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Part C: Fiscal Terms - 36. Fiscal Terms | 36.1 State Equity Participation

State equity participation refers to provisions that mandate or allow the State to hold a percentage of equity or ownership in corporate entities engaged in mining activities. State equity participation can take many forms including:

  • Fully paid interest meaning the State fully pays for its share of expenses in proportion to its percentage ownership in the mining company. The State may also make a non-cash contribution for its equity share, for example, through provision of infrastructure.
  • Carried interest in which the investor pays the State’s share of project costs until the production phase and then the State forgoes dividend payments until those costs plus interest are paid off.
  • Free interest in which the State pays nothing for its share.

It should be noted that mandatory “free” state participation in the equity of mining licence holders is a policy in the members of the WAEMU (UEMOA in French), but this is generally not the case among SADC members.

The State’s equity may be held through a state-owned company, the ministry responsible for mining or through other government institutions. State equity may be seen as another tool via which the State can share in the revenues from a mining project (through receipt of dividends as a shareholder). Particularly when equity is held through a state-owned company, state equity participation can be seen as a means to transfer knowledge and technology and develop the capacity of the state-owned company to eventually carry out mining operations. The goal might be to indigenize the sector and reduce reliance on foreign partners as part of a broader industrial development plan. State equity may also be seen as a means to ensure greater state participation in decision-making around the project and enhance the government’s ability to monitor the activities of private mining companies. Countries such as Botswana have had some success in the use state participation in the joint venture company Debswana (formerly De Beers Botswana Mining Company). The government was initially a minority holder but now holds a 50% share of the company. Debswana has become a major private sector employer, has contributed significantly to Botswana’s economy, and employs an almost entirely local staff. In a similar manner, Chile’s CODELCO and Morocco’s OCP have also become world leaders in copper and phosphate production respectively.

Nevertheless, it is important to note that state equity participation may present some disadvantages. To begin with, the State is acquiring a stake in an undiversified local subsidiary of an international firm whose holdings are limited to the mining project. This means the investment poses a substantial risk that a country with budget constraints might be ill-equipped to bear. For fully paid equity, the State would be contributing to exploration and development costs before being sure how profitable the mine will be. For a country with pressing infrastructural and other development needs, the State would need to consider whether this is the best use of state funds given the needs of the country. For carried interest, there is still the issue of use of funds to cover project costs (through forgoing dividends until costs plus interest are paid back) that could be used for other potentially more pressing needs of the country. Free interest may still require the State to contribute if cash calls to equity holders are made to cover costs during the production phase (e.g. for mine upgrades). Free interest would also need to be considered in light of the other components of the overall fiscal regime. From a purely fiscal perspective, the State may be able to get as much of a share via use of other fiscal tools and free interest may serve as a disincentive to marginal investment or the government may have to sacrifice other negotiable terms in return for the free equity. Further, dividends may not always be distributed, as, depending on the strength of minority shareholder protections, the majority holders can make decisions concerning use of income (for example, reinvesting the funds in upgrades to the mine infrastructure) that result in limited or no dividends being distributed. From a fiscal perspective, royalties may be used to achieve the same result.

Concerning knowledge transfer and development of local capacity to manage the mineral sector, the State may use other strategies including requiring or incentivizing companies to provide company internships, scholarships or trainings for government officials, to hire and train locals for skilled and managerial positions, to carry out research and development locally, and more. The State might also require observer status on the board of the company with full access to all papers and documents provided to the board.

State equity also may not yield the expected benefits in decision-making power if the State is a minority shareholder. In this case, the State may need to negotiate a shareholder agreement with strong minority rights to protect against the majority owner making most of the decisions without minority consent. Shareholder agreements could provide for a minimum list of critical decisions that require the consent of all owners, for the right to access company books and records and dividend policy. The government may also choose to have a special share (Ghana’s Mining Act provides an example) to which no dividend rights are attached but which provide government veto rights over certain key decisions.

In countries where it is the policy of the State to participate in the equity of each mining project, the following factors should be considered for inclusion in law or regulations (the latter of which may provide better flexibility to governments):

1. At what stage the State will become a participant in the equity of the project company (exploration or production?) Most countries that require State equity participation impose the requirement at the production stage.

2. How and when the State will acquire its equity participation in the company that holds the mining licence.

3. Whether the State’s participation will be “free equity”, “carried equity” or fully paid. If further optional State participation on a paid basis is contemplated, how the price of the additional shares will be determined.

4. Whether the State’s equity will be entitled to representation on the company’s board of directors, or to any preferred distribution of dividends or other economic or voting rights. Most State equity provisions stipulate that the State’s equity shall not be subject to dilution in the event of issuance of additional shares of the company.

5. Which institution will hold and manage the State’s equity participation in the project company.

36.1. Example 1:

Article [_]

(1) Each time a mining title holder decides to mine a deposit, on the basis of a feasibility study, they are to start procedures for the creation of an operating company, to which the mining title relating to the operations shall be issued. The granting of said mining title by a member State gives the State the right to a 10% stake the share capital of the Operating Company for the entire period during which the mine operates. This shareholding, which shall have no charge attached to it, may not be diluted in the event of a capital increase.

(2) For a member State to hold any addition share of an Operating Company's share capital, this is to be done through contributions and shall be negotiated.


Drawn from the West African Economic and Monetary Union (WAEMU) Common Mining Code, this provision imposes the following rules of State equity participation:

(1) Each time the holder of a mineral licence decides to develop a deposit, the holder must create a new mining company to which the mining license will be given.

(2) The issuance of the mining licence by the State entitles the State to 10% of the equity of the mining company for the entire life of the mine.

(3) The State’s equity share is free of charge and not subject to dilution when additional share capital is raised.

(4) Any additional state equity participation will be purchased pursuant to negotiation.

36.1. Example 2:

Article [_]

(1) From the effective date of this [Code][Act][Law], the grant by the State of an exploitation licence immediately gives the State an ownership interest, at no cost, of up to a maximum of fifteen per cent (15%), in the capital of the company holding the licence.

(2) This provision does not automatically apply to mining concessions signed and ratified before the effective date of this [Code][Act][Law]. Its implementation in relation to the said mining concessions (signed and ratified) is subject to the conditions provided in Article [_] (addressing the specifics of pre-existing mining concession agreements) of this [Code][Act][Law].

(3) This interest cannot be diluted by eventual increases in capital. This participation is also free from all charges and this interest is free carry. This interest is obtained upon the signature of the exploitation licence.

(4) This interest, which is at no charge to the State, can neither be sold, nor become the subject of a pledge or mortgage. It confers on the State all the rights conferred on to shareholders by the OHADA Uniform Act relating to commercial companies and economic interest group.

(5) The State has the right to acquire a supplementary participation, in cash, according to the terms agreed with each relevant mining company within the scope of the mining agreement. This acquisition option may be scheduled over time, but may be exercised only once. The total participation held by the State under this article may not exceed thirty-five per cent (35%).

(6) The table below defines, per mineral substance and with the basic limit of thirty-five per cent (35%), the levels of State participation in the capital of companies holding a mining operation licence.

(7) Levels of State participation in companies holding a mining operation licence:

Mineral products and derivatives

Non-dilutive Shareholders’ Rights%

Supplementary Cash Interest (%)




Bauxite-alumina (integrated project*)









Iron ore






Gold and diamond



Radioactive ore



Other mineral substances



*financing of a bauxite mine and alumina refinery.

(8) At the request of a holder of an exploitation licence, the right of the State to acquire an additional interest in cash in the capital of a company holding a mining operation licence can be reduced in exchange for an increase of equal value, determined by an independent expert selected by mutual agreement, and according to the mineral substance concerned, of the tax rate on the extraction of mine substances other than the precious metals indicated in article [_] (addressing the type and scope of minerals classified as precious metals) or of the tax on the industrial or semi-industrial production of precious metals indicated in article [_] (classifying semi-industrial precious metals) of this [Code][Act][Law], for which such company is liable.

(9) The interest of the State that is payable in cash is assignable and may be sub-leased. The State reserves the right to auction, in an open and transparent process, all or part of its interest that is payable in cash, with no right of preemption for the other shareholders of the company holding the exploitation licence.

(10) The decision relating to the assignment of all or part of the State’s interest that is payable in cash, and the terms thereof, must comply with the provisions of the act relating to withdrawal by the State.

(11) The shareholders of the company holding the exploitation licence must sign a shareholders’ agreement that defines, inter alia, decisions which are not to be made without the prior agreement of the State.

(12) A public limited company, with the State as the sole shareholder, is hereby established to direct the management of mineral resources.

(13) This company is mandated to diligently manage the State’s ownership interests in companies holding an exploitation licence. In so doing, this company acts in the name of and on behalf of its sole shareholder, the State.

(14) This public limited company in charge of mineral resource management is obligated to pay out in the form of dividends to its sole shareholder, the State, the products and dividends received.

(15) The powers and functioning of this public limited company in charge of the management of mineral resources are determined by regulation.


Drawn from Guinea’s mining code (2011 – as amended in 2013), this provision grants the State free equity and the provision includes a requirement for the shareholders to sign an agreement that defines decisions which are not to be made without the prior consent of the State. This provision seeks to both provide the State a means to participate in the dividends and a means to participate in key decision-making (depending on how the shareholders’ agreement is drafted). The effectiveness of the latter goal would depend on the strength of the shareholders’ agreement.

It is worth noting that Guinea’s Code also reflects the idea that from a purely fiscal perspective, state equity participation may be interchangeable with other tools. The Code allows for a mining company to opt for a reduction in the additional equity the State is entitled to purchase, in exchange for an increase in the tax on the extraction of mine substances (a royalty) of equal value. However, it should be noted that apart from adding some degree of perhaps unwarranted complexity, this creates a consistency problem, with royalty rates potentially varying across projects. In practice, the government could decide to simplify its fiscal regime by getting rid of state equity altogether and opting for a higher royalty rate. If such an either equity/or higher royalty or tax rate feature were to be included in law, it would be advisable to include requirements for transparency on the use of this feature to avoid abuse.