Mining Journal: Time to move on – Open-access regulation key to unlocking shared-use infrastructure


January 2016
Glen Ireland, InfraShare Partners
Paul Collier, Blavatnik School of Government,
University of Oxford

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“Open Access” Regulation is Key to Unlocking Shared-Use Mining Infrastructure

Paul Collier and Glen Ireland[*]

Resource-rich countries, development agencies and commentators have for years highlighted the potential to achieve “win-win” outcomes through the sharing of rail, port and other infrastructure required for mining operations.  Despite this opportunity, relatively few examples of shared mining infrastructure can be seen in developing countries, particularly in sub-Saharan Africa. In our recent article Shared-Use Mining Infrastructure: Why it Matters, and How to Achieve it[†] we consider the cases for and against regulating for “open access” to bulk mining logistics infrastructure. We argue that countries should impose such regulation in almost all cases, although governments (particularly those in sub-Saharan Africa) should not underestimate the policymaking and governance challenges involved.

In sub-Saharan Africa, opportunities for shared-use bulk mining infrastructure abound.  For example, the rail and port facilities required for Rio Tinto’s proposed $20 billion Simandou South project could be shared with the future developer of Simandou North, as well as other mining and non-mining users.  A joint infrastructure solution could unlock multiple projects in the vast iron ore region that straddles Cameroon, Congo-Brazzaville and Gabon.  Sharing of an existing railway corridor controlled by ArcelorMittal’s Yekepa mine in Liberia could unlock iron ore and other minerals in the Mount Nimba region of Guinea.  High cost copper mines operating in the DRC and Zambia would become more competitive with a joint rail/port solution using the recently-upgraded Benguela corridor in Namibia.  If the new Nacala corridor in Malawi and Mozambique were operated by Vale on a fully open access basis, numerous coal projects in the Tete region would not be forced to pursue sub-optimal logistics solutions (such as Rio Tinto’s ill-fated plan to barge coal down the Zambezi river).

As depressed commodity prices continue to put pressure on capital intensive bulk mining projects, the list of opportunities for collaboration becomes ever longer.  The key question is this: how should governments in resource-rich developing countries facilitate rational and efficient shared infrastructure solutions that are in their national interest and represent sound value propositions for foreign mining firms?  Experience in developed countries (especially Australia) has shown that such solutions will not emerge in the absence of effective open access regulation, not least because infrastructure represents a key “competitive battleground” within the mining sector.  In sub-Saharan Africa, the absence of regulatory institutions and expertise, and constraints on public finances, represent additional hurdles to be overcome.  However, solutions can be found by drawing upon extensive international experience and engaging with key stakeholders including mining firms, development agencies, financial institutions and community groups.

It has been common in many developing countries (and not unknown in developed countries, including parts of Australia and Canada) for large mines to be developed as “integrated” projects in which the mine and its associated rail and port infrastructure are under the common ownership and/or control of a “first mover”.  The fixed costs and potential inefficiencies involved in duplicating the infrastructure, which often qualifies as a “natural monopoly,” confer a tremendous competitive advantage on the first mover.  In comparable circumstances in the telecommunications and power transmission sectors, the need for regulation is taken for granted.  In the case of mining infrastructure, however, the potential harm arising from natural monopolies is much less appreciated by host governments, which often find themselves “locked in” to contractual arrangements under which further mineral exploitation effectively requires renegotiation with the first mover.

If a government fails to regulate access to a first mover’s logistics infrastructure, other mining firms seeking to invest in mineral exploration in the same region are at risk of economic “hold up” if they identify a project that requires access to the existing infrastructure.  While mining firms can try to avoid this risk by seeking early agreement with the first mover, the latter often has little incentive to cooperate.  Where this type of “infrastructure risk” is not eliminated or mitigated, investment in regional mineral exploration will fall short of its potential – and may fail to materialise at all.

Also, whenever a host government plans to auction mineral rights in a region “served” by existing, privately-controlled infrastructure, open access regulation is needed to protect the national interest.  Without it, potential investors cannot know what to bid – unless of course they have previously negotiated access terms with the infrastructure owner.  In such a negotiation, the owner holds all the cards and can, in effect, pre-empt the value of the state’s mineral rights through access pricing.  Moreover, if the infrastructure owner wishes to secure the mineral rights for itself, it can refuse to negotiate and establish itself as the sole credible bidder. In either scenario, there is a very real risk that the state’s mineral rights will be sold at an undervalue, or not at all.

Of course, open access mining infrastructure does not only support the rational development of a host country’s mining sector. It also promotes broad-based economic development by making efficient logistics facilities available to other sectors, such as agribusiness and freight transportation. Although the precise nature of non-mining opportunities is often unclear when the infrastructure is first built, access regulation enables these to emerge over time. In this way, resource-rich countries can reduce their traditional over-reliance on the mining sector and mitigate the adverse effects of the so-called “resource curse.” Moreover, by avoiding unnecessary duplication of investment in infrastructure facilities, shared-use solutions minimise the adverse social and environmental costs associated with these major assets.

Controversies surrounding the use of rail and port infrastructure have been common within the mining industry over the last 20 years. Owners of integrated mines have routinely defended their rights of ownership, and access-seekers have insisted on the regulation of infrastructure monopolies.  Nowhere have these issues played out more completely than in Australia,where government introduced the “National Access Regime” in the 1990s to enable third parties to use “bottleneck” infrastructure.  Subsequent attempts to gain access to private rail and port facilities in Western Australia led to the hotly-contested and protracted Pilbara railway case, which pitted the upstart Fortescue against incumbent infrastructure owners Rio Tinto and BHP Billiton. Due to peculiarities of the National Access Regime, Fortescue eventually lost its case and was forced to construct and finance its own rail and port infrastructure.  Roy Hill followed suit several years later. The financial implications of the large debts incurred by Fortescue and Roy Hill to build their own parallel infrastructure are still playing out today.

Experience with mining infrastructure access in other states in Australia has, we find, been more positive than in the Pilbara. In the central Queensland coal basin, for example, Aurizon (an independent, listed infrastructure company) operates an efficient railway network that serves over 50 coal mines and supports general freight, container and passenger traffic. The explanation for this very different outcome has much to do with history and government policy. The rail network in Queensland was originally constructed by the state and provided as a public service. Is was privatised much later under Aurizon, which has always been subject to a robust access undertaking and comprehensive regulation.  By contrast, Rio Tinto and BHP Billiton have owned and operated their integrated Pilbara mines since the 1960s, which has created major challenges for policymakers seeking to break down their entrenched positions.  The Australian experience demonstrates that the initial arrangements for construction, ownership, financing, operation and use of mining infrastructure can affect the ability of policymakers to achieve shared-use outcomes in the longer term.

Recently, a review of competition law and policy in Australia provided a public platform for major mining companies to advance their views on the regulation of infrastructure access, including the National Access Regime. Opinions split sharply, depending on whether they were advanced by infrastructure “haves” (e.g., first-movers BHP Billiton and Rio Tinto) or “have nots” (e.g., Glencore and Anglo American).  In our article, we consider the arguments against open access regulation advanced by BHP Billiton and Rio Tinto, concluding that each of these fails on close examination.  For example, the companies claim that owners of private infrastructure (such as themselves) have a strong incentive to maximise its value and will enter into access arrangements with third parties whenever the benefits from access outweigh the costs.  This argument completely ignores the potential for an unregulated infrastructure owner to extract a disproportionate share (or even all) of the value of an access-seeker’s mineral rights in any negotiations, and the adverse consequences of this for a host country’s mining sector, fiscal position, and broader economy.

We also evaluate the concern, occasionally raised by the International Finance Corporation, that shared-use infrastructure arrangements can impair the “bankability” of mining projects.  Although we accept that such arrangements can add a degree of complexity to new projects, we don’t regard this as fatal to their successful financing.  Moreover, we highlight ways in which infrastructure sharing can enhance project bankability, such as by improving project cash flows (through lower unit costs), achieving greater counter-party diversification and mitigating political risk through stronger “linkages” with the host country’s economy.

For governments in sub-Saharan Africa wrestling with mining infrastructure access issues, some helpful resources are now available.  The Columbia Center on Sustainable Investment has, for example, produced a useful guide entitled A Framework to Approach Shared Use of Mining-Related Infrastructure, which is available online.  Also, the Milken Institute will soon be launching an initiative to develop detailed written “norms” for the sharing of mining and other natural resource infrastructure, which can be incorporated by host governments, private investors and development agencies into mining concessions, tender documentation and best practice guidelines.  In partnership with the authors of this article, the Milken Institute will consult widely with interested parties – including mining firms and other private sector investors, regulators, and policymakers – during the course of 2016 (contact carole.biau@milkeninstitute.org for further information).

It is hoped that this new initiative will assist governments in sub-Saharan Africa and other developing regions to overcome any remaining hurdles to achieving much needed shared-use mining infrastructure solutions.

[*] Paul Collier is Professor of Economics and Public Policy at the Blavatnik School of Government, University of Oxford and author of The Plundered Planet.  Glen Ireland is a Founding Partner of InfraShare Partners Limited (www.infra-share.org), and former Chair of the mining and metals groups of White & Case and Latham & Watkins.

[†] Part of the Working Paper Series of the Blavatnik School of Government, University of Oxford.  See:  http://www.bsg.ox.ac.uk/research/working-paper-series/working-paper-009