Ecuador’s New Mining Law No Panacea

Photo Caption —MMP minister Derlis Palacios (left) explains the new mining law to Congresillo president Fernando Cordero (center), Congresillo Vice-president Aminta Buenaño, and other legislators last Wednesday. Photo Credit — National Assembly

Washington D.C., November 24, 2008 — Ecuador’s MMP minister Derlis Palacios visited the Congresillo last Wednesday, November 19th after presenting the mining law the prior Friday. Palacios personally explained the bill’s provisions to legislators, and urged them to promptly approve the law, which will create clear rules and spur the growth of a modern responsible mining industry in a country that currently lacks large-scale mining operations.

Undersecretary of Mines Jose Serrano added that 60 percent of the new 5 percent royalty will be used by the government to develop sustainability projects in neighboring communities, and that 80 percent of the firms’ workforce will be Ecuadorian, as detailed in the law. The Congresillo Economic Development Commission will study the bill for 20 days before presenting it for its first debate within the full Congresillo. The legislature has announced that it expects to approve the mining law next January. Read Assembly Press Release

The administration’s presentation of the mining law to the Congresillo caused several protests by anti-mining movements, signaling that the mining law favors industry. Nonetheless, the new mining law is not a panacea. The new bill creates new oversight agencies and a 5 percent minimum sales royalty (with no maximum level), confirms the 70 percent windfall tax, and encourages firms to opt for service contracts rather than individual exploitation contracts.

The bill also imposes new per-hectare administrative fees, environmental conservation fees, and compensation to the state if annual investment goals are not reached or construction plans are delayed or canceled. Furthermore, it defines firms’ obligations such as environmental conservation, water treatment, waste management, and other industrial standards. These obligations are familiar to international companies, which already operate with the highest industrial standards.

The bill also gives the government the authority to cancel mining concessions or contracts if any human right is violated, or if the natural habitat suffers irreversible damage, without further specifying such violations. Such ambiguity in the law makes the law in its current form somewhat unpredictable. Unless these issues are detailed in a clear way in the upcoming regulations, firms will rightfully view the law with skepticism. The Congresillo is currently soliciting comments from stakeholders and the public at large on the bill. Go to the Congresilo comment page

EMN has translated some of the most important articles in the Mining Law, below, and also commented on some of them.

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Extracts from the Mining Law Presented to the Congresillo

EMN has translated and summarized some provisions of the version of the mining law presented to the Congresillo. EMN has partially omitted content from the original and made edits for better understanding. Download the original law – Spanish only —

Art. 3 — Mining Policy Direction — The Executive Branch is responsible to formulate the National Mining Policy. The development of such policy, its execution, and application, is the State’s responsibility through the MMP. The State will also control, monitor, regulate and develop the mining industry, prioritizing sustainable development and social participation.

EMN comment: Notice how President Correa himself has the power to shape mining policy. This will also include mining regulations, which will be issued four months after the law is approved next January. Thus, regulations can be expected by May 2009, just in time for his reelection. Mining analysts prefer mining policies to be led by the MMP, but EMN prefers President Correa over the MMP, which still has some green NGO infiltrators.

Art. 4 — Institutional Structure— The mining sector is structured as follows:

a) The Ministry (MMP)

b) The Mining Agency for Control and Regulation (MACR)

c) The National Institute for Geological Research (NIGR)

d) The National Mining Company (NMC)

More info: Three out of four of these institutions will be created when the law is enacted. The MACR and the NIGR will be attached to the MMP, while the NMC will be an independent entity, which can engage in JVs, strategic alliances, or mixed companies.

Art. 13 — Jurisdiction and Competence— The individuals or companies, nationals or internationals, who hold mining rights or conduct mining activities, are subject to the laws, courts and judges in Ecuador. Foreign firms or individuals must withdraw from any complaint with diplomatic assistance. They cannot use another jurisdiction than the judges of Ecuador, or arbitration in Latin American.

EMN comment: President Correa may want to avoid lawsuits from international mining companies, after his administration’s experience with oil companies. Ecuador faced about a dozen lawsuits from oil firms for about USD 12 billion this year. International pressure helped the oil companies to renegotiate contracts in fairer terms, especially after the windfall tax was raised unilaterally from 50 to 99 percent, and then lowered to 70 percent. This article should be unacceptable, especially due to ambiguity that can lead to the canceling of concessions for human rights violations (art. 112) or irreversible damage for the environment (art. 110).

Art. 26 — Public Auction for Mining Concessions — The MMP will call for public action to grant any mining concession. The regulations of this law will establish auction procedures and requirements.

Art. 37 – The state, through the MMP, will sign a contract for services, which will be provided under the terms and conditions offered by the concessionaire at the time of public auction. The Contract for Services will include the concessionaire’s remuneration, environmental management obligations, guarantees, community relations, and plans for partial or total closure of the mine. Such contract will be approved by the MMP.

Under this type of contract, mining concession holders will not pay royalties or windfall taxes. The Government will send 3 percent of its exploited minerals sales to local sustainable development projects, through parish councils. The concessionaire has the same rights and obligations than individual mining exploitation contractors described in the following article.

EMN comments: Ecuador is making service contracts more attractive – and less uncertain — than individual contracts by eliminating the windfall tax and royalties for the service contract concessionaire. It is interesting, though, that when the state exploits minerals it only pays 3 percent on sales, with no mention of the WFT, or income taxes. It is clear that the government favors JVs through the yet-to-be-created National Mining Company, or Service Contracts, over Exploitation ones.

Art. 38 – Mining Exploitation Contract — Within six months since the beginning of the exploitation phase, the mining concessionaire must sign a contract with the State, through the MMP. Such contract will contain the terms, conditions and time frame for the construction, assembly, extraction, transportation, and mineral marketing. The model for this contract will be approved by the MMP.

Also, the contracts should include the concessionaire obligations regarding environmental management, guarantee provisions, relationship with communities, royalty payment, and partial or total closure of the mine. The contract must contain the Mining Base Price to apply the regulations specified in the current Tax Law.

The contract will establish the mining concessionaire rights to suspend mining operations, previous compensation to the State. The suspension can be approved in the case of technical or market conditions, which prevent the firm from meeting deadlines for each mining stage.

The mining concession holder cannot perform exploitation operations without previously having signed the contract with the State. Notwithstanding the foregoing, the concessionaire will own the minerals that are eventually obtained as a result of the exploitation work.

In developing the exploitation phase, the mining concessionaire must comply with the best environmental standards and must obtain an environmental license. The resolution of differences and/or controversy that are subject to these contracts may only be process within the Ecuadorian Judicial Function or Latin America arbitration.

EMN comment: Individual contracts with different royalties and different base prices to apply the WFT may frighten the few investors that continue trusting in Ecuador since this randomness leaves the door wide open to corruption. Clear rules for everybody with one single royalty, one base price, and one standard for every metal would send a clear message overseas.

Art. 88— Mining Royalties — The State, as the owner of non-renewable natural resources, will be entitled to receive royalty payments from mining concessionaires who exploit them.

Royalties paid by the concessionaires will be established on a sales percentage and it will be paid every six months, every March and September each year. The royalty payment must be appropriately reflected in semi-annual production reports, and in the Internal Revenue Service statements.

Art. 89 — Exploitation Mining Royalties — The mining concessionaire must pay a sales royalty, no less than 5 percent. In the Exploitation Mining Contract, the concessionaire and the State will agree on the royalty percentage considering the project technical and economic specifications.

Sixty percent of royalties will go to local sustainable development projects through government branches, parish councils and, if so, indigenous communities governments. The Regulations of this Act and the Exploitation Mining Contract will establish the parameters for royalty payments, as its distribution.

EMN comment: As the National Mining Chamber recommended, royalties should be of a maximum of three percent over profits, and they should be paid annually.

Art. 112 — Expiration for Human Rights Violation — The Ministry of Mines, upon decision that determines human rights violation, issued by a competent judge, either by the concessionaire or his subcontractors and especially security companies acting on the concessionaire behalf, can declare mining concession revocations.

EMN comment: The lack of description of a human rights violation make this article ripe for abuse by extreme lefists who act violently in the name of the Pachamama. It should be clearly stated in this article that when firm security responds to an attack, they are exempt from any punishment.

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