Title: and its Implications for Foreign Investment

Title: and its Implications for Foreign Investment
Title: The Imperatives of Beneficiation Law for Botswana’s Diamond Mining Industry
and its Implications for Foreign Investment
Dissertation Submitted In Partial Fulfilment of the Requirements For The
Degree of Master of Laws (LL.M) In International Trade and Investment Law in Africa
(UNIVERSITY OF PRETORIA)
BY: KUDA TSHIAMO
STUDENT NO: 14198551
SUPERVISOR: DR FEMI SOYEJU
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DECLARATION
I declare that this Mini-Dissertation which is hereby submitted for the award of Legum
Magister (LL.M) in International Trade and Investment Law in Africa at International
Development Law Unit, Centre for Human Rights, Faculty of Law, University of Pretoria, is
my original work and it has not been previously submitted for the award of a degree at this or
any other tertiary institution.
Signed
___________________
KUDA TSHIAMO
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ACKNOWLEDGEMENTS
This study would have been impossible without the input of many. I thank my God for
everything that I have become through this program. He has given me a new song, if I am to
pen down the wonderful works which He has done, they are more than can be numbered.
I would like to also extend my gratitude to ABSA Bank, South Africa for the scholarship,
covering both Pretoria, South Africa and Amsterdam, Netherlands. I will be forever grateful.
I would also like to honour my parents and friends who stood by me during this time. They
instilled in me great principles which carried me through the program.
Special thanks to my supervisor, Dr Femi Soyeju for believing in me and encouraging me
during the entire program to press on. I am highly indebted. Immeasurable gratitude to
Goemeone Mogomotsi, for being such a tremendous blessing during this entire period. From
day one he stood by me, encouraged me in every way he could, helped and inspired me to
become the best I could.
I am also grateful to my friend Joshua Wabwire, I trusted him to read each chapter I wrote
and was always on stand-by to heed to my call. Neither words nor gifts can express how
grateful I am. I am immensely thankful to Dr Mosoti, World Bank Counsel, for accepting to
guide me in this study. I am grateful for the honest, objective and valuable comments on this
study. Without his insights and correction, this paper would not be a complete success.
Special thanks also to Baker & McKenzie law firm in Indonesia, in particular, Mr Radman
Milan, for providing me with the English versions of the beneficiation legislation, I cannot
begin to explain how this contribution re-shaped my paper.
Special thanks to the Centre for Human Rights and IDLU for having us during the program.
Special gratitude to Angela Bukenya for always being there for us. Thank you to Francky
Lukanda Kapwadi, and Dr Dinokopila for their initial thoughts on this paper. To the
Amsterdam 3, Magalie Masamba, Kate Munuka and Abena Danso, you the best!!! Lastly, to
the LLM class of 2014, you guys are amazing.
„Because you have been my help, therefore in the shadow of your wings I rejoice!‟-Psalm
63:7
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ABSTRACT
The paper shall offer a vigorous debate on the opportunities and challenges of enactment of
Beneficiation Law. The term beneficiation has been used largely to mean downward linkages
and value addition to mineral resources for the benefit and full participation of the
communities in which the mineral resources are mined. The linkages and/ or interface
between beneficiation law and international investment protection will also be considered.
Here, the writer will endeavour to assess how such a law impacts on protection of foreign
investments.
The paper shall on a balance argue that the opportunities of enactment of this law far
outweighs the costs of coming up with same. In cementing this argument the paper shall draw
lessons and inspirations from South Africa’s beneficiation strategy and Indonesia which has
a successful story on full beneficiation law on mineral resources.
The paper will finally conclude by putting forward some recommendations.
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ABBREVIATIONS AND ACRONYMS
BBSEE: Broad-Based Socio-economic Empowerment Charter
BIDPA: Botswana Institute for Development Policy Analysis
CERDS: Charter of Economic Rights and Duties of States
CoW: Contracts of Work
DMR: Department of Mineral Resources
DTC: Diamond Trading Company (Botswana)
FET: Fair and Equitable Treatment
FPS: Full Protection and Security
HDSA: Historically Disadvantaged South Africans
ICSID: International Convention for Settlement of Investment Disputes
IPR: Smallholder Mining Permit
IUP: Mining Business Permit
IUPK: Special Mining Permit
MCMA: Minerals and Coal Mining Act
MFN: Most Favoured Nation
MMA: Mines and Minerals Act
MMWWR: Ministry of Minerals, Energy and Water resources
MPRDA: Minerals and Petroleum Resources Development Act
NT: National Treatment
WTO: World Trade Organisation
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Table of Contents
DECLARATION................................................................................................................................... 2
ACKNOWLEDGEMENTS ................................................................................................................. 3
ABSTRACT ........................................................................................................................................... 4
ABBREVIATIONS AND ACRONYMS ............................................................................................. 5
1.1Introduction .................................................................................................................................. 8
1.2 Problem statement ...................................................................................................................... 9
1.3 Research questions .................................................................................................................... 10
1.4 Thesis statement ........................................................................................................................ 11
1.5 Objectives................................................................................................................................... 11
1.6 Justification ............................................................................................................................... 11
1.7 Preliminary literature review .................................................................................................. 11
1.8 Proposed methodology.............................................................................................................. 12
1.9 Limitations to the study ............................................................................................................ 13
1.10 Overview of chapters .............................................................................................................. 13
CHAPTER 2 ........................................................................................................................................ 15
DIAMOND MINING INDUSTRY AND THE REGULATORY REGIME .................................. 15
2.1 Introduction ............................................................................................................................... 15
2.2 Botswana diamond discovery ................................................................................................... 15
2.3 Towards beneficiation .............................................................................................................. 16
2.4 Botswana’s beneficiation strategy and stage of beneficiation ............................................... 17
2.5 Legislative framework .............................................................................................................. 19
2.5.1 Mines and Minerals Act (MMA) and Regulations .......................................................... 19
2.5.2 Other diamond mining regulating Acts and regulations ................................................ 20
2.6 Conclusion ................................................................................................................................. 20
CHAPTER 3 ........................................................................................................................................ 21
BENEFICIATION IN DEPTH: OPPORTUNITIES AND CHALLENGES ................................ 21
3.1 Introduction ............................................................................................................................... 21
3.2 Beneficiation genesis ................................................................................................................. 21
3.3 What is beneficiation? .............................................................................................................. 22
3.3.1 Downstream beneficiation v side-stream beneficiation .................................................. 22
3.3.2 Downstream beneficiation ................................................................................................. 23
3.3.3 Stages of downstream beneficiation ................................................................................. 23
3.4 Opportunities and challenges explored ................................................................................... 24
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3.4.1 Opportunities...................................................................................................................... 24
3.4.2 Challenges ........................................................................................................................... 26
3.5 Conclusion ................................................................................................................................. 28
CHAPTER 4 ........................................................................................................................................ 29
THE INTERFACE BETWEEN BENEFICIATION LAW AND PROTECTION OF FOREIGN
INVESTMENTS ................................................................................................................................. 29
4.1 Introduction ............................................................................................................................... 29
4.2 Foreign investment defined ...................................................................................................... 29
4.3 The powers of states to regulate foreign investments ............................................................ 30
4.4 International minimum standards of protection of foreign investments ............................. 31
4.4.1 Protection of existing investments .................................................................................... 31
4.4.2 Protection of potential investments .................................................................................. 35
4.6 Conclusion ................................................................................................................................. 37
5.2 Lessons from South Africa ....................................................................................................... 39
5.2.1
The Mineral and Petroleum Resources Development Act of 2002 (MPRDA) ....... 40
5.2.2 The South African Mining Charter of 2004 (BBSEE) .................................................... 41
5.2.3 The Diamonds Amendments Act ...................................................................................... 41
5.2.4 The Precious Metals Act .................................................................................................... 42
5.3 Lessons from Indonesia ............................................................................................................ 42
5.3.1 Background to the Indonesian mineral and mining law ................................................ 42
5.3.2 Analysis of the main features of the mining regulatory framework in Indonesia ........ 43
5.4 Conclusion ................................................................................................................................. 49
CHAPTER 6 ........................................................................................................................................ 51
CONCLUSIONS AND RECOMMENDATIONS ............................................................................ 51
6.1 Introduction ............................................................................................................................... 51
6.2 Summary of conclusions ........................................................................................................... 52
6.3 Recommendations ..................................................................................................................... 54
6.4 Overall conclusion ..................................................................................................................... 55
REFERENCES .......................................................................................................................................... 57
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CHAPTER 1
1.1Introduction
Diamonds are the most prized and highly valued of gemstones. Throughout history they have
been admired by royalty and worn as a symbol of strength, courage and invincibility. Over the
centuries the diamond acquired unique status as the ultimate gift of love, in myth and reality.
It is the hardest known substance yet has the simplest chemical composition, consisting of
crystallized carbon, the chemical element that is fundamental to all life.1
Botswana‟s diamonds are her pride and no wonder the mining sector is the pillar and tower of
the economy. The exploration and exploitation of her mineral resources has always been
instrumental towards economic development. Botswana is best known for her diamond
mines.2
All mineral rights in Botswana are vested in the state and it is the Minister of Minerals,
Energy and Water resources (MMEWR) who should ensure, in the public interest, that the
mineral resources of the Republic are investigated and exploited in the most efficient,
beneficial and timely manner.3 The Botswana legal framework for mining operations is
anchored on the Mines and Minerals Act (hereinafter “MMA”) of 1999. The MMA provides
for amongst others, mining licenses, retention licenses, prospecting and mineral permits.4
Botswana is the world's largest producer (in value) and exporter of diamonds, which
contribute about 30% to Gross Domestic Product (GDP).5 Foreign direct investment in
Botswana is concentrated in the mining sector.6 Mining remains the largest sector in the
economy, accounting for 20.3 percent of total output.7 Mining has contributed enormously to
the economic growth of Botswana, in terms of direct foreign exchange and government
revenues generated by diamond sales.8
1
Marijan Dundek, Diamonds quotes. http://www.notablequotes.com/d/diamonds_quotes.html, (accessed 16
September 2013).
2
Ministry of MMEWR, „Botswana Mineral Investment Promotion Report‟(2008) 3.
3
The Mines and Minerals Act of 1999 sec 3, Laws of Botswana.
4
Sections 13, 25, 37 and 52 of MMA.
5
Botswana Annex, SACU-Botswana, Trade Policy Review WT/TPR/S/222/BWA.
6
Bank of Botswana Annual Report (2009) 87.
7
Bank of Botswana Annual Report (2012) 65. http://www.bankofbotswana.bw/assets/uploaded/bob-ar-2012main.pdf (accessed 17 September 2013).
8
Available at DTC (Botswana) website. http://www.dtcbotswana.com/about_us.php (accessed 4 October 2013).
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The most notable investment is by Diamond Trading Company (DTC Botswana). DTC
Botswana is an equal shareholding (50/50) Joint Venture partnership between the
Government of the Republic of Botswana and De Beers Group.9 It is the world‟s largest and
most sophisticated rough diamond sorting and valuing operation.10 DTC Botswana sorts and
values Debswana Diamond Company‟s rough diamond production.11
1.2 Problem statement
The country‟s attention was recently focused on its parliament proceedings. Sometime in
February 2013, the Parliament engaged in a somewhat heated debate on the enactment of
beneficiation legislation. The motion was tabled by Member of Parliament Phillip
Makgalemele, requesting the government to enact beneficiation legislation for Botswana.
This motion was met with mixed feelings in the house.12 Other members of Parliament
believed that it was crucial to have such legislation in place, as it could help transform the
country‟s abundant minerals and other resources to a competitive advantage.13
The motion did not escape sharp and loud criticism from some of the members of Parliament
who lamented it would be disastrous to enact beneficiation legislation. Interestingly, the
Minister of Trade and Industry, Ms Makgato-Malesu argued that such legislation would scare
away investors who would not be interested in it.14 One would assume that she saw it as
tantamount to expropriation or at least likely to lead to some kind of interference in the
investors‟ rights. Consequently, the voting results were 19 for the motion, 23 against the
motion whilst one Minister abstained.15
This study seeks to explore and investigate the legislators‟ lack of enthusiasm, for creation of
beneficiation legislation which is deemed a vehicle instrumental to take the economy of
Botswana to greater heights. Beneficiation is often considered one of the options available to
countries seeking to take full advantage of their mineral wealth. In fact, the African Union
has a mining vision of February 2009, which vision is to have a knowledge-driven African
9
DTC (Botswana) (n 8 above).
DTC (Botswana) (n 8 above).
11
DTC (Botswana) (n 8 above).
12
„Beneficiation law may scare away investors‟ Ministry of Trade and Industry (Botswana) 18 February
2013.WWW.GOV.BW (accessed 20 August 2013).
13
Ministry of Trade and Industry (Botswana) website (n 12 as above).
14
Ministry of Trade and Industry (Botswana) website (n 12 as above).
15
Ministry of Trade and Industry (Botswana) website (n 12 as above).
10
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mining sector that catalyses and contributes to the broad-based growth and development of a
single African market through, amongst other things, beneficiation.16
Against this background, this investigation, attempts to make a case for the enactment of
beneficiation legislation in Botswana while anticipating the impacts and challenges it is likely
to have on Botswana‟s foreign investment. It will further investigate whether beneficiation
legislation could be equated to expropriation or some kind of interference with investors‟
rights and thus scare them away.
The principal question for interrogation is whether
beneficiation legislation is the best guarantee for local community benefits under Botswana‟s
regulatory regime for diamond mining, or it is just another flawed concept that will
undoubtedly scare investors away as some view it.
1.3 Research questions
The over-arching question this study will seek to answer is:
a) Whether beneficiation legislation is the best guarantee for local community
benefits under Botswana‟s regulatory regime for diamond mining, or it is just
another flawed concept that will undoubtedly scare investors away?
In answering this broad question, attempts will be made to answer the following subquestions:
b) What is the current legal environment of Botswana‟s diamond mining
industry?
c) What is beneficiation and the controversial debate surrounding it?
d) What are the likely implications the enactment of beneficiation legislation on
protection of foreign direct investments?
e) Are there any lessons to be learnt from South Africa and Indonesia to ensure
successful enactment of beneficiation legislation?
16
African Union Mining Vision (2009) 6.
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1.4 Thesis statement
This investigation attempts to make a case for the enactment of beneficiation legislation in
Botswana. Thus, there is a need to assess this law in the light of protection of foreign
investments. This assessment will eventually assist proffer practical recommendations for
Botswana‟s beneficiation legislation.
1.5 Objectives
To discuss how beneficiation legislation may impact foreign investments in Botswana. The
study would also attempt to demonstrate these impacts with aid of lessons from South Africa
and Indonesia and lastly, to offer necessary practical recommendations.
1.6 Justification
This study is not only relevant to the government of Botswana and Africa but also to the
international community. It will critically analyse the effects beneficiation legislation in the
diamond mining industry may have on protection of foreign investments in Botswana. It will
further attempt to foster confidence in the policy makers by providing a balanced debate on
the matter, and present a unique opportunity for them to re-think the enactment of
beneficiation legislation.
The study will also draw lessons from South Africa and Indonesia. Those jurisdictions are
developing countries like Botswana. South Africa is chosen due its almost similar economic
developments with Botswana. Indonesia is chosen because it has been successful in enacting
full beneficiation legislation. For the academia, the study will contribute to the on-going and
ever expanding debate on beneficiation law and promote assessment of the law in light of its
linkage to protection of foreign investments.
1.7 Preliminary literature review
A considerable body of literature exists concerning the notion of beneficiation. There is
much on the nature, scope and application of beneficiation legislation. This literature mainly
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exists in the form of journal articles, newspaper articles, conference and presentation papers.
Finding books on the subject matter appears to be challenging.
Research reveals that scholars are divided on the significance of beneficiation legislation.
Two different approaches exist on the issue. One approach comprises of those who argue that
beneficiation while superficially attractive, is an inherently flawed concept and a bad policy
paradigm.17 The other approach consists of those who see beneficiation as an emerging norm
relevant to international law.18 For instance conferences are constantly held in Africa to share
ideas on how to beneficiate African countries‟ solid minerals. The aim of such conferences is
to ensure that the participants acquire full understanding of opportunities to be derived from
domestic beneficiation of African solid minerals.19
The only challenge is that this literature does not address the issue whether beneficiation
legislation would be necessary for economies such as Botswana‟s nor does it offer insights on
its impact on foreign investment protection. Consequently, it remains to be found whether or
not beneficiation legislation is the best guarantee for local community benefits under
Botswana‟s regulatory regime for diamond mining and its likely impacts on foreign
investments.
1.8 Proposed methodology
This is a desk and library based study. It relies on both published and unpublished materials,
taking into account significant primary and secondary sources of information on the issue in
addressing the research questions. Various Acts of Parliament from different jurisdictions on
the subject matter will be consulted.
The secondary sources of information include, but not limited to, relevant journal articles,
newspaper reports and publications, as well as position papers written by law-firms. The
study relies also heavily on internet public sources. Speeches and government press releases
17
R Hausmann et al „Examining Beneficiation‟ (2007) Center for International Development, Harvard
University 1-25. http://www.cid.harvard.edu/southafrica (accessed 14 September 2013).
18
C Kabemba „Alternatives on Resource Trade and Access to Information in Africa: A response to EU Policy
on Raw Materials‟ (2012) Comhlámh Policy Report
19
On Ore Beneficiation Africa 17 – 18 March 2014 | Indaba Hotel & Conference Centre, Johannesburg,
Beneficiating to unlock value in Africa‟s iron ore deposits. http://www.immevents.com/mining-conference/ironore-beneficiation-africa/p14w01webpdf (accessed 10 February 2014).
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will also be considered. The study will adopt a descriptive, analytical and exploratory
approach. The aim is to build on the existing literature and on-going debate on beneficiation
legislation, particularly placing more emphasis on the impacts it is likely to have on
protection of foreign investments.
1.9 Limitations to the study
A lot has been written on beneficiation, however this only exist in the form of journal articles,
conference presentation papers, and newspaper publications. Besides, the mining industry is
also very sensitive, as a result obtaining some information proved to be a challenge.
1.10 Overview of chapters
a) Chapter 1
This chapter introduces the study. It further outlines the nature of the study,
significance, methodology and the literature review.
b) Chapter 2
This chapter provides a brief history on the Botswana diamond mining industry. It
also discusses and assesses the current legal regulatory framework of the diamond
mining sector.
c) Chapter 3
This chapter examines the concept of beneficiation in depth. In addition, it presents
both arguments for opportunities and challenges of Beneficiation legislation.
d) Chapter 4
This chapter explores the likely impacts of beneficiation legislation in Botswana with
regard to protection of existing and potential foreign investments.
e) Chapter 5
This chapter investigates whether or not there are lessons to be drawn from South
Africa and Indonesia which have gone a milestone in this area.
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f) Chapter 6
This chapter makes some concluding remarks for the study while at the same time
offering some recommendations.
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CHAPTER 2
DIAMOND MINING INDUSTRY AND THE REGULATORY REGIME
2.1 Introduction
This chapter gives a brief history of the diamonds mining sector and takes a look at the legal
environment for diamond mining industry in Botswana, before making the concluding
remarks.
Botswana has been said to be the „Switzerland of Africa,‟ mainly due to its diamonds
sector.20 The mining sector greatly contributes to the wealth of the country. 21 The economy is
thus highly anchored on this sector.22 It cannot be gainsaid that Botswana has one of the most
lucrative diamond mining sectors. She has been ranked as the greatest diamond producing
state in the world by value at 21% of global rough diamond production alone.23 Botswana is
home to two of the world‟s two largest diamond mines, Jwaneng and Orapa.24
Thus Botswana retains the best address in diamonds in Africa.25 It is not in dispute that the
diamond industry has translated Botswana economy into a middle-income nation and one of
the most dynamic economies in Africa.26 Diamond mining has fuelled much of its economic
expansion and currently accounts for 70-80% of export earnings.27
2.2 Botswana diamond discovery
The search of diamonds in Botswana began in the Tuli Block in 1955. 28 Diamonds were first
discovered in 1959 and the first kimberlites were discovered in 1967.29 The first mine, Orapa
mine was discovered in 1967.30 The Orapa pipe held a great potential and the approval was
20
„Diamond Exploration in Elephant Country‟ Botswana Diamond Plc 10 October 2011 4.
www.botswanadiamonds.co.uk.
21
European Commission „Country Level Evaluation Botswana‟ (December 2009) 11 Final Report Volume 1
Main Report Mining (in this sense not only of diamonds but copper and nickel).
22
European Commission Report (n 21 above) 11.
23
„All about Botswana‟, Pangolin Diamonds, Corp. http://www.pangolindiamondscorp.com/aboutbotswana.php (accessed 29 February 2014).
24
Pangolin Diamonds (n 23 above).
25
Botswana Diamond Plc Annual Report (2012) 11. www.botswanadiamonds.co.uk .
26
Plc Annual Report (n 25 above) 11.
27
Plc Annual Report (n 25 above) 11.
28
http://www.debswana.com/About%20Debswana/Pages/HistoryAndProfile.aspx.
29
Pangolin Diamonds Corp (n 23 above).
30
Debswana webpage (n 28 above).
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granted to the shareholders to develop it.31 A year after, two other small pipes were
discovered some 40 kilometres south-east of Orapa, near Letlhakane village.32
Formation of the De Beers Botswana Mining Company took place in 1969.33 This was a joint
venture between De Beers (85%) and the Botswana Government (15%).34 Orapa mine was
officially commissioned in 1971.35 When the Letlhakane mine was commissioned in 1975 the
shareholding of Botswana Government was 50%.36 In August 1982, after ten years of its
discovery, Jwaneng mine was officially opened.37
Damtshaa, commenced production in 2002.38 Lerala Mine commenced in 2008.39 B/K11 and
Karowe Mines started operation in 2011.40 The Ghaghoo Mine is scheduled to start
production in June 2014.41 Today a number of companies other than De Beers are found in
Botswana. For instance Botswana Diamond Company (BOD) discovered the newest
producing diamond mine in the world, the Karowe Diamond Mine. This mine is said to
produce exceptional stones and some very rare blue stones.42 According to the directors of
BOD more diamond mines are yet to be discovered in Botswana.43
2.3 Towards beneficiation
The initial position of De Beers on beneficiation and its shift thereafter, through its managing
directors is worth mentioning. Ralfe first opined Botswana diamonds should be polished
where they could yield more revenues, and that an attempt to beneficiate locally is only a
national folly and not an acknowledgement of its economic realities.44 This company has
always resisted beneficiation and as a result Batswana for a very long time have not benefited
from their wealth. De Beers‟ stance on beneficiation six years later was radically opposed to
its earlier statement. Penny stated:
31
Debswana webpage (n 28 above).
Debswana webpage (n 28 above).
33
L Daniels „Spotlight on Botswana‟ (2004) 31 Rough Diamond Review.
34
Daniels (n 33 above).
35
Debswana webpage (n 28 above).
36
Daniels (n 33 above) 31.
37
Daniels (n 33 above) 31.
38
Daniels (n 33 above) 31.
39
MC Brook „The Journey of Botswana‟s Diamonds‟ (2012) 7.
40
Brook (n 39 above) 7.
41
„Ghaghoo mine nears production after Gem Diamonds hits kimberlite‟ Sunday Standard 30 January 2014.
http://www.sundaystandard.info/article.php?NewsID=18978&GroupID=3
42
Botswana Diamond Plc „Botswana Diamond Fact Sheet‟ (6 June 2013) 2. www.botswanadiamonds.co.uk
(accessed 15 March 2014).
43
Botswana Diamond Plc (n 42 above).
44
DeBeers Managing Director interview in 2001, Even-Zohar (2007).
32
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For the African diamond producing countries, beneficiation is not optional, not a passing
whim motivated by political correctness, but an imperative, an absolutely essential and
critical part of their macroeconomic policy designed to uplift their economies to provide
education and jobs and healthcare for their people and to make poverty history.... We [De
Beers] don‟t embrace this out of misguided enthusiasm or altruism. No, we embrace it
because it makes good business sense and because it is the right thing to do.45
It is believed that Botswana‟s opportunity to fight for downstream linkages came in 2005
when the De Beers‟ mining licence expired and was due for renewal. 46 At that point, the
government had greater leverage and hence insisted that De Beers should assist Botswana to
come up with a diamond cutting and polishing industry.47 It was apparent that De Beers could
not evade undertaking some level of beneficiation at least. A contract which ensured the
cutting and polishing of diamond locally came into force.48 Diamond Trading Company
Botswana (DTCB) was established in 2006 thus replacing Botswana Diamond Valuing
Company (BDVC).49 The aim of this establishment was to make diamonds available for sale
in Botswana for local manufacturing.50
The headquarters of DTCB were moved from London to Botswana.51 In 2012 a state
diamond trading company was established.52 This state owned company sells diamonds
independently of the DTCB joint venture.
2.4 Botswana’s beneficiation strategy and stage of beneficiation
The Botswana„s stage of beneficiation can be distilled from the above discussion. Below are
diagrams showing the various stages of beneficiation in Botswana and as well as point out
which stages have been achieved and still to be achieved.
Figures 2.4.1- Source: Minister of MMEWR Hon. Kitso Mokaila presentation ‘Botswana’s Diamond
Mining Journey’ 18 March 2013.
45
John Helmer „ ALROSA Attacks African Diamond Beneficiation‟ http://johnhelmer.net/?p=289 (accessed 4
March 2014).
46
L Mbayi „Linkages in Botswana‟s Diamond Cutting and Polishing Industry‟ (March 2011) 21 MMCP
Discussion Paper No. 6.
47
Mbayi (n 46 above) 21.
48
Botswana Annex 1 „SACU Trade Review Policy‟ (2009) 107par 189 WT/TPR/222/BWA.
49
Botswana Annex 1(n 48 above) 107para 189.
50
Botswana Annex (n 48 above) 107.
51
This is now the biggest rough diamond sorting and valuation facility globally.
52
Brook (n 39 above) 13.
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2.5 Legislative framework
This section discusses and analyses the various pieces of legislation in the diamond mining
industry.
2.5.1 Mines and Minerals Act (MMA) and Regulations
All mineral rights in Botswana are vested in the state and it is the Minister of
MMEWR who should ensure, in the public interest, that the mineral resources of the
Republic are investigated and exploited in the most efficient, beneficial and timely
manner.53 The Botswana legal framework for mining operations is anchored on the
MMA. It creates an environment to obtain inter alia, mining licences, retention
licences, prospecting licences and mineral permits for small scale mining operations.54
Retention licences allow prospectors to defer mining of uneconomic deposits for up to
six years.55 Mining licences are issued only to Botswana-registered companies.
Licence applicants must show proof of technical competence and access to adequate
financial resources.56 Government participation in mining licences is negotiated on a
full participation basis.57
For purposes of beneficiation, only a few sections are worthy of highlighting and it
shall become more clearer why these have to be flagged in chapter five where South
African and Indonesian beneficiation through legislation experiences are discussed.
Section 3 is to the effect that the Minister shall ensure, in the public interest, that the
mineral resources of the Republic are investigated and exploited in the most efficient,
beneficial and timely manner. Section 12 provides for preference of Botswana
products in so far as purchase, construction and installation in the diamond operations
are concerned. A thorough perusal of the Act and its Regulations for provisions which
could be utilized to facilitate beneficiation dismally failed. Only the above sections
are relevant hence the need to look for lessons from other jurisdictions.
53
See generally the Mines and Minerals Act of 1999, Laws of Botswana.
Sections 13, 25, 37 and 52 (n 53 above).
55
Section 30 (n 53 above).
56
Botswana Annex (n 48 above) 106 para 184.
57
Brook (n 39 above) 5.
54
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2.5.2 Other diamond mining regulating Acts and regulations
2.5.2.1 Diamond Cutting Act58
The Diamond Cutting Act regulates the cutting, sawing, cleaving and polishing of
rough and uncut diamonds and provides for other such related matters. 59 Section 29
also provides for preference of Botswana as far as installation, purchasing and
construction of facilities is concerned.
2.5.2.2 Exports and Import of Rough Diamonds Regulations60
These deal with regulation of exportation and importation of rough diamonds in
Botswana. They place particular emphasis on the „Kimberly Process Certificate.‟
Importation and exportation of rough diamonds would not be possible without the
said certificate.
2.6 Conclusion
It is reiterated that Botswana is known to be the best diamond address in Africa and thus
commonly and loosely named the „Switzerland of Africa‟. Exploration of diamonds in
Botswana started around 1967. However, nothing much was done to explore them fully. This
can be partly attributed to the position formally adopted by De Beers as regards beneficiation.
As shown above, De Beers has always been opposed to value addition of diamonds locally. It
has always maintained that it was ideal that diamonds be cut and exported offshore. This
position has since changed, as at least 21 companies have been licensed to date for cutting
and polishing purposes.
Botswana‟s beneficiation strategy is also not ambitious, enough, for instance, the target by
2021 is to have increased the number of cutting factories and improve training and
development of the locals. What about diamond jewellery manufacturing and retailing?
Furthermore, thorough perusal of diamond mining legal framework was found to be shallow
and hence not pungent enough to advance full diamond beneficiation. The latter statement
will become clearer in chapter five. The next chapter gives an in-depth discussion of
beneficiation by providing a debate on arguments for and against beneficiation.
58
Chapter 66:04 of 1979 (Laws of Botswana).
See the preamble of the Act.
60
Statutory Instrument No. 24 of 2004, published 19 March 2004.
59
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CHAPTER 3
BENEFICIATION IN DEPTH: OPPORTUNITIES AND CHALLENGES
3.1 Introduction
In the previous chapter, a brief history of the diamonds mining sector was given and the legal
environment for diamond mining industry in Botswana was examined. The conclusion was
that Botswana‟s beneficiation strategy is not ambitious enough, that the legal framework that
under-gird the diamond mining industry is shallow and hence not pungent enough to advance
full diamond beneficiation.
In this chapter however, the objective is to examine the concept of beneficiation in depth. It
attempts to answer the question: what is beneficiation and the controversial debate
surrounding it? In so doing it sets off by providing a brief genesis of beneficiation which can
be traced to the Staples Thesis. It discusses the types of beneficiation and concludes by
providing arguments for and against beneficiation.
3.2 Beneficiation genesis
Beneficiation has its roots from the Staples Thesis. Staple Thesis is a theory asserting that
„the export of natural resources, or staples, from Canada to more advanced economies has a
pervasive impact on the economy as well as on the social and political systems.‟ 61 It was
formulated in the 1920s by economic historians HA Innis and WA Mackintosh.62 This thesis
has been neatly captured by Grynberg.63 He postulates that „the staples thesis or approach is
the basis of the contemporary debate on beneficiation and linkages between staples and the
manufacturing sector. Innis argued that countries tend to fall into a „staples trap‟ whereby
they would tend to fall back into the export of staples and that growth would occur, but not
economic transformation. Mackintosh argued that development spread through backward
linkages and that sustained transformation could occur in a staples economy.‟64
61
Canadian Encyclopedia. http://www.thecanadianencyclopedia.com/articles/staple-thesis (accessed 10
February 2014).
62
Canadian Encyclopedi (n 61 above).
63
R Grynberg „Some Like Them Rough: The future of Diamond Beneficiation in Botswana‟ (March 2013) 2
Working Paper No. 142, Botswana Institute for Development Policy Analysis (BIDPA). www.ecdpm.org/dp142
(accessed 14 January 2014).
64
Grynberg (n 63 above) 2.
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The work of Innis and Mackintosh lies at the very heart of much of the early economic
literature about African development and indeed much of the „Dependency Theory‟ literature
of the 1960‟s is based on these works and that the works of Professor Hirschman on linkages
in development have sparked the contemporary policy debate over beneficiation.65
3.3 What is beneficiation?
Hausmann et al, define beneficiation as „vertical relationships in production chains, known as
linkages which have had a profound impact on economic policy in developing countries,
geared towards stimulating structural transformation.‟66 They posit that „such policies have
been termed differently, such as „promoting downstream processing; completing value
chains; increasing value-added; and beneficiation, but they are all based on the same idea:
that it is a logical, natural progression for countries exporting raw materials to move into the
processing of such materials, and therefore policies encouraging that progression can
accelerate growth,‟ they observe.67
Beneficiation is defined in the South African Minerals and Mining Policy 1998 White paper
as meaning the „successive processes of adding value to raw materials from their extraction
through to the sale of finished products to consumers, covering a wide range of very different
activities. These include large-scale and capital-intensive operations like smelting and
technologically sophisticated refining as well as labour-intensive activities such as craft
jewellery.‟68 Beneficiation legislation would therefore facilitate and enable minerals to go
beyond just mere processing but allow value addition and downstream linkages.
3.3.1 Downstream beneficiation v side-stream beneficiation
Beneficiation can either be said to be downstream or side-stream. Downstream is more
common and mostly pursued by states than side-stream beneficiation. Side-stream
beneficiation refers to the spill over effects of downward beneficiation such as establishment
65
Grynberg (n 63 above) 2.
Hausmann et al (n 17 above) 2.
67
Hausmann et al (n 17 above) 2-7.
68
White Paper „A Minerals and Mining Policy for South Africa‟ (October 1998) 30.
http://www.polity.org.za/polity/govdocs/white_papers/minerals98.html (accessed 12 January 2014).
66
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of industries vital for the operation of full diamond production.69 This study is, however,
concerned primarily with downstream beneficiation.
3.3.2 Downstream beneficiation
Traditionally, downstream beneficiation has been regarded as being the most logical natural
progression for a mineral-rich country to leverage off its comparative advantage to attain
competitive advantage.70 Downstream beneficiation involves the transformation of raw
materials to finished products which would sell at a price higher compared to what the
unprocessed raw material would sell for.71 This is illustrated in the figure below.
3.3.3 Stages of downstream beneficiation
Figure 3.3.3.1- Source: Chamber of Mines of South Africa, GIBS Forum Presentation (22 May 2013)
69
R Baxter „Facilitating further Minerals Beneficiation in South Africa‟ (22 May 2013) 5 Presentation to GIBS
Forum.
http://www.bullion.org.za/documents/COM%20presentation%20on%20Beneficiation%2022%20May%202012
%20handout.pdf (accessed 14 March 2014).
70
Southern African Institute of Mining and Metallurgy (SAIMM) „The Rise of Resource Nationalism: A
Resurgence of State Control in an Era of Free Markets or the Legitimate Search for a New Equilibrium?‟
(February 2012) 274.
71
SAIMM (n 70 above) 274.
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Downstream beneficiation can be understood in four main stages as shown in the diagram
above.72 These are:

Stage 1 involves the process of mining and producing an ore or concentrate;

Stage 2 converts the concentrate into a bulk tonnage intermediate product;

Stage 3 transforms intermediate goods into a refined product for purchase by both
small and sophisticated industries; and

Stage 4 is the action of manufacturing a final product.73
3.4 Opportunities and challenges explored
3.4.1 Opportunities
It is axiomatic that beneficiation has advantages. Firstly, with each successive stage of
beneficiation, value is added.74 The South African White Paper (1998) noted that the
beneficiation policy would develop South Africa‟s mineral wealth to its full potential and to
the maximum benefit of the entire population.75 It has been established that this would be
achieved through the promotion of secondary and tertiary mineral-based industries aimed at
adding maximum value to raw materials.76
Beneficiation has the potential to increase of the ratio of beneficiation extent to mineral
production, and thereby increasing the export revenue, employment opportunities and
economic growth.77 This therefore means that the exports are of better quality and can be
competitive in the global market. It therefore facilitates economic diversification, expedites
progress to a knowledge based economy with specialist skills and creates opportunities for
new enterprise development resulting in poverty reduction.78
72
Deloitte „Positioning for Mineral Beneficiation Opportunity Knocks‟ (2011) 6. www.deloitte.com/ (accessed
15 August 2013).
73
SAIMM (n 70 above) 274.
74
IC Robinson & MA Van „The Role of the Domestic Market in Promoting the Beneficiation of Raw Materials
in South Africa‟ (April 1990) 2 Journal of The South African Institute of Mining and Metallurgy.
75
DMR Presentation „Mineral Beneficiation in South Africa‟ (26 Feb 2013).
http://www.pmg.org.za/report/20130226-mineral-beneficiation-south-africa-department-briefing (accessed 14
February 2014).
76
DMR presentation (n 75 as above).
77
Robinson & Van (n 74 above). This was distilled by the Department of Minerals Resources in the South
African beneficiation Strategy as one of its visions.
78
Robinson & Van (n 74 above) 2.
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Increased employment opportunities through beneficiation are more visible at the labourintensive fourth stage as shown in the diagram, at which fabricated articles are produced. 79 In
addition to the advantages of the value added and new jobs created, fabrication provides
much greater scope for product diversification, which facilitates the choice of products bestsuited to penetrate export markets.80
The Minerals Minister of Zimbabwe, Moses Mpofu, observed that polished diamonds sell far
more than rough diamonds, and that Zimbabwe was keen to increase the tax revenues it earns
from diamond sales.81 This goes on to cement the fact that at each stage of beneficiation,
value is added and hence transforming the mining industry„s comparative advantage to what
is usually deemed „competitive advantage‟.
Hausmann et al posit that proponents of beneficiation most often point out that physical
proximity to raw materials provides downstream processors with advantages due to freight
costs.82 They cite an example where raw cotton from Africa is shipped to Europe to be
processed when it could be processed locally.83 They argue that such an observation is more
convincing for mineral resources with higher transportation costs, such as logs.84 They add
that often-times transportation costs of local supply may be more secure as well as cheaper
and could also be more precisely matched to downstream producer needs.85
Deloitte team presents beneficiation law benefits in a simpler manner to comprehend. They
interestingly group them under a few headings. Firstly, they identify economic benefits, and
state that beneficiation could increase a ratio of beneficiation extent to mineral production
and increase export revenue, facilitate economic diversification, expedite progress towards a
knowledge based economy, create opportunities for new enterprise development and
contribute to creation of decent jobs and poverty alleviation. 86
Under the heading dubbed „potential job creation/sustainable employment‟, advantages are
stated as taking
advantage of governments GDP for employment creation, creation of
79
Robinson & Van (n 74 above) 2.
Robinson & Van (n 74 above) 2.
81
„New Zimbabwe Law to Require Diamond Beneficiation‟ The Israeli Diamond Industry Newpaper 11 March
2013.http://www.israelidiamond.co.il/english/news.aspx?boneid=918&objid=12692 (accessed 18 March 2014).
82
Hausmann et al „Examining Beneficiation‟ (May 2008) 5 CID Working Paper No. 162 Centre for
International Development.
83
Hausmann et al (n 82 above) 5.
84
Hausmann et al (n 82 above) 5.
85
Hausmann et al (n 82 above) 5.
86
DMR (n 75 above).
80
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sustainable employment through the creation of long term projects and increased
industrialisation will facilitate access to skills, increased expertise and improved
technology.87
With regard to „revenue potential‟ beneficiation could increase tax revenue for government
through business creation, increased integration benefits and also potential cost cutting in a
number of ways.88 In terms of „saving on import/export costs of beneficiated products‟ they
anticipate reduced transportation costs of raw materials, reduced costs and fees associated
with import and export and that this could reduce the delay costs associated with the lack of
infrastructure around import/export hubs.
3.4.2 Challenges
One must hasten to state that beneficiation is not without challenges, hence the observation
by some that it is not a panacea.89
Firstly, beneficiation requires high level skills. A warning has been raised that although
beneficiation is expected to create significant employment opportunities within the country,
substantial investments will have to be poured into developing the required skills and
expertise for the aforementioned job opportunities.90 Failure to build the required talent
pipeline could be deadly as it could result in depending on high-skilled expatriate labour.91
Hence the saying goes, „the success of establishing a local mineral beneficiation sector will
also depend on how well the nation is able to develop the required skills and talent pool'.92
Hausmann et al are very critical of beneficiation. Their view is that beneficiation, in the sense
of incentivizing the domestic processing of natural resources, is not a sensible policy. 93 They
87
Deloitte (n 72 above) 7.
Deloitte (n 72 above) 7.
89
MJ Morgan „Beneficiation -- the pros and cons: Is Africa giving away the value of its minerals by exporting
them unrefined?‟ (April 2013) 66 African Business, 01413 Issue 396.
http://web.b.ebscohost.com.proxy.uba.uva.nl:2048/ehost/detail?sid=7fc4abae-0d5e-43d4-b51fe549773f816e%40sessionmgr110&vid=5&hid=117&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=buh&
AN=87317182 (accessed 23 March 2014).
90
„Local Mineral Beneficiation to Present Challenges‟ Mining Weekly 9th December 2013
http://www.miningweekly.com/article/local-mineral-beneficiation-to-present-challenges-2013-12-09 (accessed
22 March 2014)
91
Mining Weekly (n 90 above).
92
Mining Weekly (n 90 above).
93
Hausmann et al „Reconfiguring Industrial Policy: A Framework with an Application to South Africa‟ (June
17-20 2008) 17. Conference Paper 2008 on Entrepreneurship and Innovation - Organizations, Institutions,
Systems and Regions Copenhagen, CBS, Denmark.
88
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argue that capabilities developed through mining can be exploited in other ways. 94 In a
nutshell, they see beneficiation as a nonsensical concept with a narrow focus as mineral
resources could be explored differently. However, they do not offer a concrete and
convincing explanation as to why beneficiation, as an option, should not be pursued.
It is argued that one of the questions countries pursuing beneficiation should have been
advised to ponder on is which markets will they sell their manufactured products to? 95 It is
further suggested that the world‟s mineral beneficiating companies are located in the
developed world where an established and mature market consumes the products that the
industry manufactures.96 The argument goes that as a result there will be limited regional
(sub-Saharan Africa) demand for the beneficiation industry‟s manufactured products, as the
country‟s mineral beneficiation sector may want access to these international markets to
sustain its growth objectives.97
A brief produced by the Centre for International Development at Harvard University on
beneficiation for the government of South Africa concluded that „beneficiation is a bad policy
paradigm and should be dropped from South Africa's development strategy‟. 98 While the
reports acknowledges that „the exporting of raw natural resources is a legacy of colonialism,
in which countries were precluded from developing their own processing capacities in order
to supply the motherland with cheap raw materials‟, it provides a „detailed evidence‟ that
countries do not experience export development downstream.99 The report, in essence, posits
that there should not be an upright presumption in favour of beneficiation and that each case
is to be considered on its merits.100
These results of the report further suggested that policies which enhance downstream
processing are misguided.101 A focus on beneficiation, the argument goes, is necessarily at
the expense of policies that would enable other potential sectors to emerge.102 Their findings
depict beneficiation as „a bad trade-off‟ as there are better opportunities which are more often
94
Hausmann et al (n 93 above) 17.
Mining Weekly (n 90 above).
96
Mining Weekly (n 90 above).
97
See (n 90 above). However, regional integration could be looked at for markets and with the African tripartite
regional integration underway, the future looks more appealing.
98
Morgan (n 89 above).
99
Morgan (n 89 above).
100
Morgan (n 89 above).
101
Hausmann et al (n 17 above) 5.
102
Hausmann et al (n 17 above) 5.
95
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„lateral‟ than downstream.103 They conclude that beneficiation is simply a bad policy
paradigm.104
Another flaw of the concept is that it may require more research and development and hence
this could be costly than not beneficiating.105
3.5 Conclusion
Beneficiation is about value addition to minerals to enhance their value. It has been shown
that beneficiation derives its roots in the Staples Thesis which was propounded by two great
scholars Innis and Mackintosh. In addition it flagged the fact that beneficiation can be
understood from a number of perspectives. It could be downstream or side-stream. This study
is concerned with downstream beneficiation.
Moreover, a vigorous debate as advanced by various scholars on this concept was presented.
There are those who see beneficiation as viable and to be pursued by countries which want to
translate their comparative advantage to competitive advantage. However, beneficiation is not
without wrinkles. Those against it argue that it is a bad policy paradigm which is not only
myopic but narrowly focused. They argue that those in pursuit of it tend to overlook other
policies which could be more profitable. The „other policies‟ contemplated by these scholars
are not mentioned with precision and it is interesting to note that there seem to be an
assumption that they are without downfalls. The discussion revealed that opportunities of
beneficiation far outweigh the challenges of coming up with same.
The next chapter will seek to unravel the interface between beneficiation legislation and
protection of foreign investments.
103
Hausmann et al (n 17 above) 5.
Hausmann et al (n 17 above) 5.
105
Deloitte (n 72 above) 7.
104
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CHAPTER 4
THE INTERFACE BETWEEN BENEFICIATION LAW AND PROTECTION OF
FOREIGN INVESTMENTS
4.1 Introduction
In chapter 3, the concept of beneficiation was explored and the controversial debate
surrounding it was interrogated. The origin of the concept was traced to the Staples Thesis
and the conclusion was that beneficiation is about value addition to minerals to enhance their
value. In addition, it was stated that beneficiation as a concept can be understood from two
perspectives: downstream or side-stream.
This chapter seeks to explore the interface between beneficiation law and protection of
foreign investments. It attempts to provide an answer to the question „what are the likely
impacts of enactment of beneficiation legislation on protection of foreign direct
investments?‟ In so doing, it attempts to strike a balance between the powers of the state to
regulate investments in its territory and affording foreign investments the required minimum
protection.
4.2 Foreign investment defined
The term investment has been attributed various meanings in different Bilateral Investment
Treaties (BITs). There is no definition of investment in the International Convention for
Settlement of Investment Disputes (ICSID). One is inclined to believe this was a deliberate
move to enable parties to an investment agreement to agree as to what would be deemed an
investment in their circumstances. However, there is consensus to the effect that the word
“investment” has an „inherent common meaning.‟106 The „salini test‟ is perhaps more
illustrative on this point. In this case, it was held that there would be an investment if four
elements are satisfied.107 These are, a contribution, certain duration, participation of risk
involved, and lastly, there must be economic development in the host state.108
106
Pantechniki v. Albania Award (30 July 2009) para 46.
Salini v. Morocco (23 July 2001).
108
Salini (n 107 above).
107
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Sornarajah defines foreign investment as “transfer of tangible and intangible assets from one
country to another for the purpose of use in that country to generate wealth under the total or
partial control of the owner of the assets.”109
4.3 The powers of states to regulate foreign investments
State sovereignty is a concept that is well accepted under international customary law. It is
not surprising therefore that states have continued to retain exclusive control and the power to
regulate the investments within their borders. The right of states to regulate foreign
investments has been reiterated in a number of international instruments. 110 States have the
right to control admission of foreign investors and investments under customary international
law.111 Article 2 of the Charter of Economic Rights and Duties of States (CERDS) provides
that states have the right to „regulate and exercise authority over foreign investment within its
national jurisdiction in accordance with its laws and regulations and in conformity with its
national objectives and priorities.‟112
The host state thus can employ controls necessary to derive the desired benefits from its
exclusive power over foreign investments in its territory thereby retaining its policy space.
The argument is that states should be allowed to regulate onshore foreign investments and
external encroachment of such would be interference with state sovereignty. This is better
explained in India‟s submission to the WTO, when it stated that „…developing countries,
therefore, need policy space so that they can determine for themselves how the process of
economic development can be speeded up and the welfare of their citizens enhanced. This
also includes the policy space to determine the manner in which investment shall be regulated
and channeled…‟113
It has been argued that regulation of investments from entry to exit is particularly seen to be
essential to developing countries, as such right lies with the host state.114
109
M Sornarajah The International Law on Foreign Investment (2010) 4Cambridge University Press, London.
See UN GA Res. 1803 (XVII) (1962), GA Res. 3281 (XXIX) (1974), GA Res. 3201 (1974).
111
Gerard Kreijen „The Definition of Investment and Aspects of Nationality Planning‟ (7 March 2014)
University of Amsterdam Guest lecture.
112
Article 2 CERDS 1964.
113
Submission by India to the WTO WGTI (October 2002).
114
Sornarajah (n 109 above) 276.
110
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4.4 International minimum standards of protection of foreign investments
Foreign investments can be protected in numerous ways within the host state. International
investment law requires that foreign investments should not be arbitrarily interfered with,
through amongst other things, legislation enactments. The right of the state to regulate
investments in their countries and the protection of foreign investments should always be
balanced. Below is a discussion of protection measures available to foreign investments both
existing and potential investments.
4.4.1 Protection of existing investments
4.4.1.1 Compensable expropriation
Gradual enactment of legislation detracting from foreign investments can be said to be
tantamount to creeping expropriation. Creeping expropriation is a form of indirect
expropriation. Indirect expropriation refers to „measures taken by a state the effect of
which is to deprive the investor of the use and benefit of his investment even though
he may retain nominal ownership of the respective rights.‟115 Creeping expropriation
has been defined as the „slow and incremental encroachment on one or more of the
ownership rights of a foreign investor that diminishes the value of its investment. The
legal title to the property remains vested in the foreign investor but the investor‟s
rights of use of the property are diminished as a result of the interference by the
state‟.116
Section 8 of the Constitution of the Republic of Botswana provides that expropriation
should be adopted for public purposes, in accordance with the applicable law and it
should be against compensation.117 It follows therefore that should beneficiation law
be found to have interfered with foreign investments, the state would be liable to give
prompt and adequate compensation. The Constitution and the BITs entered into by
Botswana allow foreign investors redress in the local courts should they feel
115
Middle East Cement Shipping and Handling Co. v. Egypt (2002) ICSID Case No. ARB/99/6 (2002) para.
107.
116
P Leon „Creeping Expropriation of Mining Investments: An African Perspective‟ (2009) Journal of Energy &
Natural 598 Resources Law vol 27 No 4.
117
Section 8 Constitution of Botswana 1966.
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aggrieved by the state‟s acts.118
International law is also clear that an injured
(investor) state is entitled to reparations for the internationally wrongful acts
committed against it.119
However, international law is not yet settled on the distinction between noncompensable regulations which are to be considered as falling within the purview of
the police or regulatory power of the state and thus permissible and on the other hand
measures that actually deprive foreign investors of their property rights and thus
unlawful and compensable.120 Beneficiation unlike nationalisation, does not seek to
take away foreign investments but to ensure mineral value addition onshore by
investors. It is highly unlikely that such a measure can be found to be interfering with
the rights of the investors.
4.4.1.2 Fair and Equitable Treatment (FET)
The origins of FET can be traced to the Havana Charter for International Trade
Organisation (ITO).121 In terms of the Havana Charter, Article 11 (2), foreign direct
investments in host countries are to be accorded FET.122 FET is a customary
international law standard and thus not prerogative of the host state.123 This is an
absolute and non-contingent standard of treatment.124 The standard is not without
problems. It has been accorded various interpretations by scholars and investment
tribunals. The bone of contention is whether „the standard of treatment required is
measured against the customary international law minimum standard, a broader
international law standard including other sources such as investment protection
obligations generally found in treaties and general principles or whether the standard
is an autonomous self-contained concept in treaties which do not explicitly link it to
international law.‟125 Nevertheless, this is a debate for another day.
118
See BIT between Botswana and China or Luxembourg.
Hungary v Slovakia (Gabcikovo-Nagymaros Project) (1997) ICJ Reports 7 para 152.
120
Saluka Investments BV v. Czech Republic (2006) Partial Award.
121
1948
122
This standard has been reiterated in numerous BITs, the 1985 MIGA Convention, Lome IV Convetion for the
ACP and the EEC.
123
Mondev International Ltd v. United States of America (11 October 2002) ICSID Case No.ARB(AF)/99/2.
124
OECD „Fair and Equitable Treatment Standard in International Investment Law‟ (September 2004) 2
Working Papers on International Investment Number 2004/3
125
OECD „Fair and Equitable Treatment Standard in International Investment Law‟ (2005).
119
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The standard is all host states are required under international customary law to
accord foreign investments FET protection. Lack of due diligence and due process,
including denial of justice, violation of legitimate expectations and arbitrariness are
elements which depict a violation of the FET standard.126 Some tribunals have
extended and broadened the standard further and thus found that lack of good faith
and transparency to be tantamount to FET standard violation.127
Consequently, the argument for enactment of beneficiation legislation in Botswana is
not to frustrate foreign investments. Clearly, Botswana has no reputation for such. In
any event foreign investments will be accorded the FET standard under international
customary law, or better still, under the various treaties or BITs entered into.
4.4.1.3 Full Protection and Security (FPS)
The host state is expected to provide full security and protection for foreign
investments. It is believed that this standard is firmly anchored in customary
international law.128 It is a well established principle of customary international law
that a violation of this standard results in invocation of the responsibility of the host
state.129 The host state‟s obligation is to ensure full protection of foreign investments
from adverse effects.130 Unlike FET, FPS is not absolute. The standard required of the
host state is not that of strict liability but exercise of due diligence. 131 Thus, the host
state is only required to take all measures necessary and reasonable in the
circumstances.132
Historically, FPS was limited to protection of the investor against physical
violence.133 This position has developed over the years. It is now believed that the
„duty of protection and security extends to providing a legal framework that offers
legal protection to investors.
Substantive provisions protecting investments and
appropriate procedures enabling investors to vindicate their rights are now envisaged
126
Sornarajah (n 109 above) 349-359.
Maffezini v. Kingdom of Spain (November 2000) ICSID Award No ARB/97/7.
128
Sornarajah (n 109above) 359
129
Sornarajah (n 109above) 359.
130
C Schreuer „Investments, International Protection‟ para52.
http://www.univie.ac.at/intlaw/wordpress/pdf/investments_Int_Protection.pdf
131
Schreuer ( n130 above) para 55.
132
Noble Ventures Incorporation v Romania (October 2005) ICSID Award para164.
133
Saluka (n 120 above).
127
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under FPS.‟134 The jurisprudence has developed to cover any unlawful infringement
of foreign investors‟ rights.135 Changes of legislation with the effect of substantially
interfering with foreign investments have also been brought under the purview of this
standard.136
From the foregoing, should enactment of beneficiation legislation be found to
substantially alter the rights or make their investments vulnerable, the investors would
have recourse against such violations.
4.4.1.4 Non-arbitrariness
The host state is further under an obligation not to exert foreign investments to
arbitrary measures. The Elettronika case held that a measure is arbitrary if it is done
with „willful disregard of due process of law, an act which shocks or at least surprises,
a sense of judicial proprietary‟.137 An arbitrary measure would therefore have to be
one which is despotic and derived from mere opinion and capricious.138
Surely, proportionate and reasonable measures cannot be said to be arbitrary. Should
the investors establish that enactment of beneficiation legislation is arbitrary and done
with wilful disregard of the law then the government of Botswana would have failed
in its responsibility to offer investors non-arbitrary environment.
4.4.1.5 Non-discrimination
Non-discrimination envisages two limbs, namely national treatment (NT) and Most
Favoured Nation (MFN). Non-discrimination is not limited to nationality. 139 Caselaw reveals that state conduct would be discriminatory if „similar cases are treated
differently and without reasonable justification.‟140
With respect to NT, the United States-Mexico Claims Commission held that „when
aliens are admitted into the host state they should be accorded the degree of protection
of life and property consistent with the standards of justice recognized by the law of
134
C Shreuer „Full Protection and Security‟ (2010) 10 Journal of International Disputes Settlement.
Azurix Corporation v Argentina Award (July 2006) para 406.
136
CME v Czech Republic (September 2001) Partial Award para 613.
137
Paragraph 128.
138
Siemens AG v Argentina Award (February 2007).
139
Campbell v. Zimbabwe (2008) SADC Tribunal Award.
140
Saluka (n 120 above).
135
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nations.‟141 In NT a comparison to be made is between the foreign investor and local
investors engaged in the same business.142 Discrimination will be found to exist if
these two investors are treated differently in like circumstances.143
The MFN is not an obligation for host states under customary international law.144
4.4.1.6 Diplomatic protection
Diplomatic protection is „the invocation by a state, through diplomatic action or other
means of peaceful dispute settlement, of the responsibility of another state for an
injury caused by an internationally wrongful act of that state to a natural or legal
person that is a national of the former state with a view to the implementation of such
responsibility.‟145
Diplomatic protection is premised on the notion that injury to nationals of one state is
basically an injury to that state and hence a state taking up the matter for its national is
actually asserting its own right.146 The disadvantage with this however, is that there is
no obligation on the part of the national state to take up the matter on behalf of its
injured national.
4.4.2 Protection of potential investments
In addition to the safeguards above, potential investors can firmly secure their investments in
a number of ways. Well drafted BITs which insist on having internationalized foreign
investment contracts to ensure substantial detachment from the whims and caprices of the
host state are desirable. For instance, dispute settlement is through a clause on independent
arbitration, choice of law and even investment insurance, should be pursued vigorously.
4.4.2.1 Internationalisation of investments agreements
Sornarajah postulates that placing an investment agreement on an immutable and
supranational system detached from the host state is vital for protection of foreign
141
1917-1926.
Sornarajah (n 109 above) 337.
143
Sornarajah (n 109 above) 337.
144
Schreuer (n 130) para 71.
145
Article 1 of the draft Articles on Diplomatic Protection, 2006.
146
Mavrommatis Palestine Concessions Case (1924) PCIJ Series No 2.
142
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investments.147 Such agreements tend to be more stable as the host state cannot
tamper with them.148 The popular belief is that internationalized contracts somehow
neutralize the ability of the host state to interfere with foreign investments. 149 Greater
protection is attained if foreign investments removed from the host state„s legislative
powers.
4.4.2.1.1. Independent arbitration
Strengthened arbitration clauses on BITs offer better safety valves. Settlement of
investment disputes should also be removed from the internal sphere of the host state.
The local courts tends to be biased towards the host state should the investment
dispute be placed before its judiciary. It would seem a neutral settlement mechanism
is to be sought. Independent arbitration can offer sufficient protection to foreign
investments. This argument is neatly articulated by Brower. He posits thus:
By and large, parties to international transactions choose to arbitrate eventual disputes
not because arbitration is simpler than litigation, not because it is cheaper, not
because it is „final and binding‟ and therefore substantially unreviewable, and not
because arbitrators may have greater relevant expertise than national judges, although
any of those factors may be of interest; they arbitrate simply because neither will
suffer its rights and obligations to be determined by the courts of the other party's
state of nationality.150
4.4.2.1.2 Choice of law clause
This is anchored on the principle of party autonomy, where parties are free to
determine which law is to govern their contracts. Contracts governed by some other
law other than that of the host state are advisable. Party autonomy gives the parties an
opportunity to adopt some neutral legal system to govern the investment contract.
This may bring about some stability in the investment agreement.
147
Sornarajah (n 109 above) 289.
Sornarajah (n 109 above) 289.
149
Sornarajah (n 109 above) 289.
150
C.N. Brower Introduction in International Arbitration in the 21 st Century (1994) (R.B. Lillich & C.N.
Brower eds.).
148
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4.4.2.1.3 Investment insurance
Outwards investments are usually exposed to more risks as opposed to when investors
invested in their countries. As a result, it is always prudent to take investment
insurance to cushion any risks that are likely to affect their investments offshore.
4.5 Striking the balance
States coming up with beneficiation regulations need to proceed cautiously lest they be found
to be interfering with investors‟ rights. They should always be aware not to substantially
encroach into foreign investments.
The primary question really is whether enactment of beneficiation legislation in Botswana
can be equated to creeping expropriation or any other unlawful interference with foreign
investments? Justice Brennan identified three factors which determine whether the foreign
investment is being interfered with.151 He states that one is to look at the governmental
actions; the economic impact of the regulation and the extent to which the regulation has
interfered with distinct investment-backed expectations.152 Nevertheless, sight is never lost
of the host state‟s right to regulate foreign investments and not to confuse this with indirect
expropriation.153
From the foregoing, one thing remains clear, beneficiation unlike nationalisation or
expropriation does not seek to infringe on foreign investments and as such should not be
equated to any of the latter measures. Indeed, enactment of beneficiation legislation may have
an effect on existing foreign investments. The sole impact is an obligation to do more by
beneficiating locally. For potential investors, this would mean „be prepared, the bar has been
raised higher.‟
4.6 Conclusion
This chapter examined the interface between beneficiation legislation and protection of
foreign investments. It established that a balance is to be struck between the powers of states
to regulate the foreign investments within its territories and protection of same. The power to
151
Penn Central Transportation Co. v New York City (1978) US Reports.
Penn Central Transportation Co. (n 151 above).
153
Renée Rose Levy de Levi v Republic of Peru (February 2014) ICSID Case No. ARB/10/17.
152
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regulate the foreign investments still lies with the host state. This power has been recognized
in a number of international instruments such as the CERDS and the General Assembly
Resolution 1803 (XVII) (1962) on permanent sovereignty over natural resources.
A discussion on cushioning foreign investments from arbitrary measures such as
expropriation and nationalisation ensued. The international minimum standards of protection
of foreign investments were laid down. The discussion of these standards was not in any way
an admission that enactment of beneficiation law could interfere with foreign investments. It
was merely to illustrate the fact that the investors‟ rights are secure, but should an
interpretation be reached, which is highly unlikely that beneficiation is tantamount to
creeping expropriation then investors still have recourse against the state.
As said earlier on in the study, Botswana does not have any foreign investment law and has
concluded only four BITs.154 She is thus highly dependent on its past dealings and track
records with foreign investments which are unimpeachable.155 Interviews and independent
surveys have always singled Botswana as one of the shining examples of Africa and
corroborate her adherence to the rule of law for contract and property rights protection.156
Consequently, any conclusion that beneficiation legislation is likely to scare away investors,
with due respect, is without basis.
The next chapter seeks to establish if there are any lessons to be learnt from South Africa and
Indonesia on enactment of beneficiation legislation.
154
Kluwer arbitration website. http://www.kluwerarbitration.com/.
Investment Policy Review Botswana (2003) 38 United Nations Conference on Trade and Development
Investment.
156
Investment review (n 155above) 38.
155
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CHAPTER 5
LESSONS FROM SOUTH AFRICA AND INDONESIA
5.1 Introduction
In the last chapter, the interface between beneficiation law and protection of foreign
investments was explored. It attempted to provide an answer to the question of the likely
impacts of enactment of beneficiation legislation on protection of foreign direct investment.
In pursuit of this objective, attempt was made to strike a balance between the powers of the
state to regulate investments in its territory and according foreign investments the required
minimum protection. It was argued that the power to regulate the foreign investments still lies
with the host state.
This chapter investigates whether or not there are any lessons to be learnt from South Africa
and Indonesia respectively. It further highlights and assesses the beneficiation regulatory
regime in these jurisdictions before offering concluding remarks.
5.2 Lessons from South Africa
The economic development in South Africa has always been possible due to its mining
industry.157 Mining remains at the heart of South Africa‟s economy, as a result it‟s a sector
that has always been prioritized.158 It is ranked fifth in the world, following China, USA,
Australia and Brazil, and one of the richest in terms of in-situ mineral resources which are
estimated at around US$2, 5 trillion, with more than a century remaining in terms of
exploitable life.159
South Africa is committed to promotion of downstream beneficiation.160 It has a beneficiation
strategy of 2011.161 The objective of this strategy is to transform the country‟s sheer
comparative advantage to a national competitive advantage through legislation.162 It identifies
157
SAIMM (n 70 above) 270.
SAIMM (n 70 above) 271.
159
P Leon „SA's Mining Industry in Decline: An analysis‟ (1 September 2010).
http://www.politicsweb.co.za/politicsweb/view/politicsweb/en/page71654/page71656?oid=196410&sn=Detail&
pid=71616 (accessed 23 March 2014).
160
SAIMM (n 70 above) 271.
161
South Africa„s Beneficiation Strategy (2011).
162
Beneficiation strategy (n 161 above) 6.
158
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ten strategic mineral commodities.163 In this regard, beneficiation can be said to be sector
specific as the strategy targets only a handful minerals.
Worth mentioning is the fact that the strategy is based on already existing legislations. 164
These incentives, policies and legislation are identified as instruments necessary as an
enabling environment for beneficiation.165 Some of these instruments include the Minerals
and Mining Policy for South Africa,166 the Minerals and Petroleum Resources Development
Act (MPRDA),167 the Broad-Based Socio-economic Empowerment Charter (BBSEE),168 the
Precious Metals Act169 and the Diamonds Second Amendment Act.170
A closer glance at and review of some of these instruments is warranted.
5.2.1 The Mineral and Petroleum Resources Development Act of 2002
(MPRDA)
This is Botswana‟s MMA equivalent. Section 3 of this Act can be equated to section 3
of Botswana‟s MMA, in that both acts require the Ministers to ensure sustainable
development of mineral resources.171 However, the MPRDA, unlike the MMA, goes
further than that. The MPRDA has a section dedicated to beneficiation, a provision
the MMA lacks. In fact, section 26 of this Act stipulates that the Minister may
prescribe ways promoting beneficiation in South Africa, acting on the advice of the
Board, if such a move would be economical.172 The Act provides that no external
beneficiation is to occur without a written notice and consultation with the
Minister.173
Through section 26 it has been possible to pursue beneficiation of minerals and
petroleum in South Africa. The South African government has been pushing for
further amendments to the Act for three years and this was finally achieved in March
163
Beneficiation strategy (n 161 above) 6.
SAIMM (n 70 above) 272.
165
Beneficiation strategy (n 161 above) 6.
166
1998.
167
Act 26 of 2002.
168
2004.
169
2005.
170
2005.
171
Section 3 MPRDA.
172
Section 26 (1)-(2) MPRDA.
173
Section 26 (3) MPRDA.
164
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2014.174 This places South Africa in a somewhat stronger position compared to
Botswana. A section 26 equivalent or better in the MMA would enable Botswana to
ensure beneficiation of its precious diamonds.
5.2.2 The South African Mining Charter of 2004 (BBSEE)
In terms of this Charter mining companies are to bind themselves to identify their
current levels of beneficiation and to further make it known to what stages of
beneficiation they can go.175 It would appear they are to agree to state to what extent
they are able and willing to take local beneficiation to.
The Charter makes it possible for these companies to offset the value of the level of
beneficiation achieved by the company against its Historically Disadvantaged South
Africans (HDSA) ownership commitments.176 The latter objective can be understood
by recourse to the objectives of the Charter. One of the objectives of this Charter is to
ensure that the HDSA participate in the nation‟s mineral resources wealth. As a result,
some level of beneficiation in these mining companies can be compromised and
allowed provided the HDSA are part of these companies. One thing remains clear, the
aim is to have South Africans participate in nation‟s mineral resources.
5.2.3 The Diamonds Amendments Act
The Diamonds Act of 1986 was amended in 2005. The aim behind the amendment
was to enhance access of rough diamonds for jewellery manufacturing locally, as well
as facilitate beneficiation of diamonds.177 Chapter II, Part 1 of the Amendment Act is
more illustrative in that it introduces South Africa‟s Diamond and Precious Metals
Regulator.178 According to the Act the Regulator is to ensure that the diamonds are
exploited and developed in a manner that is beneficial to the nation and also ensure
equitable access and local beneficiation promotion.179 The Regulator is also expected
174
D McKay „SA Parliament Approves MPRDA Amendments Miningmx 6 March 2014.
http://www.miningmx.com/page/news/markets/1640257-SA-parliament-approves-MPRDAamendments#.U0LoZ2bNtdg (accessed 27 March 2014).
175
Clause 4.8 BBSEE.
176
Clause 4.8 BBSEE.
177
DMR „Economics of Beneficiation in SA‟ (12 July 2013) http://www.dmr.gov.za/beneficiationeconomics.html (accessed 24 February 2014).
178
Section 3 (1).
179
Section 3 (1) (a)-(b).
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when evaluating applications of interested investors to ensure equitable access to and
local beneficiation of the diamonds.180 Also, introduced in the Act is the definition of
beneficiation, as the „polishing of diamond or the setting of a diamond in a tool in an
article or in jewellery‟.
Botswana does not have the equivalent Diamond Act. Instead the industry is regulated
by the MMA. It does however, have the Diamond Cutting and Polishing Act which is
incomparable to the South African Act in that none of the Botswana Acts mention
beneficiation in clear, concise and explicit terms let alone in an evasive manner.
5.2.4 The Precious Metals Act
The objective of this Act is to provide for the acquisition, possession, smelting,
refining, beneficiation, use and disposal of precious metals.181 Just like the Diamonds
Amendment Act it establishes and sets out the objects of the Regulator in the exact
same terms as the latter Act.182 It further provides for the issuance and renewal of
precious metal beneficiation license.183 This license is basically issued to those who
can display ability to beneficiate the precious metals. This position, also, compared to
Botswana legislation is progressive in that issuance of licenses is only made to those
with the ability to beneficiate locally.
5.3 Lessons from Indonesia
5.3.1 Background to the Indonesian mineral and mining law
Indonesia‟s mining system was traditionally based on Contracts of Work (CoW), established
in 1967.184 CoW is basically an agreement between the Indonesian government and the
investor company, which company should be incorporated in Indonesia.185 Such a contract
would set out the rights and obligations of the parties concerning mining operations.186 This
contract was specific, in the sense that it applied to a certain designated mining area, known
180
Section 5 (1) (a).
Act No.37 of 2005.
182
Section 2 (a) and (b).
183
Section 8 (1) (b).
184
Pwc „Mining in Indonesia: Investment and Taxation Guide‟ (April 2012) 33 4 th ed. www.pwc.com/id
(accessed 1 April 2014).
185
Pwc (n 184 as above).
186
Pwc (n 184 as above).
181
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as the contract area.187 The investor company had exclusive authority in the contract area,
responsible for the management and all mining activities in the area.188 Interestingly, the law
governing CoWs has over the time been agreed to be lex specialis in consonance with the
maxim lex specialis derogate legi generali.189 As a result if there was any conflict between
the provisions of the CoW and other laws or regulations, the CoW would prevail.190
The CoW system has since been abolished and replaced with the Minerals and Coal Mining
Act (MCMA).191 The MCMA is now the primary text regarding mineral and coal mining in
Indonesia. Consideration C of this Act recapitulates Indonesian position, namely, that in light
of national and international developments, CoWs are now irrelevant, but regulations and
laws to ensure maximum yield, sustainable development are needed.192 This Act is
supplemented by a number of regulations and these also form part of the discussion below.
5.3.2 Analysis of the main features of the mining regulatory framework in Indonesia
5.3.2.1 The MCMA and its regulations
5.3.2.1.1. CoWs replaced
First of all the introduction of the MCMA replaced the previous system of CoWs as
captured by consideration C of the Act. This effectively revoked the law of 1967 and
all its supplementary regulations on CoWs.193
5.3.2.1.2 Status of CoWs
The Act provides that despite change of laws the CoWs shall remain in place and only
come to an end on their expiry date.194 These CoWs are to be subjected to the new law
187
Pwc (n 184 as above).
Pwc (n 184 as above).
189
H Juwana „Amending Contracts of Work: Rectifying Past Misconstruals‟ The Jarkata Post 19 March 2014.
http://www.thejakartapost.com/news/2014/03/19/amending-contracts-work-rectifying-past-misconstruals.html
190
Juwana (n 189 above).
191
2009.
192
Consideration C MCMA.
193
Section 173 MCMA.
194
Sections 169 (a) and 172 MCMA.
188
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after a year of coming into effect.195 Many of the CoWs are being renegotiated to
ensure that they align to the beneficiation requirements. Many companies have shown
willingness to renegotiate their contracts.196 The law further provides aid on how
these companies may transform, for instance the law makes it possible for investor
under CoW to start beneficiating or to cooperate with other companies once the
transition period has lapsed to attain the minimum beneficiation requirements.197
5.3.2.1.3 New forms of mining businesses
In terms of Article 34 of the MCMA mining businesses are classed into two, namely,
mineral mining and coal mining. These mining businesses can take the form of the
Mining Business Permit (IUP), Smallholder Mining Permit (IPR) or the Special
Mining Permit (IUPK).198
forms.
199
The IUP and IUPK licenses come in two different
One may be for exploration purposes, general inspection and feasibility
study and the other for operation production.200 Investors can carry out these functions
in part or as a whole, which means it is possible to have two different investors
holding IUP licenses for the same contract area.201 Investors would have to secure any
of these licences to conduct any mining activities in Indonesia. They would then have
to comply with the minimum requirements which are attached to each of them.
Transition of the CoW into either of the abovementioned permits is provided for in
the law.202
5.3.2.1.4 Distinction between categories of metals
The law distinguishes between minerals which can and cannot be exported.203 The
first category comprises of certain minerals which can only be exported once certain
minimum requirements of processing have been met.204 These minerals are listed in
Annex I of the Trade Regulation, and these minerals may be exported without the
195
Section 169 (b) MCMA.
„Government concludes renegotiations with 25 miners‟ Jarkata Post 7 March 2014.
http://www.thejakartapost.com/news/2014/03/07/govt-concludes-renegotiations-with-25-miners.html
197
Article 12, Permen ESDM Regulation 01 of 2014.
198
Section 35 MCMA.
199
Article 36 (1) and 76 MCMA.
200
Article 36 (1) MCMA.
201
Article 36 (2) MCMA.
202
Article 112 (8) Government Regulation of the Republic Of Indonesia Number 1 Year 2014.
203
Articles 2 and 3 of Permenday (Trade Regulation) 04/2014.
204
Article 2 (n 203 as above).
196
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prior approval of the Trade Minister.205 Included in the first category are minerals
which they are to be exported after specific minimum processing requirements have
been met, the approval of the Trade Minister for each shipment is to be sought to
enable their exportation.206 These minerals are contained in Annex II of the Trade
Regulation. The second category comprises of those metals whose exportation is
totally prohibited.207 These minerals are contained in Annex III of the Trade
Regulation.
5.3.2.1.5 Onshore beneficiation obligations
The IUP and IUPK holders are required to increase value to the minerals explored.208
In addition, guidance on beneficiation is provided through government regulations.209
It would appear that flowing from the above discussion on categorization of minerals
that the law is such that no minerals are to leave Indonesia in pure raw form. There
are specific minimum requirements that should be satisfied before any minerals may
leave the country. The minimum requirements are progressive as beneficiation
requirements increase yearly.210 For instance, Copper which is an Annex II metal the
minimum requirement at the end of 2014 is 25%. By the end of 2015 beneficiation
expected of copper processing is 40% and by end of 2016 companies are expected to
beneficiate at 60%.
In fact, the law provides that as regard Annex II minerals they will only be exported
until 2017.211 The companies are to prepare for on-coming total export ban on Annex
II minerals as well. Category two is concerned with total beneficiation onshore. 212
This means minerals such as bauxite and nickel which are found in Annex III can
never be exported in raw form but must be processed to the last form. According to
the Finance Ministry Press Release the aim is to aid acceleration of local beneficiation
with construction of the processing and refining plant (smelter).213
205
Article 6 (1) (a) (n 203 as above).
Article 6 (1) (b) (n 203 above).
207
Article 2 (n 203 above).
208
Section 102 MCMA.
209
Section 103 MCMA.
210
Press release „Policy of Export Duty of Mineral Product‟ (13 January 2014) Ministry of Finance of the
Republic of Indonesia Secretary General Communication and Information Services Bureau.
211
Article 3 Permen ESDM Regulation 01 of 2014.
212
Annex III minerals.
213
Press Release (n 210 above).
206
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5.3.2.1.6 Non-transferability of shares
Transferability of ownership and /or shares to third parties in the holders of IUP and
IUPK is prohibited.214 Transferability is only possible through the Indonesian Stock
Exchange, albeit conditional upon certain stages of exploration having being
achieved.215 The other exception to non-transferability of ownership and/ or shares is
possible through the Minister provided such transfer does not go against the
legislation.216
It seems the Indonesian government has every area covered. With transfer of shares
prohibited Indonesia is able to avoid situations where company ownership alters
before the next expected stage of beneficiation. Should this be allowed to happen it
would work against the aim of beneficiation. This is so because the on-coming
shareholders will also be concerned with making money at exploration stage and
leaving, and nothing really would ever materialize.
5.3.2.1.7 Local content obligations
There is a further obligation on the IUP and IUPK holders to ensure priority is given
to locals in terms of employees and mining services generally. 217 They are to involve
local businessmen when carrying out the operational production.218 The government
has been accused of being adamant not to leave anything to chance in advancing local
beneficiation.219 It is being attacked for having a sweeping expansion on the definition
of mining services, such that even non-traditional services can be subsumed under
such a provision through the MoEMR Regulation 24 of 2012.220
214
Article 93(1) MCMA.
Article 93 (2) MCMA.
216
Article 93 (3) MCMA.
217
Article 106 MCMA.
218
Article 107 MCMA.
219
B Sullivan „Expanding the Concept of Mining Services Provider to Include Non-Traditional Mining Services
Providers: More Empire Building at MoEMR 1234‟ (April-may 2013) 1 Christian Teo Purwono & Partners
LLP.
http://news.mitraismining.com/Mining%20Regulations%20Documents/13WAS038%2003%20Coal%20Asia%2
0-%20Mining%20Industry%20Regulation%20in%20Indonesia%20-%20Mining%20Services%20%20Article.pdf (accessed 4 April 2014).
220
Sullivan (n 219 above).
215
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It is interesting how Indonesia is out to take every opportunity it has. Downstream
beneficiation always leads to spill-over effects in other sectors. Not only does it result
in mining industry boom but also boosts the services sector.
5.3.2.1.8 Community development obligations
Development and empowerment of communities where investors are based is also at
the heart of this Act. The IUP and IUPK holders are to come up with programs on
how to develop their various communities.221 Further guidance on issues of
development as required above is to be given from time to time by way of
government regulations.222 Mining companies have an obligation to improve the
livelihoods in their area of operation.
5.3.2.1.9 Divestment
The law provides for divestment of shares from foreign parties in a sequential
manner.223 The MCMA provides that shares from IUP and IUPK foreign holders
should resume being divested at least nine months after 5 years.224 Priority is to be
afforded the government, state owned company, regional government owned
company or a national private company.225 The divestment process is laid out in the
procedures for Divestment and Share pricing Changes to Investment in Mineral and
Coal Mining Business Regulation.226
This regulation provides for divestment is a progressive way such that on the tenth
year of production 51% of shares are locally owned.227 Companies are expected to
follow this divestment procedure to the letter. Failure to comply investors risks their
licenses being revoked or suspended.228
221
Article 108 MCMA.
Article 109 MCMA.
223
Article 112 MCMA.
224
Article 112 (1) MCMA.
225
Article 112 (1) MCMA.
226
MEMR 27 of 2013.
227
MEMR (n 226 above).
228
MEMR (n 226 above).
222
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5.3.2.1.10 Implementation of beneficiation
As aforesaid, section 103 of the MCMA provides that guidance as to how
beneficiation is to be carried out will be done through Government Regulations. One
such regulation is the ESDM Regulation concerning the increment added value of
mineral through the activities of processing and refining or smelting mineral. 229 The
law stipulates that IUP production operation and IUPK metal mineral production
holders should process, and/or refine or smelt certain metal mineral commodities
domestically.230 They are expected to do the same with regard to non-metal mineral
and rock mining commodities.231
Beneficiation of mineral mining commodity may be in three forms. 232 It may either be
processing or refining specific kinds of metal mineral mining commodity with its
associated minerals.233 Secondly, it may be processing of specific types of non-metal
mineral mining commodity.234 Lastly, it may be processing of specific types of Rock
mining commodity.235
Regulation 7 of 2012 further states that this required domestic beneficiation can be
achieved directly by the IUP and IUPK holders or through cooperation with license
holders same as theirs and this a requirement more particularly for processing and
refining or smelting.
In addition, the law is to the effect that in the event the IUP and IUPK operation
production holders are compelled to consider cooperation of other licence holders
then they should first seek approval of the Director General on behalf of the
Minister.236 The regulation further allows for these holders to engage in partnerships
with other entities in the event they are unable to meet domestic beneficiation on their
own.237 The use of the term „entities‟ tends to suggest this is different from the latter
instance where they are to collaborate with other license holders. This is cemented by
229
No 7 of 2012.
Article 7 (1) (n 229 above).
231
Article 7 (2) (n 229 above).
232
Article 3 of PerMen EDSM Regulation concerning Increase of Mineral Added Value through Mineral
Processing and Refining Activity Domestically.
233
Article 3 (1) (a) (n 232 above).
234
Article 3 (1) (b) (n 232 above).
235
Article 3 (1) (c) (n 232 above).
236
Article 8 (3) (n 229 above).
237
Article 9 (n 229 above).
230
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the fact that the envisaged partnership may be in the form of shares. 238 In this instance
as well, they are expected to seek the consent of the Director General on behalf of the
Minister.239
Moreover, in the event that both cooperation and partnership are not possible as
discussed above due to economic reasons the IUP and IUPK operation production
holders may consult the Director General.240 The Director General may after
conducting a feasibility study appoint other license holders to take over from the
holders who are unable to discharge their mandate.241
5.4 Conclusion
This chapter examined the beneficiation regulatory frameworks in South Africa and
Indonesia. The findings were that South Africa does not really have an over-arching
beneficiation law, but rather beneficiation strategy of 2011. This strategy is anchored in
various pieces of legislation as discussed above. It was possible to come up with same
because these Acts already had relevant provisions on beneficiation. Although, it is visible
that South Africa has achieved a milestone in terms of putting in place the right legislation to
facilitate beneficiation than Botswana, it is doubtful if this strategy can be said to be a total
success.
In fact, it has been said that it is questionable if the strategy in its current form is able to
address the complexities faced by the mining industry in South Africa. 242 It is further argued
that this strategy is not sufficiently drafted as it does not deter countries like China from
purchasing raw materials and later beneficiate them in their home states.243 Indeed, such
reports are not desirable, as this means that the raw materials from South Africa are used to
bolster China‟s economy. This is so because value addition which is usually labour intensive
then occurs in China, and not South Africa as the primary producer. Nevertheless, South
Africa is better placed compared to Botswana as none of her legislation come close to
mentioning the word beneficiation at least.
238
Article 9 (2) (n 229 above).
Article 9 (3) (n 229 above).
240
Article 10 (1) (n 229 above).
241
Article 10 (2)-(3) (n 228 above).
242
SAIMM (n 70 above) 270.
243
SAIMM (n 70 above) 279.
239
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On the other hand, Indonesia has made strides in ensuring and promoting beneficiation in
clear, concise manner through legislation. Although its law is relatively new, it displays
commitment as a developing country towards Indonesians by enhancing their lives with their
own wealth. A balance is to be struck between the interests of the government and those of
investors.
It is interesting to note that although Indonesia expects investors under old
contracts to adjust to the new law, it did not expropriate nor nationalize their investments. On
the contrary, the contracts are to remain valid until expiration, at which time they will be
expected to follow the new law. This is to be commended.
Indonesia has however been accused of maximizing in every opportunity it can get. One key
area pointed out is the use of local services and goods requirement. The argument is that even
non-traditional mining services are covered by the law as services investors are obliged to
source locally. Consequently, at all times the need for beneficiation and interests of investors
should be placed on a scale of balance.
The question whether or not beneficiation law scares investors lies at the heart of this study.
It has been established that beneficiation if properly legislated can be a blessing. In the case
of Indonesia it appears beneficiation law did not drive away foreign investors as seems to be
the Botswana policy makers‟ fear. In contrast, companies are rushing to set up smelters in
Indonesia. Indonesia like Botswana did not have the ideal infrastructure. However, with this
law in place efforts are being made to be up to par infrastructure wise.
The next chapter will offer conclusions as well as recommendations.
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CHAPTER 6
CONCLUSIONS AND RECOMMENDATIONS
6.1 Introduction
Beneficiation of minerals is an approach being pursued and adopted by nations. For instance
the African Union Mining Vision has as one of its objectives beneficiation of minerals to
ensure competitive advantage. South Africa too, is hard at work trying to ensure that its
minerals benefit its locals as evidenced by its 2011 beneficiation strategy. The amendment of
the MPRDA was recently approved to ensure efficient and effective beneficiation after three
years of going back and forth.
Ensuring beneficiation through legislation, contrary to popular beliefs is not only an African
phenomenon but also pursued by some Asian countries as Indonesia. Several lessons are to
be learnt from Indonesian mineral beneficiation. There are no reports of investors leaving due
to these pieces of legislation, in fact reports are that Australian companies are looking at how
they can invest in Indonesia.
This investigation sought to find out how enactment of beneficiation legislation could impact
on protection of foreign investments in Botswana and other economies which may wish to
pursue beneficiation. This entailed an assessment of the accuracy of the arguments by some
members of Parliament who lamented that such legislation could scare away investors both
existing and potential.
Given the controversy surrounding enactment of beneficiation laws in economies such as
Botswana, the questions which this study has laboured to answer are, how can policy-makers
be encouraged to re-think enactment of beneficiation law in Botswana? Is beneficiation the
best guarantee for the local community to benefit under Botswana‟s diamond mining
industry, or it is just another flawed concept that will undoubtedly scare investors away?
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6.2 Summary of conclusions
This study sought to provide an opportunity for policy-makers in Botswana to re-think
enactment of beneficiation legislation in Botswana by presenting a balanced debate on the
opportunities and challenges of beneficiation. The aim was to contribute to the everexpanding literature on beneficiation law in light of its linkages to protection of foreign
investments. Chapter one provided an introduction to this study.
Chapter two gave a peep into the genesis of the diamond mining industry in Botswana. It
reiterated the fact that Botswana is one of the best diamond destinations in Africa and thus
affectionately dubbed the „Switzerland of Africa‟. Although the first diamond discovery was
in 1967, little has been done to date to fully explore them. This can be partly attributed to the
position previously maintained by De Beers, namely, that it was ideal that diamonds be
exported for cutting and polishing purposes as opposed to local beneficiation.
This position has since changed, as at least twenty one companies are licensed to date for
cutting and polishing diamonds purpose. The question remains, should Botswana have
pushed for more? Indeed, if De Beers was pushed further more beneficiation onshore could
have been attained. Findings reveal that it was not a mammoth task to move the London
Headquarters to Gaborone, Botswana for purposes of ensuring cutting and polishing of
diamonds.
Botswana‟s beneficiation strategy is also not ambitious, enough for instance, the target is to
have increased the number of cutting factories and improve training and development of the
locals by 2021. What about diamond jewellery manufacturing and retailing? Furthermore,
thorough perusal of diamond mining legal framework was found to be shallow and hence not
pungent enough to advance full diamond beneficiation.
Chapter three discussed beneficiation in depth. It revealed that beneficiation derive its roots
in the Staples Thesis as propounded by two great scholars Innis and Mackintosh. It further
flagged the fact that beneficiation can be understood from two perspectives, namely,
downstream or side-stream, although, study is concerned primarily with downstream
beneficiation.
Moreover, a vigorous debate as advanced by various scholars on beneficiation was presented.
Findings are that some see beneficiation as viable and to be pursued by countries that yearn to
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translate their comparative advantage to competitive advantage. However, beneficiation is not
without wrinkles as some scholars argue that it is a bad policy paradigm which is myopic and
narrowly focused as it looses sight of other policies which could be more profitable.
Chapter four examined the interface between beneficiation legislation and protection of
foreign investments. It established that a balance is to be struck between the powers of states
to regulate the foreign investments within its territories and protection of same. The power to
regulate the foreign investments still lies with the host state. This power has been recognized
in a number of international instruments such as the Charter of Economic Rights and Duties
of States (CERDS) and the General Assembly Resolution 1803 (XVII) (1962) on permanent
sovereignty over natural resources.
A discussion on cushioning foreign investments from arbitrary measures such as
expropriation and nationalisation ensued. The international minimum standards of protection
of foreign investments were laid down. The discussion on these standards was not in any way
an admission that enactment of beneficiation law could interfere with foreign investments. It
was merely to illustrate that the investors‟ rights are secure, but should an interpretation be
reached, which is highly unlikely that beneficiation is tantamount to creeping expropriation,
then investors still have recourse against the state.
Botswana does not have any foreign investment law and has concluded only four BITs. She
is thus highly dependent on her past dealings and track records with foreign investments
which are unimpeachable.
Interviews and independent surveys have always singled
Botswana as one of the shining examples in Africa and corroborate her adherence to the rule
of law for contract and property rights protection.
Consequently, any conclusion that
beneficiation legislation is likely to scare away investors, with due respect, is without basis.
Chapter five examined the beneficiation regulatory frameworks of both South Africa and
Indonesia. The findings were that although, South Africa does not have an over-arching
beneficiation law, it has a beneficiation strategy of 2011 in place. This strategy is anchored
on various pieces of legislation as discussed above. Although, it is apparent that South Africa
has achieved a milestone in terms of putting in place legislation to facilitate beneficiation
than Botswana, it is doubtful if this strategy can be said to be a total success.
In fact, it has been said that it is questionable if the strategy in its current form is able to
address the complexities faced by the South African mining industry. The argument is that
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the strategy is insufficiently couched, as it leaves room for countries such as China to buy
raw materials and later beneficiate them in their home states. Indeed, such reports are not
desirable, as this means that the raw materials from South Africa are used to bolster China‟s
economy. This is so because value addition which is usually labour intensive occurs in China.
The writer herein is nevertheless aware that South Africa is still ahead of Botswana whose
legislation does not even mention the word beneficiation.
By contrast, Indonesia has made great strides in ensuring and promoting beneficiation in
clear and concise manner through legislation. Although its law is relatively new, it depicts
commitment as a developing country towards Indonesians by enhancing their lives with their
own wealth. A balance is to be struck between the interests of the government and those of
investors.
It is interesting to note that although Indonesia expects investors under old
contracts to adjust to the new law, it did not expropriate nor nationalize their investments. On
the contrary, the contracts are to remain valid until expiration, at which time they will be
expected to follow the new law. This is to be commended. No reports of investors leaving
Indonesia as a result of the law but rather more investors especially from Australia are
coming in to build smelters and are willing to comply with the beneficiation requirements set.
6.3 Recommendations
From the foregoing, it has been revealed that downstream beneficiation has more benefits for
both the investors and the local communities. It is axiomatic that if there is no legislation in
place to promote beneficiation, investors will merely take advantage of the situation, explore
and beneficiate minerals offshore, thus taking employment opportunities and other sidestream benefits away from the host states. Economies such as Botswana if they continue
without a law in place to aid onshore beneficiation will never take full advantage of its
mineral wealth. As shown above it took Botswana very long to at least have the diamonds cut
and polished in Botswana. De Beers swiftly put in place all the necessary logistics and moved
its headquarters from London to Botswana. This goes on to show that if there is nothing
pushing them, investors will not do more.
As a result, it is highly recommended that the government of Botswana and other similarly
placed countries should see beneficiation legislation as a tool that can unlock their mineral
wealth and thus contribute significantly to the development of their countries. Through
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enhanced beneficiation, the government of Botswana, Batswana and the investors themselves
can benefit. For the local communities as seen in the case of South Africa and more
illustrative in the case of Indonesia, investors can do more for the local communities where
they mine like hiring the services of the locals. Wealth is thus distributed within the
community and not concentrated in the investors alone.
An argument can be put that Botswana is a developing country and thus not adequately
developed nor have the skills to ensure efficient local beneficiation. It is true that Rome was
not built in a day and as a result, the policy-makers need to take a leap of faith in the light of
the above discussion to enact beneficiation law for diamonds in the land which will compel
both existing and potential investors to build the necessary infrastructure. Transfer of skills
would also be assured through such a process.
However, in enacting beneficiation legislation, the policy-makers should exercise caution to
ensure there is no substantial encroachment in existing foreign investments. A balance is to
be struck between the interests of the government and those of investors. For instance,
Indonesia has been accused of accused of trying to take every opportunity to maximize its
beneficiation policy. One area pointed out is where the law, imposes an obligation on
investors to source local services and goods to be used for mining services and operations.
The argument is that the law is couched in such wide and general terms such that even nontraditional mining services are covered by the law as services which investors are obliged to
source locally.
In addition, it is highly recommended that should the government of Botswana or any other
state in enacting beneficiation legislation should not come up with many pieces of legislation
as seen in the case of Indonesia. A single document maybe “beneficiation code,” that contains
all the relevant provisions may suffice to ensure that the law is certain and easily accessible.
A haphazard number of stand-alone regulations from several ministries create some level of
uncertainty and confusion which is undesirable.
6.4 Overall conclusion
In conclusion, the likely impact of beneficiation legislation on foreign investments can only
be an obligation to ensure more value addition to the diamonds. Contrary to the skeptics
belief, this does not deflate foreign investments, rather it has the potential to enhance them as
both the people of Botswana and the investors are likely to benefit from such an arrangement.
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Having found no substantial negative impacts of enactment of beneficiation legislation, it is
argued that beneficiation legislation is the best guarantee for local community benefits under
Botswana„s diamond mining regulatory regime. Beneficiation legislation is not a bad
paradigm that is likely to scare away investors, but has the potential to add value to
Botswana‟s economy.
At the conclusion of this paper it was far from clear whether the motion for beneficiation
legislation in Botswana will ever find light of day again amongst the policy-makers.
However, it can be safely said that beneficiation legislation is the best guarantee for
Botswana‟s local communities, the government of the day and the foreign investors alike. It
is not a flawed concept that is likely to scare the foreign investors away. The total death of
that motion would be to promiscuously jeopardize the entitlements due to Batswana. We can
only hope the policy-makers will re-think enactment of beneficiation legislation.
WORD COUNT WITHOUT TECHNICAL PAGES: 15 095
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