformers should team up with their colleagues working on extractives transparency to advocate for contract disclosures.

Natural resource governance is changing rapidly in the pandemic era and as the need to transition to more sustainable energy sources becomes ever more urgent. Yet humans still rely on the extraction of non-renewable resources. The contracts which govern extraction have significant implications for a country’s economic growth, development, environment, and communities; the stakes for citizens are high. Government officials must make well-informed decisions that reflect the interests and concerns of different stakeholders, and civil society actors need the tools to effectively oversee this process. 

High hopes around resource-funded development have been followed by failure to improve the quality of life for citizens in resource-rich countries. In some cases, resource extraction has engendered conflict and further economic and social disempowerment. Corruption, lack of accountability, mismanagement and poorly structured deals prevent citizens from receiving their due. For a long time, many of these contracts were hidden, although a new global norm means that over 40 governments now publish contracts, licenses and permits. The Natural Resource Governance Institute (NRGI) has worked to improve contract transparency in the sector, promoting greater transparency around investments in the extractive industries and facilitating a better understanding of the contracts that govern them.

To help countries secure better deals when negotiating extractive contracts, NRGI, in partnership with the Columbia Center on Sustainable Investment (CCSI) and SDG Academy, and with the support of CONNEX Support Unit, is launching a three-week online course at no cost to learners. Through this course, participants will learn about the challenges governments face as they aim to negotiate strong contracts, and the strategies that governments can use to address these and increase the chances of reaching a good deal. The course will also cover the importance of disclosing a negotiated agreement and making it publicly available to enable more transparency and accountability in the oil, gas and mining sectors. The “mini” massive open online course (MOOC) will lay out the various stages of planning and preparation for large-scale investment, including how to negotiate the main investment contracts, and how to monitor and manage the implementation of the investment.

Online self-paced courses offer more potential than ever before as they can reach thousands of people across the globe, particularly those in developing countries with limited access to learning opportunities exacerbated by extended travel restrictions during the coronavirus pandemic. NRGI online offerings seeks to address this.

Building on our existing online learning resources, the “Getting a Good Deal: Negotiating Extractive Industry Contracts”, will contribute to strengthening the technical capacity of multiple stakeholders interested in the role of extractive industry contracts and how to optimize contract negotiations. This short self-paced course complements our MOOC “Natural Resources for Sustainable Development: The Fundamentals of Oil, Gas and Mining Governance”, which offers a holistic look at the role of extractives in sustainable development.

Among its three modules, the course covers the legal framework and roles of contracts and related challenges, the role of model contracts, what government officials need to know before negotiating a contract, how to assemble a team and choosing a strategy for negotiations, researching contracts using ResourceContracts.org, the negotiation moment, and how to implement a contract after a negotiation.

Six leading experts on contract negotiation in the extractive sector will present the three modules:

• Solongoo Bayarsaikhan, deputy chief at the Cabinet Secretariat, Government of Mongolia
• Alberto Reyes, former vice-minister of hydrocarbons, Government of the Dominican Republic
• Nicola Woodroffe, senior legal analyst, NRGI
• Zorigt Dashdorj, former minister of mineral resources and energy, Government of Mongolia
• Tehtena Mebratu-Tsegaye, senior legal researcher, Columbia Center on Sustainable Investment
• Herbert P. M’cleod, country director for Sierra Leone and Liberia, International Growth Centre

The course is offered in English and requires between three to six hours of commitment per week. The self-paced format allows participants to learn on their own terms by watching the videos and doing the exercises at their own convenience, thus avoiding scheduling issues.

Sign up for the course.

In an attempt to raise capital in difficult times, Ghanaian officials have embarked on a plan to leverage the country’s gold royalties in what the government has called an “innovative financing solution.” Under the plan, Ghana will assign a significant portion of its future gold mining royalties to an offshore company it has created in return for cash up front (estimated at approximately USD 500 million). The government plans to raise the money by listing the company on the London and Ghana stock exchanges while retaining majority ownership. But the news has raised alarm among civil society organizations. The largest opposition party has promised to repudiate the deal should it win the elections later this year, while the special prosecutor has called for a halt to the plans until completion of a corruption risk assessment.

Despite the current outcry, the plan has been in the works since 2018 with the passage of the Minerals Income Investment Fund Act. The act established a corporate government entity called the Minerals Income Investment Fund. The fund has the right to receive and invest mineral royalties and other related income that Ghana receives from mining companies. Pursuant to the act, the fund created a royalty company called Agyapa Royalties Limited (Agyapa) in Jersey. Under a series of complex agreements approved by parliament in August, the fund has allocated the rights to just over 75 percent of royalties from several gold mining leases to Agyapa’s wholly owned Ghana subsidiary, ARG Royalties Ghana Limited (ARG) for $1 billion. These leases represent most of Ghana’s current gold production. The fund has assigned this money to Agyapa as consideration for Agyapa’s shares. The fund plans to then raise capital by selling 49 percent of these shares on both the London and Ghana stock exchanges in an initial public offering (IPO).

Structure of Ghana's Agyapa deal

The government has touted the deal as a means to raise non-debt funding for development while dismissing suggestions that this move is driven by desperation. Like so many others, though, Ghana’s economy is in dire straits amid the pandemic.

While governments in richer countries have responded to the economic crisis with large spending programs and plentiful credit to businesses, Ghana’s options are more limited. Its budget has been under stress for some time, dragged down by immense debt (nearly 70 percent of GDP). The government had borrowed, in part, in anticipation of growing petroleum revenues (which reached over 10 percent of budget revenues last year), but is now finding it increasingly difficult to repay after the oil price collapse. Conventional credit is becoming increasingly expensive to raise.

Ghana has experimented with unconventional borrowing in the past, including taking multiple resource-backed loans in exchange for bauxite, cocoa and oil cargoes. It also collateralized portions of revenue from value-added tax to fund an education trust fund in 2018.

But gold prices have soared during the crisis, with prices exceeding $2,000 per ounce in August. The government has indicated it is keen to capitalize on this moment to fund infrastructure and human capital development without incurring repayment obligations or interest payments.

The Minerals Income Investment Fund Act may lay the groundwork for creative solutions to Ghana’s economic needs. However, the deal at hand raises a number of concerns as to whether the terms represent the best deal for Ghana, even under present circumstances. Government officials may wish to:

1. Consider reducing the scope of the agreement

Given the novel arrangement, the government might have chosen to start small. Instead, the deal is expansive in scope and open-ended (a concern initially raised by Ghana’s attorney general). The government will allocate 75.6 percent of royalties from 16 areas under production or development. (Together these currently comprise 48 mining leases.) Based on our research, these mining leases essentially cover all of Ghana’s current industrial gold production. The deal also includes prospecting licenses and any mining leases that may be later granted in the areas covered by these prospecting licenses. This means the volume of gold production involved in the deal is as yet unknown. The duration of the arrangements is equally indeterminate. The arrangements would apply until the last of the mining leases has expired or been terminated without any further extension or renewal. The deal could therefore endure for decades.

While the government has pointed to private-sector precedents, commodity-backed sovereign financing more often takes the form of resource-backed loans. As a point of comparison, typical resource-backed loan agreements studied by NRGI set out either the total volume or total value of resources and interest to be repaid. This makes their valuation much more straightforward than in this case. The Agapya arrangement runs the risk of being mispriced/undervalued by both the government and investors. Moreover, by offering as much as 49 percent in the IPO, the government also loses the potential benefit of selling additional shares later at a higher price while retaining majority ownership.

A deal with a more limited scope would be less risky for Ghana.

2. Consider safeguards against the risk of undervaluation

Some analysts have argued that the $1 billion valuation put forward by government is too low. At current gold prices, Agyapa may annually receive $150 to $200 million (our estimate) in revenues net of administrative fees, for many years to come. Depending on the market’s assumptions on both price and volume of future gold production, there is indeed potential that investors value this deal at a much higher price. In a traditional IPO, the offering price is set by investment banks (the underwriters) based on the amount of money the company wants to raise and a gauging of investor interest. If the actual price at which the shares start to trade on the open market is higher than the offering price, the profits accrue to IPO investors (mostly large institutional investors or clients of the investment banks). While the government’s shares would also appreciate in value, the government would only realize this gain by selling additional shares and further reducing its level of ownership. Given the uncertainties, Ghanaian officials should consider an approach that might better enable the government to capture the market-determined value of the shares. This might be done through a Dutch auction IPO or other mechanism, though such other approaches also come with their own risks. The government should therefore explain how the approach it chooses best allows it to capture the true market value of the shares.

3. Disclose assumptions underlying the valuation of the deal

The price at which Agyapa shares are ultimately sold will be closely watched. But the basis for evaluating the deal should not be whether the $1 billion valuation is ultimately mispriced or not. Rather, the key financial question is whether the capital raised through these means is ultimately any cheaper than other forms of available financing.

One way to compare would be to calculate the internal rate of return (IRR) from the stream of forgone royalties. Analysts could then readily compare that figure with the interest rate the government pays on conventional loans to assess value for money. If the IRR is much higher than the interest rate(s) the government is paying, this would indicate the deal is actually more expensive for the government than conventional loans. No one can know this figure for sure until the deal ends (i.e., once royalties are no longer being paid out to Agyapa). But the government should disclose its own modelling and reveal what interest rate or IRR it has used in its current valuation.

4. Protect the right to adjust fiscal terms

A stability clause included in at least one version of the royalties investment agreement prevents changes to the royalty rate that would have a “material adverse effect” on ARG (since investors would be relying on the royalty stream). For possibly decades to come, this clause would limit the government’s ability to reduce royalty rates for the mining leases included in the agreement, even if such a reduction would, for example, encourage companies to maintain gold production in times of financial difficulty. Meanwhile, Ghana’s mining act caps stability agreements with mining companies at 15 years.

The agreement caps the royalty rates at a rate specified in the agreement for each mining lease. Presumably this means the government could raise the royalty rate, but Agyapa would not be entitled to royalties above the agreed rates. At the very least, the agreement should specify that the government may increase fiscal terms but that Agyapa is not entitled to benefit from any increases above the specified rate, for the avoidance of doubt.

5. Consider including anti-dilution provisions and a dividend policy to preserve influence over Agyapa

The government of Ghana has asserted that it is not mortgaging future revenues for a lump sum of cash today. Per the government, as 51 percent shareholder the Minerals Income Investment Fund will hold two seats on the board of Agyapa, will exercise its right to vote for the other directors, and will receive a majority of the future dividends. However, an agreement establishing the relationship between the fund and Agyapa includes several clauses that may limit the fund’s (and therefore the Ghanaian government’s) future control over Agyapa’s decisions. These clauses include commitments by the fund and the government to not use voting rights to prevent Agyapa from making decisions for the benefit of the shareholders of the company as a whole or in a manner that would require the company to make decisions solely for the benefit of the fund or Ghana.

The Ghanaian government’s level of control over the board is also uncertain. Under the agreement the fund is able to appoint two directors as long as it maintains at least 30 percent equity in the company, but a majority of the directors must be independent. The fund is able to vote on independent directors as a shareholder. However, the relationship agreement prevents the fund from exercising its voting rights against a shareholder resolution to appoint any independent director and from using voting rights to remove any independent director appointed by the board. The agreement defines “independent director” using the definition set out in the U.K. Corporate Governance Code, which includes “represents a significant shareholder” as a factor likely to impede independence. It is also not clear that Ghana will be able to retain majority ownership should the board seek to raise additional equity financing in future to expand the business. The agreements scrutinized by parliament and the company’s articles of association do not contain any provisions that would prevent the company from reducing or “diluting” the fund’s percentage ownership by issuing additional shares.

In general, the relationship agreement is meant to establish Agyapa as an independent commercial entity, free to pursue its own profitability without considering Ghana’s budgetary needs. It is questionable whether Agyapa will be able to diversify its portfolio by acquiring new assets (a stated government ambition for the company) while at the same time distributing proceeds from the IPO to the fund and distributing meaningful dividends annually (at least at the outset) while the fund maintains 51 percent ownership in perpetuity.

Nevertheless, anti-dilution provisions (for example, requiring approval of the fund-appointed directors to issue additional shares) and a clear dividend policy might provide Ghana with some protection of its interests, although it might also affect Agyapa’s commerciality.

6. Consider the risk of severe knock-on effect on other loans

By pledging one of Ghana’s larger and more reliable revenue streams to Agyapa investors for years to come, the government will have fewer funds with which to repay Ghana’s existing domestic and international lenders. Investors closely watch the ratio of interest payments to government revenue, and Ghana is already performing quite poorly in this respect. (Half of its revenues now go toward interest payments, a key consideration given by S&P for its recent downgrade.)

If the Agyapa deal is successful, future governments may be tempted to raise further funds on the back of other sources of income. If lenders ultimately perceive that Ghana’s debt repayment capacity is deteriorating, they will demand higher interest when rolling over existing, much larger loans. In such a scenario, any benefit from the Agyapa deal may be outweighed by overall borrowing costs.

The government should clarify to the public how it plans to guard against such risks and ensure that additional costs for medium-term financing needs do not outweigh any short-term gains.

7. Ensure parliamentary oversight of use of mineral income flowing to the fund

The government has said that the proceeds from the deal will finance infrastructure and socioeconomic development. Plans floated include new health facilities, developing a university jewelry course, building a mineral refinery, and developing road networks in mining communities. However, it is unclear whether monies will be remitted to the treasury and spent through the normal budgetary process, subject to parliamentary oversight. The act only requires the fund to distribute the investment income it receives in accordance with an investment policy statement and any directives by the minister of finance. To ensure the most effective use of the capital raised, the government should clarify the process for investing the proceeds from the IPO and ensure necessary safeguards for spending it wisely.

8. Build consensus

Ghana’s present challenges warrant unconventional thinking. But the many open questions around the deal and the strong opposition in parliament and by civil society actors may actually deter investors and lead to a much poorer valuation than could otherwise be achieved with consensus. Further public consultations could create the opportunity to improve the structure of the Agyapa deal and close gaps in the act to ensure that the people of Ghana ultimately benefit from their resources. After all, under the constitution Ghana’s minerals are held in trust for the people of Ghana.