New social investments or confidence within the mining industry?/Venezuela

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After a deep recession in 1998-99, in which the GDP contracted by 7.2%, the Venezuelan government decided to reformed (among other laws) its 1945 Mining Law, among the underlying proposals of the new legal framework highlights the promotion of private investment; to give economic incentives with a more flexible tax regime; to reduce length of time to grant mining concessions; to recognize mining rights to the small scale mining and provide them with access to loans and capital; to legalize mining contracts; and to modernize a sustainable development concept in the mining sector.

Unfortunately, the new mining law was based on a project dated of 1989, which meant 10 years backwards. This project had not reflected the new dynamics of the private investment and the associated operations required by the mining industry in order to boost the exploration activities needed, and did not consider the overall value chain, from the quarry to the mineral processing.

The key feature of the new regulatory framework was to confer the ownership of all the mineral resources to the Republic (underneath or beneath the soil), thereby the use of these resources is motivated to generate earnings through tax payments, allowing the entire society to get benefits of the activity.

This reform was influenced by a lack of a long term perspective, the absence of legal/tax stability regime or guarantees, an unpredictable constitutional regime, the unclear terms about conditions of existent mining rights, and the political unwillingness to abide by a uniform dispute resolution system (International Arbitration).

Thus, the law develops various types of mechanisms to manage mining rights which in practice did not provide appropriate regulation, but an absence of it.

For example, if the Republic already has the ownership of mineral resources, then to create a concession that confers the exclusive and direct exercise of mining activities to the Republic, can be redundant, and also, might generate terrible distortions and confusions to mining right holders, because in these cases, the State grants to itself a right that already had, and then, in practice who really develop the mining activity is a mining corporation or a private company through a Service/Operative Contract. There is a classic example of this type of contract such as Las Cristinas gold mine (Crystallex International Corporation KRY).

Check this out, Are those Service/Operating contracts regulated by the 1999 Mining Law? No, they are not. Are the tax regime rules as unclear as the contract statutes? Yes, indeed. Bear in mind that these contracts are totally different to those mentioned in the Article 132 of the 1999 Mining Law.

As we can see, the absence of regulation in a civil system makes extremely difficult the risk allocation, makes unclear what kind of guarantees are provided by law, and complicates the determination of the extent of the impact that can be caused by a potential breach of contract (among other relevant considerations in deciding to invest in a mining project).

There are some interpretations giving assurances that the absence of regulation can be covered by the Civil Code, but that is not that simple, because there are environmental issues, imposing serious social impacts, not regulated by this Code that could undermine the feasibility of the project and makes very difficult to obtain capital and to get access to financial assistance.

Likewise, there are other types of mining rights management mechanisms, except those called Small Mining Authorizations, which are quasi biding processes, where the selection criteria or the methodology to evaluate the mining petitions are not defined avoiding a fair competition between petitioners, discourage the participation in the exploratory activity and again limit the investment options.

Also, if we want to understand in depth about the so called "social investment", it is worth to review the preliminary statement that motivates the 1999 Mining Law where the word “job”, “work” or “employment” is never used.

Notwithstanding, there are some who believes that Social Production Enterprise (SPE) created by Decree N° 3895 (2005) have promoted more social investment, although, they really are a type of private corporations mixed with cooperative principles that are expected to generate better competitiveness or to improve productivity in the mining sector. Conversely, others have said that SPE's has become vehicles to distort fair market, discourage the private investment, and enhance public ownership.