Dealing with existing coal projects
At present, Bangladesh has a law that governs the exploration and development of minerals. This law sets out the procedures to be followed and the taxes that are to be paid. Any company wishing to develop mineral resources in Bangladesh must work within this law.
The two major private sector companies involved in coal -- the Tata with a number of proposals and Asia Energy's Phulbari project both conceived and investigated their ideas within the framework of this mineral law. Tata has made definite proposals to the Government reflecting work done on the feasibility of the coal mining and use of the coal in steel production and power generation; these projects are effectively proposals by Tata drawn up and prepared with the full support of the Government.
Tata was encouraged by the Government and their analysis must follow the law of Bangladesh. Asia Energy has carried out exhaustive exploration, environmental and resettlement studies in conjunction with the preparation of a mine development plan, all as required by the Government according to the law.
The implication of the preparation of a new coal policy is that Government intends to modify existing law. Bangladesh has a clear sovereign right to carry out whatever changes it wants to make to existing law.
However, in doing so it must take account of the current law and agreements made or implied under that law. Under the Foreign Investment Protection Act the Government has legislated that it will not destroy a foreign investor's project by major changes in the conditions under which the company operates.
It would be against Bangladesh law for example to raise the taxes imposed on a particular company to such a level as to effectively expropriate it. New legislation derived from the coal policy should explain clearly the position of companies working under the existing legislation. The proposed 20% royalty rate has precisely that effect.
While any country has the sovereign right to do what it wants; one has to live in an international community where actions may have consequences. One approach used to handle companies that are investing under a law or regulatory regime that is changed is to "grandfather" the existing companies into the new law; having the old laws apply to these grandfathers. New participants would fall under the new law as such groups would know the rules but Tata and Asia Energy would continue to operate under the old laws.
Persons outside Government have demanded the cancellation of the Asia Energy contracts and agreements. Under the previous regime the Ministry of Law, Justice and Parliamentary Affairs was requested by the Ministry of Energy to give an opinion on whether the contract could be cancelled without serious penalty.
The response of the Ministry is unknown. I have asked several eminent lawyers what they thought. All replied that there is no basis for cancellation of the contract that does not expose the Government to possibility of a significant arbitration award.
The negative factors that may flow from cancellation of the contract or major changes in the rules are:
- Foreign investors would be much more hesitant in investing in Bangladesh for fear that the Government would turn on them canceling contracts without justification, etc. I will be answered with the claim that there will be many investors ready to come forward -- that is correct, but they will demand much better terms. The risk of investing in Bangladesh already perceived as high would be higher still and consequently higher returns would be demanded.
- The coal reserves at Phulbari would be tied up in litigation making it impossible to exploit these resources until the legal issues are settled. Asia Energy's lawyers could attempt to block any exploitation involving a foreign company. There will be endless litigation, prospect of which will discourage foreign companies from working on this asset.
Similarly the World Bank, IDB or ADB would not touch a project at Phulbari with a background of contract cancellation. Even domestic financed exploitation may run into claims by Asia Energy that their rights have been violated and they will attempt to seize Bangladesh Government property overseas.
- The dispute involves investors in the UK. In my view the British Government would face difficulty continuing its program here if such an expropriation of Asia Energy took place; indeed Asia Energy's lawyers may go to court to prevent foreign assistance until their claims are settled.
- The dispute would go to arbitration. Asia Energy would argue for recovery of their costs -- perhaps $40-60 million and recovery of what the existing investors stand to earn. I estimate this at $1-2 per ton of coal.
That is $500-1,000 million over a thirty-year period. In addition there would be court costs and interest costs as it could take years to settle. If Bangladesh refused to pay then the consequences would be very severe in terms of access to the international capital markets as well as the IMF, ADB, World Bank etc. Of course Bangladesh may win its case in arbitration but the risks should be understood.
Cancellation of these projects or changing conditions effectively expropriates and starts down a dangerous path with the outcome uncertain and potentially expensive. Grandfathering under existing law is the better way to go forward here.
Forest Cookson is a freelance contributor to The Daily Star.
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