EI Sourcebook | 5.2 Sector Legislation: Design

5.2 Sector Legislation: Design

Three distinct approaches to the design of EI sector legislation can be identified:^[*] (1) a comprehensive, highly detailed approach to legislation; (2) reliance on individually legislated contracts or agreements; and (3) a hybrid approach, which combines less comprehensive or framework legislation with detailed regulations and flexible contract or agreement specificity.^[*] Usually, laws relating to petroleum will be adopted separately from laws that address mining of other minerals. This can lead to the perception that there are significant differences between mining and hydrocarbon legislation. However, similarities between the sectors often outnumber differences.

5.2.1 Design Option 1: Detailed Content Approach

This approach fixes in a particular law or enabling regulation all or most of the provisions required for the conduct of EI sector operations. These detailed legislative instruments also often include the content of investment agreements, although some specific terms may be left for negotiation or competitive tenders. This ‘codified’ approach is particularly favored in the mining sector worldwide. For both mining and petroleum sectors, it is the preferred approach in almost all Organization for Economic Cooperation and Development (OECD) states, which have extensive EI sector and legislative experience.

There are also a number of Latin American states that have adopted this approach. Its supporters claim it has several advantages: (1) it assures equal treatment for all EI sector participants or licensees; (2) it focuses negotiations on a few key variables and limits opportunities for arbitrary or discretionary behavior; (3) it ensures full knowledge and transparency regarding the licensing regime; (4) it enhances protection against corrupt practices whereby resource rights are obtained for bribes; (5) it mitigates the disadvantages of asymmetry of information and capability between often inexperienced officials of small governments and highly experienced and skilled resource company negotiators; and (6) it also avoids scarce government capacity being tied up in intensive negotiations on individual projects.

The main disadvantage of this approach lies in its inflexibility. Any adjustments require changes to primary legislation, which may be difficult or at least slow to achieve.^[*] Nonetheless, there appears to be a preference for states to adopt this detailed legislative approach in the mining sector,^[*] while the petroleum sector tends to adopt a framework approach to legislation albeit with a higher degree of reliance on a model contract to supplement the legislative framework.^[*]

5.2.2 Design Option 2: Individually Legislated Agreements

Under this approach, the most important terms are contained in individually negotiated agreements with investors which are given the force of law by legislative ratification. This has been the approach taken in developing states where there was no overall EI sector code in place at a time of growing investor interest and where waiting on the preparation and passage of comprehensive legislation has been deemed to be costly in terms of delayed investment and development. Since such an agreement is consensual in character, is subject to negotiation, and has the force of law, it reduces the chances of unilateral intervention by the state and can create a stable and predictable framework for the private party.

This approach also gives maximum flexibility to government authorities to negotiate terms with investors. This is perceived by some as an advantage but by others as a serious drawback. At its worst, it may facilitate corruption. At a minimum, it can complicate EI sector management by creating a patchwork or multiplicity of legal regimes. This is due to the fact that once terms have been agreed and legislated, they become fixed, subject to any provisions they may contain regarding stability of terms.

5.2.3 Design Option 3: Hybrid Approach

Under a hybrid approach, which is now common in states with EI sectors to develop, legislation typically takes the form of a relatively brief enabling law, sometimes called a 'framework law'. Such a framework is used to confirm policy choices and covers key concepts and topics but refrains from going into detail and leaves room for further definition by governmental authorities through secondary regulations and individual contracts. The less detailed legislative content under this option is designed to minimize the need for later amendments in the primary law. While this benefit is often considered a significant factor in states where the legislative process is typically lengthy or where such legislation represents a delicate comprise of diverse interests, it can also prove challenging to reconstitute in an amendment process.

Negotiating discretion under this hybrid approach can be, and usually is, limited by the issuance of model licenses or contracts. This can be important in reducing the burden on government bodies with limited resources at their disposal. At the same time, the enabling legislation allows governmental authorities to respond quickly to new needs as they arise by adjusting model contracts for new awards and amending regulations: a process that will be carried out primarily at the ministerial level rather than legislative action. The main advantage of this approach is that “it predetermines in a legislative form all those issues in respect of which the government requires a minimum standard or which can be realistically, as it were, pre-negotiated.”^[*]

In the mining sector, a framework law can permit flexibility in project-specific or site-specific agreements. These can include agreements for community programs, targets for local employment, or agreements on value-added or government equity in a specific project.

5.2.4 Assessment of Options

The choice of approach to legislative design will depend on state context and take into account legal, cultural, political, social, and economic factors as well as the level of investor interest in development of the EI sector. At greater or lesser levels of detail, all three of the above approaches will seek to reflect the overarching policies noted in Section 5.1 above and in particular will include reference to the topics listed in Section 5.3 below. Effectiveness will depend very much on the fit with context, rather than any formal advantage one approach may have over another.

In all cases, a key consideration is that EI sector legislation is harmonized with other relevant legislation, including not only fiscal and environmental legislation but also other legal texts applicable to economic activity such as foreign investment laws, labor laws and the general tax code.

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